international financial management 6e eun resnick chap001

8/20/2019 International Financial Management 6e Eun Resnick Chap001

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Chapter 01 - Globalization and the Multinational Firm

Chapter 01

Globalization and the Multinational Firm

True / False Questions

The first two columns give the maximum dail amounts of beer and whis!e that "outhern#reland and $orthern #reland can produce when the completel specialize in one or other product% The last two columns give each countr&s consumption without trade%

1% #s $orthern #reland better off when it trades with "outhern #reland'True False

(% $ow suppose that "outhern wor!ers receive a raise to )( per da% *ill trade be possible atthe exchange rate ou found in the last +uestion'True False

,% $ow suppose that "outhern wor!ers are paid )1 per da but the $orthern wor!ers receive araise to ( per da% *ill trade be possible at the exchange rate ou found in the +uestion before the last +uestion'True False

Multiple Choice Questions

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.% *hat ma/or dimension sets apart international finance from domestic finance'% Foreign exchange and political ris!s% Mar!et imperfectionsC% 2xpanded opportunit set

3% ll of the above

4% n example of a political ris! is% expropriation of assets%% adverse change in tax rules%C% the opposition part being elected%3% both answers a5 and b5 are correct%

6% 7roduction of goods and services has become globalized to a large extent as a result of% natural resources being depleted in one countr after another%% s!illed labor being highl mobile%C% multinational corporations& efforts to source inputs and locate production anwhere wherecosts are lower and profits higher%3% common tastes worldwide for the same goods and services%

8% 9ecentl: financial mar!ets have become highl integrated% This development

% allows investors to diversif their portfolios internationall%% allows minorit investors to bu and sell stoc!s%C% has increased the cost of capital for firms%3% answers a5 and c5 are both correct%

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>% "uppose our firm invests ?100:000 in a pro/ect in #tal% t the time the exchange rate is?1%(4 @ )1%00% Ane ear later the exchange rate is the same: but the #talian government hasexpropriated our firm&s assets paing onl );0:000 in compensation% This is an example of% exchange rate ris!%

% political ris!%C% mar!et imperfections%

3% none of the above: since ?100:000 @ );0:000 × ?1%(4B)1%00

10% "uppose ou start with ?100 and bu stoc! for 40 when the exchange rate is 1 @ ?(%Ane ear later: the stoc! rises to 60% ou are happ with our (0 percent return on the stoc!: but when ou sell the stoc! and exchange our 60 for dollars: ou onl get ?.4 since the pound has fallen to 1 @ ?0%84% This loss of value is an example of% exchange rate ris!%

% political ris!%C% mar!et imperfections%3% wea!ness in the dollar%

11% "uppose that Great ritain is a ma/or export mar!et for our firm: a =%"%-based M$C% #fthe ritish pound de preciates against the =%"% dollar:% our firm will be able to charge more in dollar terms while !eeping pound prices stable%% our firm ma be priced out of the =%D% mar!et: to the extent that our dollar costs staconstant and our pound prices will rise%

C% to protect =%D% mar!et share: our firm ma have to cut the dollar price of our goods to!eep the pound price the same%3% both b5 and c5 are correct

1(% "uppose Mexico is a ma/or export mar!et for our =%"%-based compan and the Mexican peso appreciates drasticall against the =%"% dollar% This means% our compan&s products can be priced out of the Mexican mar!et: as the peso price ofmerican imports will rise following the peso&s fall%% our firm will be able to charge more in dollar terms while !eeping peso prices stable%

C% our domestic competitors will en/o a period of facing lessened price competition fromMexican imports%3% both b5 and c5 are correct

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1,% "uppose Mexico is a ma/or export mar!et for our =%"%-based compan and the Mexican peso depreciates drasticall against the =%"% dollar: as it did in 3ecember 1>>.% This means% our compan&s products can be priced out of the Mexican mar!et: as the peso price ofmerican imports will rise following the peso&s fall%

% our firm will be able to charge more in dollar terms while !eeping peso prices stable%C% our domestic competitors will en/o a period of facing little price competition fromMexican imports%3% both b5 and c5 are correct

1.% "uppose that ou are a =%"% producer of a commodit good competing with foreign producers% our inputs of production are priced in dollars and ou sell our output in dollars%#f the =%"% currenc depreciates against the currencies of our trading partners:% our competitive position is li!el improved%

% our competitive position is li!el worsened%C% our competitive position is unchanged%

14% =ndoubtedl: we are now living in a world where all the ma/or economic functionsE consumption: production: and investment% are still inherentl local%% are still regional in nature%C% are slowl becoming globalized%3% are highl globalized%

16% Most governments at least tr to ma!e it difficult for people to cross their borders illegall%This barrier to the free movement of labor is an example of% information asmmetr%% excessive transactions costs%C% racial discrimination%3% a mar!et imperfection%

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18% lthough the world econom is much more integrated toda than was the case 10 or (0ears ago: a variet of barriers still hamper free movements of people: goods: services: andcapital across national boundaries% These barriers include% legal restrictions%

% excessive transportation costs%C% information asmmetr%3% all of the above

1;% The % *hen individual investors become aware of overseas investment opportunities and arewilling to diversif their portfolios internationall:% the trade one mar!et imperfection: information asmmetr: for another: exchange rateris!%% the benefit from an expanded opportunit set%C% the should not bother to read or to understand the prospectus: since it&s probabl written ina foreign language%

3% the should invest onl in dollars or euros%

(0% The $estl Corporation: a well-!nown "wiss M$C: used to issue two different classes ofcommon stoc!: bearer shares and registered shares: and foreigners were allowed to hold onl% registered shares%% bearer shares%C% voting shares%3% convertible shares%

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(1% 3eregulated financial mar!ets and heightened competition in financial services providedan environment for financial innovations that resulted in the introduction of variousinstruments% 2xamples of these innovative instruments include% currenc futures and options: foreign stoc! index futures and options%

% multicurrenc bonds%C% international mutual funds: countr funds: exchange traded funds%3% all of the above

((% $estl: a well-!nown "wiss corporation:% has been a paragon of virtue in its opposition to all forms of political ris!%% at one time placed restrictions on foreign ownership of its stoc!% *hen it relaxed theserestrictions: the total mar!et value of the firm fell%C% at one time placed restrictions on foreign ownership of its stoc!% *hen it relaxed these

restrictions: there was a ma/or transfer of wealth from foreign shareholders to "wissshareholders%3% none of the above

(,% The goal of shareholder wealth maximization% is not appropriate for non-=%"% business firms%% means that all business decisions and investments that a firm ma!es are done for the purpose of ma!ing the owners of the firm better off financiall%C% is a sub-ob/ective the firm should attempt to achieve after the ob/ective of customer

satisfaction is met%3% is in conflict with the privatization process ta!ing place in third-world countries%

