Economics 2150A/B Study Guide - Quiz Guide: Opportunity Cost, Comparative Advantage, Trade Route

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ECON 2150A/B Full Course Notes

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Each country specializes in the type of production which uses resources most efficiently. Use the income generated from that production to buy the goods and services that it desires (some of which are produced abroad!) Domestic workers earn a higher (real) income from specializing in cheese production since the relative price of cheese increases with trade. They can buy more wine with their cheese. Before trade, they earned w = pc / alc w/pworld. , that wage bought them: w/pc = 1/alc cheese, or w/pw = pc /pw x 1/alc wine. Their purchasing power remains the same in cheese and increases in wine (pc /pw < pworld. Foreign workers earn a higher (real) income from specializing in wine production since for. C them the relative price of wine increases with trade: they can now buy more cheese with their wine. Before trade, they earned w* = p*w / a*lw.

Related Questions

1. In which market will a company arrange to receive currency for a transaction at a future date?

Select one:

a. the forward market

b. the currency futures market

c. the arbitrage market

d. the forward spot market

2. The U.S. dollar is overvalued and the peso is undervalued in the foreign exchange market

Select one:

a. if a visitor to Mexico from the United States can buy more goods in the United States
than he can buy in Mexico when he converts dollars to pesos.

b. if a visitor to Mexico from the United States can buy the same amount of goods in
Mexico as he can buy in the United States when he converts dollars to pesos.

c. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts pesos to dollars.

d. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts dollars to pesos.

3. Given the following data (t is current time; t+1 is time after one period)

E_t = Â¥ 110 = $1

E_t+1 = Â¥ 95 = $1

Current Interest rate in the US = i_US= 8%

If the interest parity condition is expected to hold, interest rates in Japan (i_Japan) should equal approximately:

Select one:

a. 3.38%

b. 8%

c. -5.64%

d. None of the above.

4. Suppose the Japanese interest rate is I% while the interest rate in Britain is 3%. Interest rate parity predicts that relative to the Japanese Yen,

Select one:

a. the British pound will depreciate by 4%.

b. the British pound will appreciate by 2%.

c. the British pound will depreciate by 2%.

d. the British pound will appreciate by 4%.

5. Suppose the U.S. grows more slowly than Canada. The best medium term prediction is that the

Select one:

a. U.S. interest rates will rise.

b. U.S. dollar will appreciate against the Canadian dollar.

c. U.S. dollar will depreciate against the Canadian dollar.

6. Purchasing Power Parity (PPP) implies that

Select one:

a. In the long run, a forward exchange rate can purchase an interest rate swap for the same
price as the spot rate.

b. In the medium run, a forward exchange rate can purchase an interest rate swap for the
same price as the spot rate.

c. The short run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.

d. the long run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.

7. The current account balance will fall if

Select one:

a. the real exchange rate depreciates and disposable income goes up

b. the real exchange rate appreciates or disposable income goes up

c. the real exchange rate depreciates or disposable income goes down

d. the real exchange rate appreciates and disposable income goes down

8. A person who paid $10 for an umbrella in the U.S. sees the exact same umbrella in a store in London, England for 6 British pounds. If the person could expect the real exchange rate to be 1 U.S. umbrella per 1 English umbrella, then the person could infer that the nominal exchange rate is

Select one:

a. 0.6 U.S. dollars per 1 English pound.

b. 1.67 U.S. dollars per 1 English pound.

c. 0.6 English pounds per I U.S. dollar.

d. 1.67 English pounds per 1 U.S. dollar.

9. A U.S. wine merchant travelling in France has found a French wine of the same quality as a U.S. wine they regularly sell. She assumes that the real exchange rate should be 1 case of U.S. wine equals one case of French wine. The French wine merchant will sell her a case of the French wine for 350 euros. She knows that a case of the equivalent U.S. wine sells for $400. The euro is selling in France for $1.20. Assuming transportation costs are zero, the U.S. wine merchant should

Select one:

a. buy the French wine and sell it in the U.S. and make a profit.

b. buy the U.S. wine and sell it in France and make a profit.

c. It doesn't matter either way; there is no profit in the deal.

d. None of the above.

