Consider the Two Countries of Swala and Atlantis

question 16

Multiple Choice

Consider the two countries of Swala and Atlantis. Swala is a major producer of wheat and rice while Atlantis specializes in the production of marble and automobile parts. Engaging in free trade benefits both countries since Swala is an agrarian nation and Atlantis lacks arable land. This follows the theory of comparative advantage, and we can say that engaging in free trade benefits all countries that participate in it; however, this conclusion is based on which inaccurate assumptions?

• A) We have assumed a simple world in which there are only two countries.
• B) We have assumed the prices of resources and exchange rates in the two countries are dynamic.
• C) We have assumed there are barriers to the movement of resources from the production of one good to another within the same country.
• D) We have assumed that agrarian nations do not specialize in producing fertilizers.
• E) We have assumed diminishing returns to specialization.

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Definitions:

Lemonade Stand

A small, temporary business venture, often run by children, that sells lemonade.

Intermediate Good

Goods that are used in the production process to produce final goods or services.

Average Costs

The total costs divided by the quantity produced or consumed, indicating the cost per unit.

Transfer Prices

The prices at which services, goods, or capital are exchanged between departments or divisions within the same company or between subsidiaries.