(.% s capital mar!ets are becoming more integrated: the goal of shareholder wealthmaximization% has been altered to include other goals as well%% has lost out to other goals: even in the =%"%C% has been given increasing importance b managers in 2urope%3% has been shown to be a deterrent to raising funds abroad%

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(4% 9ecent corporate scandals at firms such as 2nron: *orldCom and the #talian firm7armalat% show that managers might be tempted to pursue their own private interests at the expenseof shareholders%

% show that #talian shareholders are better at monitoring managerial behavior than =%"%shareholders%C% show that white-collar criminals hardl ever get punished%3% show that socialism is a better wa to go than capitalism%

(6% *hile the corporate governance problem is not confined to the =nited "tates:% it can be a much more serious problem in man other parts of the world: where legal protection of shareholders is wea! or nonexistent%% it has reached its high point in the =nited "tates%

C% the =%"% legal sstem: with lawsuits used onl as a last resort: ensured that an conflicts ofinterest will soon be a thing of the past%3% none of the above

(8% The owners of a business are the% taxpaers%% wor!ers%C% suppliers%3% shareholders%

(;% The massive privatization that is currentl ta!ing place in formerl socialist countries: willli!el% eventuall enhance the standard of living to these countries& citizens%% depend on private investment%C% increase the opportunit set facing these countries& citizens%3% all of the above

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(>% firm with concentrated ownership % ma give rise to conflicts of interest between dominant shareholders and small outsideshareholders%% ma en/o more accounting transparenc than firms with diffuse ownership structures%

C% is a partnership: never a corporation%3% tends to exist overseas but not in the =%"%

,0% The ultimate guardians of shareholder interest in a corporation: are the% ran! and file wor!ers%% senior management%C% boards of directors%3% all of the above%

,1% #n countries li!e France and German:% managers have often made business decisions with regard to maximizing mar!et share tothe exclusion of other goals%% managers have often viewed shareholders as one of the Hsta!eholdersH of the firm: others being emploees: customers: suppliers: ban!s and so forth%C% managers have often regarded the prosperit and growth of their combines: or families ofrelated firms: as their critical goal%3% managers have traditionall embraced the maximization of shareholder wealth as the onlworth goal%

,(% *hen corporate governance brea!s down% shareholders are unli!el to receive fair returns on their investments%% managers ma be tempted to enrich themselves at shareholder expense%C% the board of directors is not doing its /ob%3% all of the above

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,,% 7rivatization refers to the process of% having government operate businesses for the betterment of the public sector%% government allowing the operation of privatel owned business%C% prohibiting government operated enterprises%

3% a countr divesting itself of the ownership and operation of a business venture b turning itover to the free mar!et sstem%

,.% 3eregulation of world financial mar!ets% provided a natural environment for financial innovations: li!e currenc futures and options%% has promoted competition among mar!et participants%C% has encouraged developing countries such as Chile: Mexico: and Dorea to liberalize ballowing foreigners to directl invest in their financial mar!ets%3% all of the above

,4% The emergence of global financial mar!ets is due in no small part to% advances in computer and telecommunications technolog%% enforcement of the "oviet sstem of state ownership of resources of production%C% government regulation and protection of infant industries%3% none of the above

,6% The common monetar polic for the euro zone is now formulated b% the undesban! in German%% the Federal 9eserve an!%C% the *orld an!%3% the 2uropean Central an!%

,8% "ince the end of *orld *ar #: the dominant global currenc has been the% ritish pound%%


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,;% "ince the end of *orld *ar #: the =%"% dollar has plaed the role of the dominant globalcurrenc: displacing the% German mar!%% French Franc%

C% % The ascendance of the dollar the dominant global currenc reflects several !e factorssuch as% the size of the =%"% population%% the mature and open capital mar!ets of the =%"% econom%C% exchange rate stabilit%3% all of the above%

.0% The euro% is the common currenc of 2urope%% is divisible into 100 cents: /ust li!e the =%"% dollar%C% ma eventuall have a transaction domain larger than the =%"% dollar%3% all of the above%

.1% "ince its inception the euro has brought about revolutionar changes in 2uropean finance%For example:% b redenominating corporate bonds and stoc!s from 1( different currencies into onecommon currenc: the euro has precipitated the emergence of continent wide capital mar!etsin 2urope that are comparable to =%"% mar!ets in depth and li+uidit%% "wiss ban! accounts are all denominated in euro%C% the 2uropean ban!ing sector has become much more important as a source of financing for 2uropean firms%3% there have actuall not been an revolutionar changes%

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.(% #n 3avid 9icardo&s theor of comparative advantage:% international trade is a zero-sum game in which one trading partner&s gain comes at theexpense of another&s loss%% liberalization of international trade will enhance the welfare of the world&s citizens%

C% is a short-run argument: not a long-run argument%3% has been superseded b the now-orthodox view of mercantilism%

.,% =nder the theor of comparative advantage: liberalization of international trade will% enhance the welfare of the world&s citizens%% create unemploment and displacement of wor!ers permanentl%C% result in higher prices in the long run as monopolists are able to charge higher prices aftereliminating their competitors%3% all of the above

..% 7rivatization is often seen as a cure for bureaucratic inefficienc and wasteI someeconomists estimate that privatization improves efficienc and reduces operating costs b asmuch as% 4 percent%% 10 percent%C% 14 percent%3% (0 percent%

.4% The *orld Trade Arganization: *TA:% has the power to enforce the rules of international trade%% covers agriculture and phsical goods: but not services or intellectual propert rights%C% recentl expelled China for human rights violations%3% ruled that $FT is to be the model for world trade integration%

.6% 7rivatization

% has spurred a tremendous increase in cross-border investment%% has allowed man governments to have the funds to nationalize important industries%C% has guaranteed that new ownership will be limited to the local citizens%3% has generall decreased the efficienc of the enterprise%

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.8% The theor of comparative advantage% claims that economic well-being is enhanced if each countr&s citizens produce onl asingle product%% claims that economic well-being is enhanced when all countries compare commodit

prices after ad/usting for exchange rate differences in order to standardize the prices chargedall countries%C% claims that economic well-being is enhanced if each countr&s citizens produce that whichthe have a comparative advantage in producing relative to the citizens of other countries: andthen trade production%3% claims that no countr has an absolute advantage over another countr in the production ofan good or service%

.;% multinational firm can be defined as a firm that

% invests short-term cash inflows in more than one currenc%% has sales affiliates in several countries%C% is incorporated in more than one countr%3% incorporated in one countr that has production and sales operations in several othercountries%

.>% n M$C ma gain from its global presence b% spreading 9J3 expenditures and advertising costs over their global sales%% pooling global purchasing power over suppliers%

