Question

1. Suppose that there are 10 million workers in Canada and that each can produce either 2 cars or 30 bushels of wheat in a year. If the United States offers to buy 10 million cars from Canada in exchange for 20 bushels of wheat per car

a. Canada should renegotiate the deal to sell 10 million cars in exchange for 10 bushels of wheat per car

b. Canada should not accept the deal

c. none of the above

d. Canada should accept the deal

2. An increase in the price of gasoline provides

a. information that tells consumers to buy more gas

b. information that tells consumers to buy less gas

c. information that tells producers to produce less gas

d. no information

Answer 1

1) Canada can produce 20 million cars or 300 million bushels of wheat which means its opportunity cost of producing 1 car is 15 bushels of wheat. If it produces only cars, then it will exchange it with wheat only when it receives a higher trade price, that more than 15 bushels of wheat for each car. US offers to buy 10 million cars in exchange for 20 bushels of wheat per car which Canada will get 200 million bushels for exporting 10 million cars, the trade price being greater than 15 bushels of wheat for each car. Hence d. Canada should accept the deal

2) b. information that tells consumers to buy less gas. Higher price means less quantity demanded and more quantity supplied