10. In a fixed exchange rate system, how do countries address the problem of currency market pressures that threaten to lower or raise the value of their currency?

Select one:

a. If demand falls, then countries must increase demand by buying up the excess supply
with domestic currency.

b. If demand rises, countries must fill the excess demand for foreign currency by selling
their reserves.

c. If demand rises, then countries can adjust the value of the exchange rate to the desired
level.

d. A and B only.

1. Strong property rights are important for modern economic growth because:

a. They allow governments to extract the gains from private citizen’s investments.

b. People are more likely to invest if they don't fear that others can take their returns on investment without.

c. They ensure an equitable distribution of income.

d. Business cycle fluctuations will be smaller and less likely to disrupt investment patterns.

2. A subsistence economy is:

a. A very low-income economy.

b. An economy in which people make what they consume.

c. An economy in which people receive food for pay.

d. All of the above.

3. Most economists agree that an effective way of comparing income levels between countries around the world is through the use of:

a. Employment statistics.

b. GDP divided by GNP.

c. Foreign investment.

d. Purchasing power parity.

4. Growth depends on which two processes?

a. Accumulation of assets and making those assets more productive.

b. Harnessing natural resources and marketing them to developed nations at a "fair trade" rate.

c. Exploitation of the agricultural sector in order to advance industrialization.

d. Engaging in free trade while subsidizing domestic agricultural and industrial production.

amethystworm783

This discussion involves a business ethics case that companies and boards of directors regularly face in conduction business.:

1. Identify the most important and ethical issues arising from the situation.

2. Identify the viable options for addressing these issues and the ethical implication of the identified options.

3. Reach a definite resolution of the ethical issues by choosing what you think is the best option.

4. Develop a strategy for implementing your resolution. Please cite your references.

Background

Paul Oliver, Sr., immigrated to the United States from Greece. After working for several wineries, he started Oliver Winery, Inc., which eventually found a market niche in non-varietal jug wines. Through mass-marketing techniques, the company established a substantial presence in this segment of the market. Ten years ago, Paul, Jr., joined the firm after receiving a degree in enology (the study of winemaking). He convinced his father of the desirability of entering a different segment of the wine market: premium varietals. To do this, the company needed a large infusion of capital to purchase appropriate vineyards. Reluctantly, Paul, Sr., agreed to take the company public. The initial public offering succeeded, and 40 percent of the company's stock went into outsiders' hands. Also, for the first time, outsiders served on the board of directors. Although Paul, Jr., wanted to use a new name for the premium varietal to appeal to a more upscale market, his father insisted on using the name, Oliver.

Board Meeting

The board of directors met, along with Janet Stabler, the director of marketing of Oliver Winery, Inc. The following directors were in attendance:

Paul Oliver, Sr., chairman of the board and founder of the company

Paul Oliver, Jr., CEO, has an advanced degree in enology

Cyrus Abbott, CFO, has an MBA

Arlene Dale, the comptroller, has a CPA with a master's degree in accounting

Raj Ray, COO, has a master's degree in industrial engineering

LaTasha Lane, vice president legal, has a J.D. degree

Elisabeth Constable, the union representative to the board, has a GED degree

Rev. John W. Calvin, the outside director, has a Doctor of Divinity degree

Carlos Menendez, the outside director, has an MFA degree

Oliver, Sr.:

The next item on the agenda is a proposal to develop a new line of wines. Janet Stabler will briefly present the proposal.

Stabler:

Thank you. The proposal is to enter the fortified wine market. It's the only type of wine in which unit sales are increasing. We'll make the wines cheaply and package them in pint bottles with screw-on caps. Our chief competitors are Canandaigua with Richard's Wild Irish Rose, Gallo with Thunderbird and Night Train Express, and Mogen David with MD 20/20. We'll market the wine with little or no media advertising by strategically sampling the product to targeted consumers. That's it in a nutshell.