C% utilizing their technological and managerial !now-how globall with minimum additionalcosts%3% all of the above are potential gains

40% M$Cs can use their global presence to% ta!e advantage of underpriced labor services available in certain developing countries%% gain access to special 9J3 capabilities residing in advanced foreign counties%C% boost profit margins and create shareholder value%3% all of the above

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41% Foreign-owned manufacturing companies in the world&s most highl developed countries% generall are more productive and pa their wor!ers more than do comparable locall-owned businesses%% generall are less productive and therefore pa their wor!ers less than do comparable

locall-owned businesses%C% tend to specialize in different articles of manufacture than the produce in their homecountries%3% usuall do not build their own production facilities but simpl bu existing domesticmanufacturing firms%

4(% purel domestic firm sources its products: sells its products: and raises its fundsdomesticall% can face stiff competition from a multinational corporation that can source its products in

one countr: sell them in several countries: and raise its funds in a third countr%% can be more competitive than an M$C on its home turf due to superior !nowledge of thelocal mar!et%C% can still face exchange rate ris!: /ust li!e an M$C%3% all of the above are true

4,% M$C stands for% Multinational Corporation%% Multi $ationalized Corporation%

C% Militar $ational Cooperation%

4.% *hich is growing at a faster rate: foreign direct investment b M$Cs or internationaltrade'% F3# b M$Cs%% #nternational trade%C% "ince the are lin!ed: the grow at the same rate%3% $one of the above%

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44% true M$C: with operations in dozens of different countries% must effectivel manage foreign exchange ris!%% can ignore foreign exchange ris! since it is diversified%C% will pa taxes in onl its home count%

3% none of the above

46% n M$C can% be a factor that increases the opportunities of the citizens of less developed countries%% be a factor that increases the opportunit set of domestic investors%C% increase economic efficienc%3% all of the above

48% Toda for an M$C to produce merchandise in one countr on capital e+uipment financed b funds raised in a number of different currencies through issuing securities to investors inman countries and then selling the finished product to customers in et other countries is% not uncommon%% extremel common%C% uncommon%3% the norm%

4;% corporation that can source its products in one countr: sell them in another countr: andraise the funds in a third countr% is a multinational corporation%% is a domestic firm if all of the shareholders are from the same countr%C% en/os a built-in hedge against exchange rate ris!%3% en/os a built-in hedge against political ris!%

4>% Countr can produce 10 ards of textiles or 6 pounds of food per unit of input% Computethe opportunit cost of producing one additional unit of food instead of textiles%

% 1 ard of textiles per 1%68 pounds of food% 1 pound of food per 1%68 ards of textilesC% 1 ard of textiles per %6 pounds of food3% 1 pound of food per %6 ards of textiles

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60% The gains from trade% are li!el realized in the long run when wor!ers and firms have had the time to ad/ust tothe new competitive environment%% are immediatel realized in the short run: when governments drop protectionist policies%

C% are smaller than the costs of ad/ustment%3% none of the above

61% 9estrictions or impediments to free trade include such things as% import +uotas%% import tariffs%C% costl transportation%3% all of the above

6(% "uppose that countr is twice as good at producing widgets as countr % #f the currencof is twice as valuable as the currenc of :% the comparative advantage will be canceled out%% trade will be an improved outcome for both and %C% the comparative advantage could possible be canceled out depending on how much it coststo produce the widget in countr %3% none of the above

6,% Comparative advantage% is also !nown as relative efficienc%% can lead to trade even in the face of absolute efficienc%C% exists when one part can produce a good or service at a lower opportunit cost thananother part%3% all of the above

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6.% Countr can produce 10 ards of textiles or 6 pounds of food per unit of input% Countr can produce ; ards of textiles or 4 pounds of food per unit of input%% Countr is relativel more efficient than Countr in the production of food%% Countr is relativel more efficient than Countr in the production of textiles%

C% Countr has an absolute advantage over Countr in the production of food and textiles%3% Countr has an absolute advantage over Countr in the production of food andtextiles%

64% =nderling the theor of comparative advantage are assumptions regarding% free trade between nations%% that the factors of production Kland: labor: capital: and entrepreneurial abilit5 are relativelimmobile%C% that the factors of production Kland: labor: capital: and entrepreneurial abilit5 are relativel

mobile%3% a5 and b5

66% #f one countr is twice the size of another countr and is better at ma!ing almosteverthing than the benighted citizens of the smaller count:% the bigger countr en/os an absolute advantage%% the bigger countr en/os a relative advantage%C% the bigger countr en/os a comparative advantage%3% there is not enough information to ma!e a determination%

68% Countr can produce 10 ards of textiles or 6 pounds of food per unit of input% Countr can produce ; ards of textiles or 4 pounds of food per unit of input%% Countr is relativel more efficient than Countr in the production of food%% Countr is relativel more efficient than Countr in the production of textiles%C% Countr has an absolute advantage over Countr in the production of food and textiles%3% nswers b5 and c5 are both correct

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6;% Countr can produce 10 ards of textiles or 6 pounds of food per unit of input% Countr can produce ; ards of textiles or 4 pounds of food per unit of input%% Countr is relativel more efficient than Countr in the production of textiles%% Countr is relativel more efficient than Countr in the production of food%

C% Countr has an absolute advantage over Countr in the production of food and textiles%3% all of the above

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6>% Consider the no-trade inputBoutput situation presented in the following table and graph forcountries and % ssuming that free trade is legalI develop a scenario that will benefit thecitizens of both countries%

% Countr should ma!e all the textiles and trade with Countr for food%% Countr should ma!e nothing but textiles and trade with Countr for food%C% Countr should ma!e all the textiles and Countr should ma!e all the food%

3% Countr should ma!e nothing but textiles and trade with Countr for food%

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80% Countries and currentl consume .00 units of food and .00 units of textiles each andcurrentl do not trade with one another% The citizens of countr have to give up one unit offood to gain two units of textiles: while the citizens of countr have to give up one unit oftextiles to gain two units of food% Their production possibilities curves are shown%

=nder the theor of comparative advantage

% The citizens of countr should ma!e food and trade with the citizens of countr fortextiles%% The citizens of countr should ma!e textiles and trade with the citizens of countr forfood%C% There are no gains from trade in this example%3% is twice as good as at ma!ing food and is twice as good as at ma!ing textiles%

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81% Counties and currentl consume .00 units of food and .00 units of textiles each andcurrentl do not trade with one another% The citizens of countr have to give up one unit offood to gain two units of textiles: while the citizens of countr have to give up one unit oftextiles to gain two units of food% Their production possibilities curves are shown%

