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Common Information

Economists have long recognized a persistent and unfounded belief among the population which has come to be known as the anti-foreign bias. As a result of this bias, most people systematically underestimate the economic benefits of interactions with foreign nations. Some psychologists believe that this bias is rooted in a natural distrust of the "other," while others believe that a form of folk wisdom, seemingly in accord with common sense but nonetheless incorrect, explains the bias. This wisdom asserts that in any transaction there is a winner and a loser and any foreign nation that wants to engage in trade must be doing so because it seeks its own advantage. But nothing could be further from truth.

No less an authority than Adam Smith, one of the fathers of the modern free market system, spoke glowingly of foreign trade in his influential treatise Wealth of Nations. "What is prudence in the conduct of every private family, can scarce be folly in a great kingdom," said Smith. His point is simple. A baker trades his bread to the cobbler for shoes and both men benefit from the trade because of the value of specialization. The same principle works for nations. Even more startling, a basic economic theorem, the Law of Comparative Advantage, states that mutually beneficial trade is possible even if one nation is less productive than the other.

Suppose a citizen of Country X can produce either 10 computers or five bushels of wheat and a citizen of Country Y can produce either three computers or two bushels of wheat. If one citizen from Country X switches from producing wheat to computers and three citizens from Country Y switch from producing computers to wheat, there is a net gain of one computer and one bushel of wheat.


Common Information Question: 4/4

As it is described in the passage, which of the following most closely resembles "folk wisdom?"


A farmer decides that it is going to rain after scanning the sky for dark clouds.


A child asks his parents why the sky is blue and the parents reply "because it is."


A driver believes taking local roads instead of the highway will allow her to reach her destination faster because there will be less traffic on the local roads.


A person spends 10 dollars on lottery tickets every week because he believes that "someone has to win."


A mother tells her child to put on a jacket so he won’t catch cold, even though colds are caused by viruses.

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Option(E) is correct

This is an apply information question. First, read the passage and see what it says about "folk wisdom." This information is in the first paragraph:

Folk wisdom is "seemingly in accord with common sense but nonetheless incorrect."

Choice A is wrong because it is correct that darkening clouds can indicate rain.

Choice B doesn’t match the part about being "in accord with common sense" because the parents give a nonsensical answer.

Choice C is in accord with common sense but isn’t necessarily incorrect.

Choice D is similar in that it is correct that "someone has to win."

That leaves choice E. Although it makes common sense that the child should put on a jacket not to "catch cold," colds are caused by viruses. So it is incorrect to believe a jacket could stop a virus.

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