Oliver, Sr.:

Any questions before we vote?

Menendez:

Who'll buy this wine?

Calvin:

From what I know about the consumers of your competitors, it appears to me that it's bought by homeless winos.

Stabler:

Not entirely. For example, pensioners on a fixed income would find the price of the wine appealing. Thunderbird has been recently introduced into England and has become very popular with the yuppie crowd.

Calvin:

Then why put it in pint bottles?

Stabler:

For the convenience of consumers.

Menendez:

Why would pensioners want a small bottle?

Calvin:

Homeless people want it in pints so they can fit it in their hip pockets. They obviously don't have a wine cellar to lay away their favorite bottles of Mad Dog.

Stabler:

The pint-size also keeps the price as low as possible.

Calvin:

Translation: The homeless don't have to panhandle as long before they can make a purchase. Also, why would you increase the alcoholic content to 18 percent and make it so sweet if it weren't for the wino market?

Stabler:

Many people like sweet dessert wines and 18 percent are not that much more than other types of wines that have 12 percent alcohol.

Menendez:

Is it legal?

Lane:

Sure. We sell to the retailers. It may be against the law to sell to intoxicated persons, but that's the retailers' business. We cannot control what they do.

Calvin:

Isn't this product intended for a perpetually intoxicated audience that many people consider to be ill? Wouldn't we be taking advantage of their illness by selling highly sugared alcohol that suppresses their appetite? I've spoken to drinkers who claim to live on a gallon of this type of product a day.

Oliver, Jr.:

What will this do to our image? We're still trying to get our premium wines accepted.

Stabler:

Of course, we won't use Oliver's name on these wines. We will use another name.

Menendez:

Is it okay to do that?

Stabler:

Why not? Canandaigua, Gallo, and Mogen David all do the same thing. None of them put their corporate name on this low-end product.

Abbott:

We're getting away from the crux of the matter. Profit margins would be at least 10 percent higher on this line than our others. Moreover, unit sales might increase over time. Our other lines are stagnant or decreasing. The public shareholders are grousing.

Dale:

Not to mention that our stock options have become almost worthless. I'm only a few years from retirement. We need to increase the profitability of the company.

Ray:

Operationally, this proposal is a great fit. We can use the grapes we reject from the premium line. It will also insulate us from bad grape years because any grape will do for this wine. We can fill a lot of our unused capacity.

Constable:

And hire back some of the workers who were laid off!

Stabler:

It's a marketing dream. Just give out some samples to "bell cows."

Menendez:

What are bell cows?

Stabler:

Opinion leaders who will induce other consumers to switch to our brand.

Calvin:

Do you mean wino gurus?

Oliver, Sr.:

Look, if we don't do it, others will. In fact, they already have.

Abbott:

And they'll get richer, and we'll get poorer.

Lane:

Gallo pulled out of several of these skid-row markets as did Canandaigua. Little good it did. The alcoholics just switched to malt liquor, vodka, or anything they could get their hands on.

Dale:

I think our concern is misplaced. These people are the dregs of society. They contribute nothing.

Calvin:

They're human beings who need help. We're profiting off their misfortune and misery.

Oliver, Sr.:

We can take that up when we decide on what charities to support. Is anyone opposed to the proposal?

Calvin:

Is this a done deal? I believe we should contribute half of our profits from this product to support homeless shelters and other programs that benefit indigent and homeless people. If not, I must resign from this board.

Sources

Carrie Dolan, Gallo Conducts Test to Placate Critics of Its Cheap Wine, The Wall Street Journal, June 16, 1989, p. B3.

Frank J. Prial, Experiments by a Wine Maker Fails to Thwart Street Drunks, The New York Times, February 11, 1990, p. A29.

Alix M. Freedman, "Winos, and Thunderbird Are a Subject Gallo Doesn't Like to Discuss," Wall Street Journal, February 25, 1988, p. 1.

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Economics 2150A/B Study Guide - Quiz Guide: Opportunity Cost, Comparative Advantage, Trade Route

ECON 2150A/B Full Course Notes

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