Question

Suppose that there are only two goods produced in Italy: olive oil (O) and sports cars...

Suppose that there are only two goods produced in Italy: olive oil (O) and sports cars (S). Production of olive oil requires land (T) and labor (L), while production of sports cars requires capital (K) and labor (L). Use this setup to answer question 1 - 7.

1. Land is a specific factor of production of (olive oil / sports cars / neither / No answer text provided)

2.  If as a result of free trade, price of sports cars falls while the price of olive oil stays constant, then Italy is exporting (olive oil / sports cars / both / niether)

3.  If as a result of free trade, price of sports cars falls while the price of olive oil stays constant, Italy will produce (only olive oil / only sports cars / both olive oil and sports cars / No answer text provided)

4. If as a result of free trade, price of sports cars falls while the price of olive oil stays constant, capitalists in Italy will be (better off / worse off / effect is ambiguous / No answer text provided)

5. If as a result of free trade, price of sports cars falls while the price of olive oil stays constant, workers in Italy will be (better off / worse off / effect is ambiguous / No answer text provided)

6. The equilibrium free trade relative price of sports cars with respect to olive oil is determined by which of the following:

- The point where Italy's PPF is tangent to its highest indifference curve.

- The point where the demand for Italian sports cars equals supply.

- The point where the relative price line is tangent to Italy's PPF.

- The point where world relative demand equals relative supply.

7. If as a result of free trade, price of sports cars falls while the price of olive oil stays constant, Italy gains from trade if

- everyone in Italy is better off compared to autarky.

- total welfare increases.

- everyone's purchases power increases.

- No answer text provided.

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