=nder the theor of comparative advantage: if free trade is allowed: the mar!et clearing priceKor exchange rate if ou will5 between food and textiles will be% one unit of food for one unit of textiles%% somewhere between one unit of food for two units of textiles and two units of food for oneunit of textiles%C% one unit of food for two units of textiles%3% two units of food for one unit of textiles%

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8(% Countries and currentl consume .00 units of food and .00 units of textiles each andcurrentl do not trade with one another% The citizens of countr have to give up one unit offood to gain two units of textiles: while the citizens of countr have to give up one unit oftextiles to gain two units of food% Their production possibilities curves are shown%

"uppose that trade is allowed and that the international exchange rate between food and

textiles is one-for-one% The increased consumption following trade will be% an increase of .00 units of food and .00 units of textiles%% an increase of 1:(00 units of food and 1:(00 units of textiles%C% an increase of ;00 units of food and ;00 units of textiles%3% there are no gains from trade in this example%

8,% #n modern times: it is not a countr per se but rather a controller of capital and !now-howthat gives the countr in which it is domiciled a comparative advantage over another countr%These controllers of capital and technolog are

% the state%% the multinational corporations KM$Cs5%C% portfolio managers of international mutual funds%3% none of the above

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8.% #nternational trade is% a Hzero-sumH game in which one countr benefits at the expense of another countr%% an Hincreasing-sumH game at which all plaers become winners%C% none of the above

84% The doctrine of comparative advantage was first put forth b% dam "mith%% dam "andler%C% 3avid 9icardo%3% 9ic! 9icardo%2% none of the above

86% The comparative advantage argument in free trade% ignores the cost of read/ustment%% is a short-run argument%C% onl wor!s for two goods at a time%3% none of the above

88% #f ou can ma!e a good at a low opportunity cost:% ou would be well served to produce that good and trade for other goods%

% ou should ma!e something else that has a higher value%C% ou should ma!e something else that has a higher opportunit cost%3% none of the above

8;% countr li!e $orth Dorea% probabl re/ects the notion of increased opportunit presented b free trade%% engages in free trade%C% lies on a production possibilities curve superior to "outh Dorea: since $orth Dorea protectsits domestic producers%


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The table below shows the bushels of wheat and the bottles of beer that $orth and "outh3a!ota can produce per da of labor under two different hpothetical situations KCases # and##5%

8>% *hich state has an absolute advantage in producing wheat in Case #'% "outh 3a!ota

% $orth 3a!otaC% $either state

;0% *hich state has an absolute advantage in producing beer in Case #'% "outh 3a!ota% $orth 3a!otaC% $either state

;1% *hich state has an absolute advantage in producing beer in Case ##'% "outh 3a!ota% $orth 3a!otaC% $either state

;(% *hich state has a comparative advantage in producing wine in Case ##'% "outh 3a!ota% $orth 3a!otaC% $either state

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;,% *hich state has a comparative advantage in wheat production in Case #'% "outh 3a!ota% $orth 3a!otaC% $either state

;.% *hich state has a comparative advantage in wheat production in Case ##'% "outh 3a!ota% $orth 3a!otaC% $either state

;4% *hat is the relative price of wheat in $orth 3a!ota prior to trade in Case ##'

% ( bushels of wheat @ L bottle of beer % L bushel of wheat @ ( bottles of beer C% 1 bushel of wheat @ L bottle of beer 3% 1 bushel of wheat @ ( bottles of beer

;6% For case ##: in what range must the HinternationalH price of wheat fall' i.e. if $orth and"outh 3a!ota trade onl with each other: what is the range of prices possible'% etween 1 bushel of wheat @ .B, bottles of beer and 1 bushel of wheat @ ( bottles of beer % etween 1 bushel of wheat @ ,B. bottles of beer and 1 bushel of wheat @ ( bottles of beer

C% etween 1 bushel of wheat @ ,B. bottles of beer and 1 bushel of wheat @ L bottles of beer 3% $one of the above

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;8% For case ##: let the international price be 1 bottle @ 1 bushel% 3erive "outh 3a!ota&sHtrading possibilities curve%H

% Aption a% Aption b

C% Aption c3% Aption d

;;% For case ##: let the international price be 1 bottle @ 1 bushel% 3erive $orth 3a!ota&sHtrading possibilities curve%H

% Aption a% Aption bC% Aption c3% Aption d

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;>% *hat is the price of beer without trade in "outhern #reland'% ( bottles of whis!e @ , !egs of beer % 4 bottles of whis!e @ 1( !egs of beer C% 1 bottle of whis!e @ 1 !eg of beer

>0% *hat is the price of beer without trade in $orthern #reland'% ( bottles of whis!e @ , !egs of beer % 4 bottles of whis!e @ 1( !egs of beer C% , bottles of whis!e @ 1 !eg of beer

>1% #n which product does $orthern #reland have a comparative advantage'

% eer % *his!eC% $either

>(% "uppose that trade occurs% 2ach countr completel specializes and 400 !egs of beer aretraded for 400 bottles of whis!e% *hat is the international price of beer'% 1 bottle of whis!e @ 1 !eg of beer % , bottles of whis!e @ 1 !eg of beer C% (B, bottle of whis!e @ 1 !eg of beer

3% 1 bottle of whis!e @ , !egs of beer

>,% #f the international price of beer is one !eg of beer @ 1 bottle of whis!e: how muchwhis!e will $orthern #reland consume' 2ach countr completel specializes and 400 !egs of beer are traded for 400 bottles of whis!e%% 1:000 bottles% 1:(00 bottlesC% 400 bottles3% 600 bottles

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>.% *hat is the increased amount of goods available in $orthern #reland after trade'% .00 more bottles of whis!e and (00 more !egs of beer % 1:000 more bottles of whis!e and 400 more !egs of beer C% (00 more bottles of whis!e and .00 more !egs of beer

>4% "uppose that $orthern #reland and "outhern #reland each have 1:000 hours of labor perda% "outhern wor!ers are paid )1 per da and $orthern wor!ers are paid 1 per da% *hat isthe exchange rate associated with an international price of one !eg of beer @ 1 bottle ofwhis!e'% )1%(4 @ 1% )0%;0 @ 1C% )1 @ 13% $one of the above

>6% Consider a dentist and a 1.-ear old bo% The dentist can ma!e ?100 per hour drillingteeth and the 1.-ear old bo can ma!e ?( per hour pic!ing up used aluminum cans% Thedentist is a manl man and can mow his half-acre lot in one hour% The 1.-ear old bo canmow the lawn in two hours% #f the dentist hires the bo to mow his lawn at an price less than?100: but more than ?.% both he and the bo are better off%% the dentist would be exploiting the bo%C% the bo would be exploiting the dentist%

3% all of the above

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Consider the no-trade inputBoutput situation presented in the following table and graph for"outh and $orth Carolina% ssume that free trade is legal%

