Module 5 - The Market Flashcards Preview

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Flashcards in Module 5 - The Market Deck (32):
1

Which of the following is correct? A market for a good, service or resource exists when

A. there is a specific location where trade can take place.
B. individuals have something that they can sell.
C. individuals wish to buy something.
D. potential buyers are in communication with potential sellers.

The correct answer is D. A market exists when potential buyers and sellers are in communication with each other. Some transactions occur via brokers and/or on telephone lines, e.g. foreign exchange and shipping cargos. A physical building or location is not necessary. Sellers with goods unable to contact any buyers and buyers wishing goods but unable to contact sellers do not constitute markets.

2

A local store deals in second-hand musical instruments. It offered for sale three pianos at $1000 each but nobody wished to buy the pianos at that price. Over a period of months the store manager gradually reduced the asking price for the pianos but he was still unable to find buyers. Eventually a representative of a music college called at the store and offered to take the pianos at zero price on condition that the store paid the college for their removal. The store manager agreed.

A. Figure (a) only.
B. Figure (b) only.
C. Figure (c) only.
D. Figure (d) only.

The correct answer is B. The quantity of pianos being exchanged is three, and since the store manager agrees to pay for the removal of the pianos, the price is negative. The only figure showing an equilibrium quantity of three at a negative price is Figure 5.31b.

3

Suppose the market for a newly developed gold-plated pencil were represented by the demand and supply schedules below:

Which of the following is correct?

A. Equilibrium quantity would lie between 50 and 350 pencils per day.

B. No exchange would occur.

C. Suppliers would have to lower their prices to $200 since that is the maximum price consumers are willing to pay.

D. Consumers would have to pay $400 to obtain pencils since that is the minimum
price at which suppliers are prepared to sell.

The correct answer is B. The demand curve shows no pencils are demanded at a price of $250. The supply curve shows that no pencils are supplied at a price of $300. Thus no exchange will occur.

4

The price system reacts to excess demand for a good in the short run by

A. lowering the price and profits of firms producing the good.

B. raising the price and producer profits.

C. lowering the price but increasing producer profits.

D. raising the price but lowering producer profits.

The correct answer is B. When excess demand exists in a market (i.e. at a given price the quantity demanded exceeds the quantity supplied), the price of a good in the market will rise until equilibrium is reached, i.e. until excess demand or supply have been eliminated. Firms obeying marginal principles will move up their supply curves (their short-run marginal cost curves). For each additional unit of output produced for which MR > MC, profit will increase by the difference between MR and MC.

5

When influenza vaccine first became available in the US, the government set the price equal to the cost of production. At that price, output was insufficient to fulfil orders and the government regulated the distribution of the vaccine. Which of the following is correct if the vaccine had been sold privately without government intervention?

A. The price would have been higher.
B. The price would have been lower.
C. The price would have been the same.
D. Whether the price would have been higher or lower cannot be determined from the information given.

The correct answer is A. At the price set by the government, excess demand existed. Thus the price required to clear the market exceeded the set price. It should be noted that had the vaccine been sold privately at the ‘equilibrium’ price, the problem of vaccine distribution would have been solved differently: having set a price at which excess demand existed, the government then had to decide who was going to receive the vaccine and who, while willing to pay the set price, was going to be excluded. In a competitive market, distribution would have been determined by competition among buyers, with those able and willing to pay receiving the vaccine.

6

If the equilibrium price prevails in the market for a good

I. no consumers would buy units of the good if the price were higher. II. excess demand and excess supply are both zero.
III. no producers would sell units of the good if the price were lower.

Which of the following is correct?

A. I only.
B. II only.
C. I and III only.
D. I, II and III.

The correct answer is B. In equilibrium there are no unsatisfied buyers or sellers, i.e. no excess demand and no excess supply. This means that any buyer can buy as much as he wants at the going price; any buyer who would be prepared to pay more for the good need not. Similarly any seller can sell as much as he wants at the going price; any seller who would be prepared to offer the good at a lower price need not do so.

7

A city has decided to build 5000 dwelling units and to lease them to low-income residents at a rental below cost and the going rate in the private market. Other things (such as population) being the same, which of the following effects would you expect this to have on the market for private housing?

A. A decrease in rent, followed later by a decrease in the quantity supplied.

B. A decrease in tenants, followed later by an increase in rents.

C. An increase in rents, followed later by an increase in the quantity supplied.

D. No effect, because the low-income persons who will be eligible for the 5000 city-built dwelling units cannot afford acceptable private housing.

