Question

1. Scenario 9-1
The before-trade domestic price of tomatoes in the United States is $500 per ton. The world price of tomatoes is $400 per ton. The U.S. is a price-taker in the tomatoes market.

Refer to Scenario 9-1. If trade in tomatoes is allowed, the price of tomatoes in the United States

could increase or decrease or be unaffected; this cannot be determined.

will increase, and this will cause consumer surplus to decrease.

will be unaffected, and consumer surplus will be unaffected as well.

will decrease, and this will cause consumer surplus to increase.

2.

Of the following statements, which is not correct?

Trade allows for specialization.

Trade has the potential to benefit all nations.

Trade allows nations to consume outside of their production possibilities curves.

Absolute advantage is the driving force of specialization.

Answer 1

1. Ans: will decrease, and this will cause consumer surplus to increase.

Explanation:

The before-trade domestic price of tomatoes in the United States is $500 per ton. The world price of tomatoes is $400 per ton which is less than the domestic price of tomatoes in the United States. If trade in tomatoes is allowed, the price of tomatoes in the United States will decrease. As a result consumer surplus will increase.

2. Ans: Absolute advantage is the driving force of specialization.

Explanation:

Comparative advantage is the driving force of specialization.