>8% *hich state is better at ma!ing guns'% "outh Carolina% $orth CarolinaC% neither

>;% "uppose that the citizens of $orth and "outh Carolina are currentl consuming as much butter as the care to% *hat is the maximum increase in the number of guns that could occurfollowing trade'% ;,%,, guns% 4,,%,, gunsC% $o increase

>>% *hat is the relative price of a gun in terms of butter in "outh Carolina'% 1 gun costs , butters

% , guns cost 1 butter C% 1 gun costs ( butters3% ( gun costs 1 butter

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100% *hat is the relative price of a gun in terms of butter in $orth Carolina'% 1 gun costs , butters% , guns cost 1 butter C% 1 gun costs ( butters

3% ( gun costs 1 butter

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Chapter 01 Globalization and the Multinational Firm nswer De

True / False Questions

The first two columns give the maximum dail amounts of beer and whis!e that "outhern#reland and $orthern #reland can produce when the completel specialize in one or other product% The last two columns give each countr&s consumption without trade%

1% #s $orthern #reland better off when it trades with "outhern #reland'TRUE

Topic: Appendix: The Theory of Comparative Advantage

(% $ow suppose that "outhern wor!ers receive a raise to )( per da% *ill trade be possible atthe exchange rate ou found in the last +uestion'TRUE


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,% $ow suppose that "outhern wor!ers are paid )1 per da but the $orthern wor!ers receive araise to ( per da% *ill trade be possible at the exchange rate ou found in the +uestion before the last +uestion'FA!E


Multiple Choice Questions

.% *hat ma/or dimension sets apart international finance from domestic finance'% Foreign exchange and political ris!s% Mar!et imperfections

C% 2xpanded opportunit set"# ll of the above

Topic: What's Special about !nternational "inance#

4% n example of a political ris! is% expropriation of assets%% adverse change in tax rules%C% the opposition part being elected%

"# both answers a5 and b5 are correct%


6% 7roduction of goods and services has become globalized to a large extent as a result of% natural resources being depleted in one countr after another%% s!illed labor being highl mobile%C# multinational corporations& efforts to source inputs and locate production anwhere wherecosts are lower and profits higher%

3% common tastes worldwide for the same goods and services%


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8% 9ecentl: financial mar!ets have become highl integrated% This developmentA# allows investors to diversif their portfolios internationall%% allows minorit investors to bu and sell stoc!s%C% has increased the cost of capital for firms%

3% answers a5 and c5 are both correct%


;%


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11% "uppose that Great ritain is a ma/or export mar!et for our firm: a =%"%-based M$C% #fthe ritish pound de preciates against the =%"% dollar:% our firm will be able to charge more in dollar terms while !eeping pound prices stable%% our firm ma be priced out of the =%D% mar!et: to the extent that our dollar costs sta

constant and our pound prices will rise%C% to protect =%D% mar!et share: our firm ma have to cut the dollar price of our goods to!eep the pound price the same%"# both b5 and c5 are correct


1(% "uppose Mexico is a ma/or export mar!et for our =%"%-based compan and the Mexican peso appreciates drasticall against the =%"% dollar% This means

% our compan&s products can be priced out of the Mexican mar!et: as the peso price ofmerican imports will rise following the peso&s fall%% our firm will be able to charge more in dollar terms while !eeping peso prices stable%C% our domestic competitors will en/o a period of facing lessened price competition fromMexican imports%"# both b5 and c5 are correct


1,% "uppose Mexico is a ma/or export mar!et for our =%"%-based compan and the Mexican peso depreciates drasticall against the =%"% dollar: as it did in 3ecember 1>>.% This meansA# our compan&s products can be priced out of the Mexican mar!et: as the peso price ofmerican imports will rise following the peso&s fall%% our firm will be able to charge more in dollar terms while !eeping peso prices stable%C% our domestic competitors will en/o a period of facing little price competition fromMexican imports%3% both b5 and c5 are correct


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1.% "uppose that ou are a =%"% producer of a commodit good competing with foreign producers% our inputs of production are priced in dollars and ou sell our output in dollars%#f the =%"% currenc depreciates against the currencies of our trading partners:A# our competitive position is li!el improved%

% our competitive position is li!el worsened%C% our competitive position is unchanged%


14% =ndoubtedl: we are now living in a world where all the ma/or economic functionsE consumption: production: and investment% are still inherentl local%% are still regional in nature%

C% are slowl becoming globalized%"# are highl globalized%


16% Most governments at least tr to ma!e it difficult for people to cross their borders illegall%This barrier to the free movement of labor is an example of% information asmmetr%% excessive transactions costs%

C% racial discrimination%"# a mar!et imperfection%


18% lthough the world econom is much more integrated toda than was the case 10 or (0ears ago: a variet of barriers still hamper free movements of people: goods: services: andcapital across national boundaries% These barriers include% legal restrictions%

% excessive transportation costs%C% information asmmetr%"# all of the above


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1;% The


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(1% 3eregulated financial mar!ets and heightened competition in financial services providedan environment for financial innovations that resulted in the introduction of variousinstruments% 2xamples of these innovative instruments include% currenc futures and options: foreign stoc! index futures and options%

% multicurrenc bonds%C% international mutual funds: countr funds: exchange traded funds%"# all of the above


((% $estl: a well-!nown "wiss corporation:% has been a paragon of virtue in its opposition to all forms of political ris!%% at one time placed restrictions on foreign ownership of its stoc!% *hen it relaxed these

restrictions: the total mar!et value of the firm fell%C# at one time placed restrictions on foreign ownership of its stoc!% *hen it relaxed theserestrictions: there was a ma/or transfer of wealth from foreign shareholders to "wissshareholders%3% none of the above


(,% The goal of shareholder wealth maximization

% is not appropriate for non-=%"% business firms%$# means that all business decisions and investments that a firm ma!es are done for the purpose of ma!ing the owners of the firm better off financiall%C% is a sub-ob/ective the firm should attempt to achieve after the ob/ective of customersatisfaction is met%3% is in conflict with the privatization process ta!ing place in third-world countries%

Topic: $oals for !nternational "inancial %anagement

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(.% s capital mar!ets are becoming more integrated: the goal of shareholder wealthmaximization% has been altered to include other goals as well%% has lost out to other goals: even in the =%"%

C# has been given increasing importance b managers in 2urope%3% has been shown to be a deterrent to raising funds abroad%


(4% 9ecent corporate scandals at firms such as 2nron: *orldCom and the #talian firm7armalatA# show that managers might be tempted to pursue their own private interests at the expenseof shareholders%

% show that #talian shareholders are better at monitoring managerial behavior than =%"%shareholders%C% show that white-collar criminals hardl ever get punished%3% show that socialism is a better wa to go than capitalism%


