First Midterm Exam, Spring 2005RICARDIAN MODEL1-4. Cheese and wine are produced with labor. Suppose that theopportunity cost of cheese in terms of wine is higher in the UnitedStates than in Canada. 1. Under free trade, the United States producesa. Only cheeseb. Only winec. Nothingd. Cheese and sometimes winee. Wine and sometimes cheese2. The United States has comparative advantage ina. Only cheeseb. Only winec. Both cheese and wined. Neither cheese nor winee. Would need information about unit labor requirements to know3. The United States has absolute advantage ina. Only cheeseb. Only winec. Both cheese and wined. Neither cheese nor winee. Would need information about unit labor requirements to know4. Under free trade, the United States exportsa. Only cheeseb. Only winec. Nothingd. Cheese and sometimes winee. Wine and sometimes cheese5-8 The United States and Mexico engage in free trade in cheese andwine, which are produced with labor. The relative price of cheese towine under free trade equals the opportunity cost of cheese in termsof wine in the United States.5. Does the United States gain from trade?a. Yes, definitelyb. No, definitelyc. Yes, but only if produce just cheesed. Yes, but only if produce just winee. Yes, but only if produce both goods6. Does Mexico gain from trade?a. Yes, definitelyb. No, definitelyc. Yes, but only if produce just cheesed. Yes, but only if produce just winee. Yes, but only if produce both goods7. How does the wage paid in the cheese sector compare to the wagepaid in the wine sector in the United States?a. Wage is higher in the cheese sectorb. Wage is lower in the cheese sectorc. Wage is the same in the cheese sectord. Wage is the same or higher in the cheese sectore. Cannot tell from the information provided8. How does the wage paid in the cheese sector compare to the wagepaid in the wine sector in Mexico?a. Wage is higher in the cheese sectorb. Wage is lower in the cheese sectorc. Wage is the same in the cheese sectord. Wage is the same or lower in the cheese sectore. Cannot tell from the information providedSPECIFIC FACTORS MODEL9-12 Manufacturing uses labor and capital, while food uses labor and land.Suppose the price of food increases. 9. The increase in the price of food causes some workers toa. Leave food sectorb. Enter food sectorc. Leave manufacturingd. Enter manufacturinge. Leave manufacturing and enter food sector10. The increase in the price of food causes the value of the marginalproduct of labor in food in equilibrium toa. Riseb. Fallc. Remain the samed. Rise or remain the samee. Fall or remain the same11. The increase in the price of food causes the value of the marginalproduct of labor in manufacturing in equilibrium toa. Riseb. Fallc. Remain the samed. Rise or remain the samee. Fall or remain the same12. In equilibrium, the increase in the price of food causes the wage toa. Rise in the manufacturing sectorb. Rise in the food sectorc. Rise in both the manufacturing and the food sectorsd. Fall in the food sectore. Rise in the manufacturing sector and fall in the food sector13-16 Food production uses labor and land, while manufacturing useslabor and capital. Suppose that the relative price of manufacturing tofood rises in the United States due to opening up to free trade.13. In the United States, owners of which specific factor or factors arehurt by the price change?a. Capitalb. Landc. Labord. Both capital and lande. Both labor and land14. In the United States, owners of which specific factor or factors benefitfrom the price change?a. Capitalb. Landc. Labord. Both capital and lande. Both labor and land15. In the United States, how are workers (who own labor) affected bythe price change?a. They gain for sureb. They are hurt for surec. Their nominal wage goes up by more than the price ofmanufacturesd. Their nominal wage goes up by less than the price ofmanufacturese. Their nominal wage goes down16. In the United States, how will production respond to the pricechange?a. Output of manufactures increasesb. Output of food increasesc. Output of manufactures decreasesd. Output of food decreasese. Output of manufactures increases and output of fooddecreasesRD /DCDW'PWPC.PROBLEMS (Ricardian Model)In the United States (US), producing one pound of cheese requires oneunit of labor, while producing one gallon of wine requires five units of labor.In the rest of the world (ROW), producing one pound of cheese requiresthree units of labor, while producing one gallon of wine requires six units oflabor. The United States has 400 units of labor and the ROW has 600 unitsof labor. World relative demand for cheese to wine is 1. Construct the US production possibilities frontier (all three forms).Determine the maximum production of cheese and wine. What is theUS opportunity cost of cheese in terms of wine? Where does itappear in the equation describing production possibilities? Drawgraph of US production possibilities frontier.2. Construct the ROW production possibilities frontier (all three forms). Determine the maximum production of cheese and wine. What is theROW opportunity cost of cheese in terms of wine? Compare theslopes of the two production possibilities frontiers – which is flatterand why? Draw graph of the ROW production possibilities frontier.3. What is the world relative supply of cheese to wine if each countryproduces only its comparative advantage good? Construct the worldrelative supply and world relative demand functions. Find the worldequilibrium relative price of cheese in terms of wine under free trade. Draw graph of world relative supply and world relative demand.4. Determine the optimal production bundle for each country under freetrade. Determine whether each country gains from trade and explainthe source of any gains from trade.5. Construct the US trade possibilities frontier (all three forms).Determine the maximum consumption of cheese and wine under freetrade. Where does the free trade relative price of cheese in terms ofwine appear in the equation describing trade possibilities? Drawgraph of US trade possibilities frontier on the PPF graph.6. Construct the ROW trade possibilities frontier (all three forms).Determine the maximum consumption of cheese and wine under freetrade. Compare the slopes of the two trade possibilities frontiers andexplain. Draw graph of ROW trade possibilities frontier on the PPFgraph.First Midterm Exam Solutions, Spring 2005MULTIPLE CHOICE1e The United States produces wine and sometimes