The correct answer is A. There is a demand for, and a supply of, private rental housing, which jointly determine the equilibrium market output and price. When the 5000 dwelling units are complete, the demand curve for private housing will shift to the left as many people move into the dwelling units. In the short run, given that the supply of private housing is fixed, the shift of the demand curve must cause the rental price to fall. This will cause landlords’ profits to decrease and, in the long run, resources to move out of the private housing market.

8

Assume the market for golf clubs to be initially in equilibrium. If there were a considerable increase in the number of people wishing to take up golf and, simultaneously, a decrease in every golf-club manufacturer’s production costs due to the use of a new metal compound, which of the following would be correct?

A. The equilibrium price of golf clubs might rise, fall or remain at the same level, but the equilibrium quantity would increase.

B. The equilibrium price of golf clubs would rise, but the equilibrium quantity might increase, decrease or remain at the same level.

C. The equilibrium price of golf clubs would fall, and the equilibrium quantity would increase.

D. The equilibrium price of golf clubs would fall, but the equilibrium quantity might
increase, decrease or remain at the same level.

The correct answer is A. The increase in the number of golfers will shift the demand curve for golf clubs to the right. Simultaneously, the decrease in production costs will shift the supply curve of golf clubs to the right. Thus a larger quantity of clubs will be exchanged (bought or sold) but insufficient information exists to determine what will happen to the price of clubs: it depends on the relative shifts of the demand and supply curves.

9

Suppose a government wants to raise money by means of a tax levied on each unit of a good bought and sold. The government wants the incidence of the tax to fall mainly on buyers, not producers. It also wants to disturb the quantity bought and sold as little as possible. Which of the following demand or supply curves best meets these requirements?

A. Highly inelastic supply. B. Highly elastic demand.
C. Highly elastic supply.
D. Highly inelastic demand.

The correct answer is D. Highly price-inelastic demand means that any increase in price will reduce the quantity demanded by a relatively small amount. Thus a tax levied on a good that was highly price-inelastic would be borne primarily by the buyers and would cause the least disturbance of the existing quantity exchanged. A tax levied with highly inelastic supply would also disturb the equilibrium quantity by a small amount but the incidence would fall more on the sellers. By whom the tax is borne depends upon the relative elasticities of demand and supply.

10

If a government were to increase the sales tax on new cars, what would be the effect on the equilibrium price and equilibrium quantity of second-hand cars?

A. Both increased equilibrium price and equilibrium quantity.

B. Equilibrium price would decrease but equilibrium quantity would increase.

C. Equilibrium price would increase but equilibrium quantity might increase, remain the same, or decrease.

D. There would be no effect, since the second-hand market is independent of the new car market and the sales tax applies only to new cars.

The correct answer is C. The increase in the sales tax on new cars would have two effects on the market for used cars: it would increase the demand for used cars by people who do not own any car, and it would reduce the supply of used cars as people who would otherwise sell their present cars to buy new cars decide to keep their old cars. When the demand increases and supply decreases, the price will definitely rise, but the quantity sold might either increase or decrease.

11

Assume the market for fresh salmon to be in equilibrium. If the demand for fresh salmon were suddenly to increase, which of the following would happen in the market (immediate) time period?

A. Equilibrium price: no change; Equilibrium quantity: no change
B. Equilibrium price: increase; Equilibrium quantity: increase
C. Equilibrium price: increase; Equilibrium quantity: no change
D. Equilibrium price: no change; Equilibrium quantity: decrease

The correct answer is C. In the market time period, it is assumed that there is a fixed quantity of salmon to sell irrespective of the price, i.e. the supply curve is a vertical line. The salmon have been delivered to the auctioneer, whose job is to sell them at the highest price he can get (that price may be zero if no one wants them). Given an increase in demand in the market period, the equilibrium quantity will not change but the price will rise until equilibrium is achieved.

12

Suppose that the market for tomatoes were initially in equilibrium, but that costs of production for every supplier were to rise as a result of a significant increase in wages paid to all workers in the industry. Which of the following would occur?

A. Equilibrium price: increase; Equilibrium quantity: increase
B. Equilibrium price: increase; Equilibrium quantity: decrease
C. Equilibrium price: decrease; Equilibrium quantity: increase
D. Equilibrium price: decrease; Equilibrium quantity: decrease

The correct answer is B. The increase in wages (an increase in variable costs) will raise each tomato farmer’s average variable cost curve and consequently average total cost curve and shift the marginal cost curve (the short-run supply curve) to the left. The industry short-run supply curve therefore will shift to the left, with a higher equilibrium price and lower equilibrium quantity resulting.

13

In which areas of the figure can buying/selling transactions occur?