(6% *hile the corporate governance problem is not confined to the =nited "tates:A# it can be a much more serious problem in man other parts of the world: where legal

protection of shareholders is wea! or nonexistent%% it has reached its high point in the =nited "tates%C% the =%"% legal sstem: with lawsuits used onl as a last resort: ensured that an conflicts ofinterest will soon be a thing of the past%3% none of the above


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(8% The owners of a business are the% taxpaers%% wor!ers%C% suppliers%

"# shareholders%


(;% The massive privatization that is currentl ta!ing place in formerl socialist countries: willli!el% eventuall enhance the standard of living to these countries& citizens%% depend on private investment%C% increase the opportunit set facing these countries& citizens%

"# all of the above


(>% firm with concentrated ownership % ma give rise to conflicts of interest between dominant shareholders and small outsideshareholders%% ma en/o more accounting transparenc than firms with diffuse ownership structures%C% is a partnership: never a corporation%

"# tends to exist overseas but not in the =%"%


,0% The ultimate guardians of shareholder interest in a corporation: are the% ran! and file wor!ers%% senior management%C# boards of directors%3% all of the above%


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,1% #n countries li!e France and German:% managers have often made business decisions with regard to maximizing mar!et share tothe exclusion of other goals%$# managers have often viewed shareholders as one of the Hsta!eholdersH of the firm: others

being emploees: customers: suppliers: ban!s and so forth%C% managers have often regarded the prosperit and growth of their combines: or families ofrelated firms: as their critical goal%3% managers have traditionall embraced the maximization of shareholder wealth as the onlworth goal%


,(% *hen corporate governance brea!s down

% shareholders are unli!el to receive fair returns on their investments%% managers ma be tempted to enrich themselves at shareholder expense%C% the board of directors is not doing its /ob%"# all of the above


,,% 7rivatization refers to the process of% having government operate businesses for the betterment of the public sector%

% government allowing the operation of privatel owned business%C% prohibiting government operated enterprises%"# a countr divesting itself of the ownership and operation of a business venture b turning itover to the free mar!et sstem%

Topic: $lobali&ation of the World conomy

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,.% 3eregulation of world financial mar!ets% provided a natural environment for financial innovations: li!e currenc futures and options%% has promoted competition among mar!et participants%C% has encouraged developing countries such as Chile: Mexico: and Dorea to liberalize b

allowing foreigners to directl invest in their financial mar!ets%"# all of the above

Topic: $lobali&ation of the World conomy

,4% The emergence of global financial mar!ets is due in no small part toA# advances in computer and telecommunications technolog%% enforcement of the "oviet sstem of state ownership of resources of production%C% government regulation and protection of infant industries%


Topic: mergence of the uro as a $lobal Currency

,6% The common monetar polic for the euro zone is now formulated b% the undesban! in German%% the Federal 9eserve an!%C% the *orld an!%"# the 2uropean Central an!%


,8% "ince the end of *orld *ar #: the dominant global currenc has been the% ritish pound%%


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,;% "ince the end of *orld *ar #: the =%"% dollar has plaed the role of the dominant globalcurrenc: displacing the% German mar!%% French Franc%

C%


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.1% "ince its inception the euro has brought about revolutionar changes in 2uropean finance%For example:A# b redenominating corporate bonds and stoc!s from 1( different currencies into onecommon currenc: the euro has precipitated the emergence of continent wide capital mar!ets

in 2urope that are comparable to =%"% mar!ets in depth and li+uidit%% "wiss ban! accounts are all denominated in euro%C% the 2uropean ban!ing sector has become much more important as a source of financing for 2uropean firms%3% there have actuall not been an revolutionar changes%


.(% #n 3avid 9icardo&s theor of comparative advantage:

% international trade is a zero-sum game in which one trading partner&s gain comes at theexpense of another&s loss%$# liberalization of international trade will enhance the welfare of the world&s citizens%C% is a short-run argument: not a long-run argument%3% has been superseded b the now-orthodox view of mercantilism%


.,% =nder the theor of comparative advantage: liberalization of international trade will

A# enhance the welfare of the world&s citizens%% create unemploment and displacement of wor!ers permanentl%C% result in higher prices in the long run as monopolists are able to charge higher prices aftereliminating their competitors%3% all of the above


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..% 7rivatization is often seen as a cure for bureaucratic inefficienc and wasteI someeconomists estimate that privatization improves efficienc and reduces operating costs b asmuch as% 4 percent%

% 10 percent%C% 14 percent%"# (0 percent%


.4% The *orld Trade Arganization: *TA:A# has the power to enforce the rules of international trade%% covers agriculture and phsical goods: but not services or intellectual propert rights%

C% recentl expelled China for human rights violations%3% ruled that $FT is to be the model for world trade integration%


.6% 7rivatizationA# has spurred a tremendous increase in cross-border investment%% has allowed man governments to have the funds to nationalize important industries%C% has guaranteed that new ownership will be limited to the local citizens%

3% has generall decreased the efficienc of the enterprise%


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.8% The theor of comparative advantage% claims that economic well-being is enhanced if each countr&s citizens produce onl asingle product%% claims that economic well-being is enhanced when all countries compare commodit

prices after ad/usting for exchange rate differences in order to standardize the prices chargedall countries%C# claims that economic well-being is enhanced if each countr&s citizens produce that whichthe have a comparative advantage in producing relative to the citizens of other countries: andthen trade production%3% claims that no countr has an absolute advantage over another countr in the production ofan good or service%


.;% multinational firm can be defined as a firm that% invests short-term cash inflows in more than one currenc%% has sales affiliates in several countries%C% is incorporated in more than one countr%"# incorporated in one countr that has production and sales operations in several othercountries%

Topic: %ultinational Corporations

.>% n M$C ma gain from its global presence b% spreading 9J3 expenditures and advertising costs over their global sales%% pooling global purchasing power over suppliers%C% utilizing their technological and managerial !now-how globall with minimum additionalcosts%"# all of the above are potential gains


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40% M$Cs can use their global presence to% ta!e advantage of underpriced labor services available in certain developing countries%% gain access to special 9J3 capabilities residing in advanced foreign counties%C% boost profit margins and create shareholder value%

"# all of the above


41% Foreign-owned manufacturing companies in the world&s most highl developed countriesA# generall are more productive and pa their wor!ers more than do comparable locall-owned businesses%% generall are less productive and therefore pa their wor!ers less than do comparablelocall-owned businesses%

C% tend to specialize in different articles of manufacture than the produce in their homecountries%3% usuall do not build their own production facilities but simpl bu existing domesticmanufacturing firms%


4(% purel domestic firm sources its products: sells its products: and raises its fundsdomesticall

