A1-2 True: Factor Market: The factor market is a market where the factors of production are bought and

sold such as the labour markets, the capital markets etc. By getting a part time job, he is officially participating in the factor market, because he is aiding in the production and sale of consumer goods. He is one of the inputs that a company needs to reach consumer demands. Product Market: The product market is the market in which goods are bought and sold. By getting a part time job he is participating in the product market by perhaps selling goods, and by looking for an iPad he is participating in the of buying of goods as well. A1-8 True Since the line is straight and has a purely positive slope, as one factor (price) increases along the supply line, the other factor (quantity) must increase as well. This is often forced by an increase in Demand.

A1-9

The table below shows how many hybrid cars (HCs) or sport utility vehicles (SUVs) can be produced in Canada and in United States with a unit of labour input. Canada United States Canada HCs per unit of Labour SUVs per unit of Labour 2 1 United States 6 2

(a) In the absence of trade, what is the relative price of an SUV (i.e. the number of HCs per SUV) in the two countries? Explain. [4] The relative price of 1 SUV in Canada is 2 Hybrid cars. The relative price of 1 SUV in the US is 3 Hybrid cars. This is because this chart says that with the amount of resources and labour provided by either country, they can EITHER produce Hybrid cars or SUVs, if one is produced, the other is sacrificed. Therefore if they are dedicating ALL their production to SUV products, the Hybrid products cannot be produced and they are said to be the relative opportunity cost of production. (e.g. if the US decides to produce 2 SUVS, they are sacrificing the 6 Hybrid cars which they could have made with those resources.) (b) Which country has an absolute advantage in the production of SUVs? HCs? Which country has a comparative advantage in the production of SUVs? HCs? Explain. [6] Absolute advantage is said to exist when a country can produce a product at a lower FINANCIAL cost than another country. Therefore the US has absolute advantage in the production of both SUVs and HCs. We know this because with the amount of resources Canada has they can make 1 SUV or 2HCs, whereas the US can make 2SUVs or 6HCs. They can make more of both products! Comparative Advantage is said to exist when a country can produce a product at a lower OPORTUNITY cost to any other country. For comparative advantage you look at what a country has to give up in order to produce another good; if it has to give up less than another country then it has comparative advantage. Therefore since the US has a lower opportunity cost in the production of HCs they should produce HCs. They have a comparative advantage in the production of Hybrids. In the production of SUVs since Canada has a lower opportunity cost in production, they should produce SUVs. Canada has a comparative advantage

in the production of SUVs. Both countries should produce the product that they have a comparative advantage in and trade that product that they have a greater opportunity cost in.

Canada
HCs per unit of labour 2 SUVs per unit 1 of labour

Per unit Opp. Cost SUVs 2 HCs 6 2

US

Per unit Opp. Cost 1/3 SUVs 3 HCs

(c) If specialization occurs and trade takes place between the two, which country will produce SUVs and trade some of them for HCs? Can you give a range for the trade price of an SUV in terms of the number of HCs? [6] If specialization occurs, since Canada has a lower relative opportunity cost involved with producing SUVs ( its equivalent to 2 HCs, whereas the US is equivalent to 3 HCs), Canada should specialize in producing SUVs, and allow the US to produce HCs. By trading their products they are able to minimize each others opportunity cost. The trade price for an SUV produced by Canada is 6 HCs produced by the US. This is because they would trade the amount of product they can each make with one unit of labour unless some other deal was agreed upon.

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(d) Explain why both countries are better off (or at least no worse off)
under the pattern of trade you describe above. [4]

By participating in trade, both countries are able to specialize in one product. Together they can be more efficient, and sacrifice less when they trade. Having an absolute advantage in the production of both products has no benefit to a country, because they can only produce one of the products at a time. For example, say we have a chef who is quick at baking and cleaning, and their friend and sous chef who is slow at baking and cleaning in one kitchen. It doesnt

make sense to leave both tasks to the main chef just because hes quicker at both tasks, because in total his time will be slower than if they just worked together. If the chef cooks while the sous chef simultaneously cleans the pots and pans, they can be done the task much faster. Its worth trading because then you can receive the benefit of both products, even though you only produce one. Trading in this scenario with countries with different comparative advantage allows the countries to fulfill each others opportunity cost of production.