A. p2xz
B. xyz
C. p1zy
D. p2zp1

The demand curve defines a limit outside of which no consumer would be willing to buy the good at any price, i.e. beyond price p2 and beyond quantity q2 and beyond the line p2q2 which is the demand curve. Similarly the supply curve S shows the limit below which none of the good would be supplied. The common area bounded by the D and S curves is p2zp1 the only area within which transactions can occur.

14

What would happen in the market if, initially, a price between pe and p1 were announced?

A. The supply curve would shift to the right to get rid of excess demand

B. The demand curve would shift to the left until equilibrium was reached.

C. Excess supply would encourage suppliers to offer lower prices to equate demand and supply

D. Excess demand would cause prices to increase until the equilibrium price was reached whereupon excess demand would be zero

Buyers unable to find suppliers at a price between pe and p1 , i.e. the definition of excess demand, would compete against each other for the limited supply and cause price to increase. At the higher price however a larger quantity would be supplied. This process would continue until the excess demand became zero which would occur of a price of pe.

15

After the market had reached equilibrium the price of a substitute good increased and at the same time the factor input prices of the good in the diagram decreased. What happened to the equilibrium price and quantity exchanged of the good in the market?

A. Equilibrium price indeterminate, equilibrium quantity indeterminate
B. Equilibrium price indeterminate, equilibrium quantity increased
C. Equilibrium price indeterminate, equilibrium quantity decreased
D. Equilibrium price remained, equilibrium quantity indeterminate

The correct answer is B. The increase in the price of a substitute good would shift the demand curve from the good in the figure to the right. The decrease in factor input prices would shift the supply curve to the right. Thus the equilibrium quantity would increase but the equilibrium price could be higher, unaltered or lower.

16

If the market were in equilibrium producer surplus would be represented by

A. xyz
B. p1zy
C. pezp1
D. p2xz

Producer surplus is represented by the difference between the price suppliers would be willing to offer goods for sale and the actual price they received, i.e. the equilibrium price pe.

17

The good in the figure is sirloin steak and D is your demand curve. You are having a barbecue, the intended meal being barbecued chicken, sausage, sirloin steaks and salmon steaks over which you have allocated your budget.

When you arrive at the supermarket however special deals are announced. Your demand curve for steak will shift to the right because

I. the store is out of salmon steaks
II. the price of chicken is halved
III. the price of sirloin steak is halved

A. I only
B. I and III only
C. II only
D. I, II and III

The correct answer is A. Since salmon steaks are no longer available you will allocate that part of your budget which you intended spending on salmon on other items – chicken, sirloin steak and sausage; this will shift your demand curve to the right. Thus I is true. The decrease in the price of chicken, a substitute good, will make chicken relatively more attractive; this will shift your demand curves for steak and sausages to the left. Thus II is wrong. The decrease in the price of sirloin steak will cause you to move down your demand curve for steak but will not cause the curve to shift. Thus III is wrong.

18

The good in the figure is sirloin steak and D is your demand curve. You are having a barbecue, the intended meal being barbecued chicken, sausage, sirloin steaks and salmon steaks over which you have allocated your budget.

When you arrive at the supermarket however special deals are announced. Your demand curve for steak will shift to the right because there is a change in the number of guests coming to dinner and also a dramatic change in the price of salmon steaks. Your demand curve for sirloin steaks remains in exactly the same position despite these changes. Which of the following is consistent with your non shifting demand curve for sirloin steak?

A. Two more dinner guests, increase in the price of steak
B. Two fewer dinner guests, decrease in the price of salmon steak
C. Two more dinner guests, decrease in the price of salmon steak
D. Two fewer dinner guests, decrease in the price of steak

The correct answer is C. Changes in the price of steak do not shift the demand curve thus A and D are wrong. Two fewer dinner guests shifts the demand curve to the left, as does a decrease in the price of salmon steaks therefore B is wrong. Two more dinner guests shifts the demand curve to the right while a decrease in the price of salmon steaks shift the demand curve to the left, therefore C is correct.

19

The good in the figure is sirloin steak and D is your demand curve. You are having a barbecue, the intended meal being barbecued chicken, sausage, sirloin steaks and salmon steaks over which you have allocated your budget.

If the market demand curve for steak remains in the same position but the price of steak increases, the increase in price could have been caused by

I. an increase in imports of foreign goods
II. farmers bringing more cattle to the market

Which of the following is correct?

A. I only
B. II only
C. Both I and II
D. Neither I nor II

The correct answer is D. Both an increase in imports and farmers bringing more cattle to markets would shift the supply curve of steak to the right thereby, given a non shifting demand curve, lowering the price of steak. Thus both I and II are wrong.