% can face stiff competition from a multinational corporation that can source its products inone countr: sell them in several countries: and raise its funds in a third countr%% can be more competitive than an M$C on its home turf due to superior !nowledge of thelocal mar!et%C% can still face exchange rate ris!: /ust li!e an M$C%"# all of the above are true


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4,% M$C stands forA# Multinational Corporation%% Multi $ationalized Corporation%C% Militar $ational Cooperation%


4.% *hich is growing at a faster rate: foreign direct investment b M$Cs or internationaltrade'A# F3# b M$Cs%% #nternational trade%C% "ince the are lin!ed: the grow at the same rate%3% $one of the above%


44% true M$C: with operations in dozens of different countriesA# must effectivel manage foreign exchange ris!%% can ignore foreign exchange ris! since it is diversified%C% will pa taxes in onl its home count%3% none of the above


46% n M$C can% be a factor that increases the opportunities of the citizens of less developed countries%% be a factor that increases the opportunit set of domestic investors%C% increase economic efficienc%"# all of the above


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48% Toda for an M$C to produce merchandise in one countr on capital e+uipment financed b funds raised in a number of different currencies through issuing securities to investors inman countries and then selling the finished product to customers in et other countries isA# not uncommon%

% extremel common%C% uncommon%3% the norm%


4;% corporation that can source its products in one countr: sell them in another countr: andraise the funds in a third countrA# is a multinational corporation%

% is a domestic firm if all of the shareholders are from the same countr%C% en/os a built-in hedge against exchange rate ris!%3% en/os a built-in hedge against political ris!%


4>% Countr can produce 10 ards of textiles or 6 pounds of food per unit of input% Computethe opportunit cost of producing one additional unit of food instead of textiles%% 1 ard of textiles per 1%68 pounds of food

% 1 pound of food per 1%68 ards of textilesC# 1 ard of textiles per %6 pounds of food3% 1 pound of food per %6 ards of textiles


60% The gains from tradeA# are li!el realized in the long run when wor!ers and firms have had the time to ad/ust tothe new competitive environment%

% are immediatel realized in the short run: when governments drop protectionist policies%C% are smaller than the costs of ad/ustment%3% none of the above


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61% 9estrictions or impediments to free trade include such things as% import +uotas%% import tariffs%C% costl transportation%

"# all of the above


6(% "uppose that countr is twice as good at producing widgets as countr % #f the currencof is twice as valuable as the currenc of :% the comparative advantage will be canceled out%% trade will be an improved outcome for both and %C# the comparative advantage could possible be canceled out depending on how much it costs

to produce the widget in countr %3% none of the above


6,% Comparative advantage% is also !nown as relative efficienc%% can lead to trade even in the face of absolute efficienc%C% exists when one part can produce a good or service at a lower opportunit cost than

another part%"# all of the above


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6.% Countr can produce 10 ards of textiles or 6 pounds of food per unit of input% Countr can produce ; ards of textiles or 4 pounds of food per unit of input%% Countr is relativel more efficient than Countr in the production of food%% Countr is relativel more efficient than Countr in the production of textiles%

C# Countr has an absolute advantage over Countr in the production of food andtextiles%3% Countr has an absolute advantage over Countr in the production of food andtextiles%


64% =nderling the theor of comparative advantage are assumptions regarding% free trade between nations%

% that the factors of production Kland: labor: capital: and entrepreneurial abilit5 are relativelimmobile%C% that the factors of production Kland: labor: capital: and entrepreneurial abilit5 are relativelmobile%"# a5 and b5


66% #f one countr is twice the size of another countr and is better at ma!ing almost

everthing than the benighted citizens of the smaller count:A# the bigger countr en/os an absolute advantage%% the bigger countr en/os a relative advantage%C% the bigger countr en/os a comparative advantage%3% there is not enough information to ma!e a determination%


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68% Countr can produce 10 ards of textiles or 6 pounds of food per unit of input% Countr can produce ; ards of textiles or 4 pounds of food per unit of input%% Countr is relativel more efficient than Countr in the production of food%% Countr is relativel more efficient than Countr in the production of textiles%

C% Countr has an absolute advantage over Countr in the production of food and textiles%"# nswers b5 and c5 are both correct


6;% Countr can produce 10 ards of textiles or 6 pounds of food per unit of input% Countr can produce ; ards of textiles or 4 pounds of food per unit of input%% Countr is relativel more efficient than Countr in the production of textiles%% Countr is relativel more efficient than Countr in the production of food%

C% Countr has an absolute advantage over Countr in the production of food and textiles%"# all of the above


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6>% Consider the no-trade inputBoutput situation presented in the following table and graph forcountries and % ssuming that free trade is legalI develop a scenario that will benefit thecitizens of both countries%

% Countr should ma!e all the textiles and trade with Countr for food%$# Countr should ma!e nothing but textiles and trade with Countr for food%C% Countr should ma!e all the textiles and Countr should ma!e all the food%

3% Countr should ma!e nothing but textiles and trade with Countr for food%


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80% Countries and currentl consume .00 units of food and .00 units of textiles each andcurrentl do not trade with one another% The citizens of countr have to give up one unit offood to gain two units of textiles: while the citizens of countr have to give up one unit oftextiles to gain two units of food% Their production possibilities curves are shown%

=nder the theor of comparative advantage

% The citizens of countr should ma!e food and trade with the citizens of countr fortextiles%$# The citizens of countr should ma!e textiles and trade with the citizens of countr forfood%C% There are no gains from trade in this example%3% is twice as good as at ma!ing food and is twice as good as at ma!ing textiles%


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81% Counties and currentl consume .00 units of food and .00 units of textiles each andcurrentl do not trade with one another% The citizens of countr have to give up one unit offood to gain two units of textiles: while the citizens of countr have to give up one unit oftextiles to gain two units of food% Their production possibilities curves are shown%

=nder the theor of comparative advantage: if free trade is allowed: the mar!et clearing priceKor exchange rate if ou will5 between food and textiles will be% one unit of food for one unit of textiles%$# somewhere between one unit of food for two units of textiles and two units of food for oneunit of textiles%C% one unit of food for two units of textiles%3% two units of food for one unit of textiles%


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8(% Countries and currentl consume .00 units of food and .00 units of textiles each andcurrentl do not trade with one another% The citizens of countr have to give up one unit offood to gain two units of textiles: while the citizens of countr have to give up one unit oftextiles to gain two units of food% Their production possibilities curves are shown%

"uppose that trade is allowed and that the international exchange rate between food and

textiles is one-for-one% The increased consumption following trade will beA# an increase of .00 units of food and .00 units of textiles%% an increase of 1:(00 units of food and 1:(00 units of textiles%C% an increase of ;00 units of food and ;00 units of textiles%3% there are no gains from trade in this example%


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8,% #n modern times: it is not a countr per se but rather a controller of capital and !now-howthat gives the countr in which it is domiciled a comparative advantage over another countr%These controllers of capital and technolog are% the state%

$# the multinational corporations KM$Cs5%C% portfolio managers of international mutual funds%3% none of the above


8.% #nternational trade is% a Hzero-sumH game in which one countr benefits at the expense of another countr%$# an Hincreasing-sumH game at which all plaers become winners%

C% none of the above


84% The doctrine of comparative advantage was first put forth b% dam "mith%% dam "andler%C# 3avid 9icardo%3% 9ic! 9icardo%



86% The comparative advantage argument in free tradeA# ignores the cost of read/ustment%% is a short-run argument%C% onl wor!s for two goods at a time%3% none of the above


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88% #f ou can ma!e a good at a low opportunity cost:A# ou would be well served to produce that good and trade for other goods%% ou should ma!e something else that has a higher value%C% ou should ma!e something else that has a higher opportunit cost%



8;% countr li!e $orth DoreaA# probabl re/ects the notion of increased opportunit presented b free trade%% engages in free trade%C% lies on a production possibilities curve superior to "outh Dorea: since $orth Dorea protectsits domestic producers%



The table below shows the bushels of wheat and the bottles of beer that $orth and "outh3a!ota can produce per da of labor under two different hpothetical situations KCases # and##5%

8>% *hich state has an absolute advantage in producing wheat in Case #'A# "outh 3a!ota% $orth 3a!otaC% $either state


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;0% *hich state has an absolute advantage in producing beer in Case #'% "outh 3a!ota$# $orth 3a!otaC% $either state


;1% *hich state has an absolute advantage in producing beer in Case ##'A# "outh 3a!ota% $orth 3a!otaC% $either state


;(% *hich state has a comparative advantage in producing wine in Case ##'A# "outh 3a!ota% $orth 3a!otaC% $either state


;,% *hich state has a comparative advantage in wheat production in Case #'A# "outh 3a!ota% $orth 3a!otaC% $either state


;.% *hich state has a comparative advantage in wheat production in Case ##'

A# "outh 3a!ota% $orth 3a!otaC% $either state


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;4% *hat is the relative price of wheat in $orth 3a!ota prior to trade in Case ##'% ( bushels of wheat @ L bottle of beer % L bushel of wheat @ ( bottles of beer C% 1 bushel of wheat @ L bottle of beer

"# 1 bushel of wheat @ ( bottles of beer


;6% For case ##: in what range must the HinternationalH price of wheat fall' i.e. if $orth and"outh 3a!ota trade onl with each other: what is the range of prices possible'A# etween 1 bushel of wheat @ .B, bottles of beer and 1 bushel of wheat @ ( bottles of beer % etween 1 bushel of wheat @ ,B. bottles of beer and 1 bushel of wheat @ ( bottles of beer C% etween 1 bushel of wheat @ ,B. bottles of beer and 1 bushel of wheat @ L bottles of beer

3% $one of the above


;8% For case ##: let the international price be 1 bottle @ 1 bushel% 3erive "outh 3a!ota&sHtrading possibilities curve%H

% Aption a% Aption bC# Aption c

3% Aption d


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;;% For case ##: let the international price be 1 bottle @ 1 bushel% 3erive $orth 3a!ota&sHtrading possibilities curve%H

% Aption a% Aption b

C% Aption c"# Aption d


;>% *hat is the price of beer without trade in "outhern #reland'A# ( bottles of whis!e @ , !egs of beer % 4 bottles of whis!e @ 1( !egs of beer C% 1 bottle of whis!e @ 1 !eg of beer


>0% *hat is the price of beer without trade in $orthern #reland'% ( bottles of whis!e @ , !egs of beer % 4 bottles of whis!e @ 1( !egs of beer C# , bottles of whis!e @ 1 !eg of beer


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>1% #n which product does $orthern #reland have a comparative advantage'% eer $# *his!eC% $either


>(% "uppose that trade occurs% 2ach countr completel specializes and 400 !egs of beer aretraded for 400 bottles of whis!e% *hat is the international price of beer'A# 1 bottle of whis!e @ 1 !eg of beer % , bottles of whis!e @ 1 !eg of beer C% (B, bottle of whis!e @ 1 !eg of beer 3% 1 bottle of whis!e @ , !egs of beer


>,% #f the international price of beer is one !eg of beer @ 1 bottle of whis!e: how muchwhis!e will $orthern #reland consume' 2ach countr completel specializes and 400 !egs of beer are traded for 400 bottles of whis!e%A# 1:000 bottles% 1:(00 bottlesC% 400 bottles

3% 600 bottles


>.% *hat is the increased amount of goods available in $orthern #reland after trade'A# .00 more bottles of whis!e and (00 more !egs of beer % 1:000 more bottles of whis!e and 400 more !egs of beer C% (00 more bottles of whis!e and .00 more !egs of beer


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>4% "uppose that $orthern #reland and "outhern #reland each have 1:000 hours of labor perda% "outhern wor!ers are paid )1 per da and $orthern wor!ers are paid 1 per da% *hat isthe exchange rate associated with an international price of one !eg of beer @ 1 bottle ofwhis!e'

A# )1%(4 @ 1% )0%;0 @ 1C% )1 @ 13% $one of the above


>6% Consider a dentist and a 1.-ear old bo% The dentist can ma!e ?100 per hour drillingteeth and the 1.-ear old bo can ma!e ?( per hour pic!ing up used aluminum cans% The

dentist is a manl man and can mow his half-acre lot in one hour% The 1.-ear old bo canmow the lawn in two hours% #f the dentist hires the bo to mow his lawn at an price less than?100: but more than ?.A# both he and the bo are better off%% the dentist would be exploiting the bo%C% the bo would be exploiting the dentist%3% all of the above


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Consider the no-trade inputBoutput situation presented in the following table and graph for"outh and $orth Carolina% ssume that free trade is legal%

>8% *hich state is better at ma!ing guns'A# "outh Carolina% $orth CarolinaC% neither


>;% "uppose that the citizens of $orth and "outh Carolina are currentl consuming as much butter as the care to% *hat is the maximum increase in the number of guns that could occurfollowing trade'A# ;,%,, guns% 4,,%,, gunsC% $o increase


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>>% *hat is the relative price of a gun in terms of butter in "outh Carolina'% 1 gun costs , butters% , guns cost 1 butter C# 1 gun costs ( butters

3% ( gun costs 1 butter


100% *hat is the relative price of a gun in terms of butter in $orth Carolina'A# 1 gun costs , butters% , guns cost 1 butter C% 1 gun costs ( butters3% ( gun costs 1 butter


international financial management 6e eun resnick chap001

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