20

The good in the figure is sirloin steak and D is your demand curve. You are having a barbecue, the intended meal being barbecued chicken, sausage, sirloin steaks and salmon steaks over which you have allocated your budget.

Given the demand and supply curves what could cause exchanges to take place continuously at prices other than pe in area p1p2 z?

Shortage of

A. buyers

B. sellers

C. information

D. substitute goods

Transactions can take place anywhere within the triangle p1p2z because the demand curve specifies the maximum amount consumers are prepared to pay for each and every quantity and the supply curve indicates the maximum amount sellers are willing to supply at each and every price. Thus a buyer being offered the good at a price just above pe but well below his/her maximum of p2 might make a purchase thinking he/she had made a good buy. Similarly a seller prepared to accept any price above p1 may conclude a deal at a price below pe thinking he/she had done well since a price above a reservation price had been achieved. Such exchanges do not indicate a shortage of buyers or sellers. Thus A and B are wrong. In a perfect market the price would be driven to pe by the forces of demand and supply but for a perfect market to operate information on exchanges and prices is required. When pe is achieved no buyer would pay more than pe and no seller would sell at less than pe. At the equilibrium price pe, all buyers who wish to buy at that price and all sellers who wish to sell at that price can do so; this is what equilibrium price means. Thus C is true. The demand and supply curves are drawn given all parameters including the demand and supply of substitutes. Thus D is wrong.

21

The good in the figure is sirloin steak and D is your demand curve. You are having a barbecue, the intended meal being barbecued chicken, sausage, sirloin steaks and salmon steaks over which you have allocated your budget.

If a price ceiling of p1 were imposed by local government on this market what would the impact be?


A. Zero would be supplied
B. Excess demand of p1p2 would develop
C. Excess demand of q1q2 would exist
D. The government would have to dispose of oq1 of the good

A price ceiling is a price above which transactions are prohibited. In the case at a price of p1, oq1 is demanded but zero is supplied. There would be excess demand of oq1.

22

‘Fish farming is an industry in which you will never make above normal profits for more than a year or two. As soon as we have a good year, new firms will come into the industry and the prices fall back to where they were. The reason is not difficult to fathom; fish farming skills are easy to learn and start up costs are low.’
Which of the following is correct?

The story above suggests that in fish farming
A. the short-term supply curve is price elastic
B. the long-term supply curve is a horizontal line
C. the demand curve is price elastic
D. the demand curve is price inelastic

The correct answer is B. The quotation is not concerned about the responsiveness of the demand for fish to price changes and thus C and D are wrong. The quotation is about the long run, i.e. about the impact on price of new firms moving in, implying that the long run supply curve is price elastic, i.e. a horizontal line.

23

What would happen in the market if, initially, a price between pe and p2 were announced?

A. The supply curve would shift to the left to get rid of excess supply
B. The demand curve would shift to the right until equilibrium was reached
C. Excess supply would encourage suppliers to offer lower prices to increase sales
D. Excess demand would put buyers in a position of being able to force down prices

The price between pe and p2 would cause excess supply in the market forcing suppliers to lower prices, i.e. move along their supply curves. The lower prices would result in a larger quantity being demanded, i.e. buyers would move along their demand curves. There would be no shifts in the supply and demand curves because none of the parameters determining their positions had changed. Thus A and B are wrong and C is true. Excess supply, not excess demand, would exist, thus D is wrong.

24

After the market had reached equilibrium the price of a complementary good increased and simultaneously the government imposed a tax on the good in the figure.

What happened to the equilibrium price and quantity exchanged of the good in the market?

A. Equilibrium price indeterminate, equilibrium quantity indeterminate
B. Equilibrium price indeterminate, equilibrium quantity increased
C. Equilibrium price indeterminate, equilibrium quantity decreased
D. Equilibrium price remained, equilibrium quantity indeterminate

The correct answer is C. The increase in the price of a complementary good would cause the quantity of it demanded to decrease and as a consequence cause the demand curve for the good in the diagram to shift to the left. The imposition of the tax would cause the supply curve to shift to the left. Thus the equilibrium quantity must decrease but the equilibrium price could be higher, unaltered or lower.

25

Which of the following is correct?

If the market were in equilibrium consumer surplus would be represented by

A. p1p2z
B. pep2z
C. op1zpqe
D. op1zyq1

Consumer surplus is represented by the difference between what consumers would be prepared to pay as evidenced by the demand curve and what they had to pay, i.e. equilibrium price pe.

26

The winkle pickers pick winkles at low tide, the small crustacean being a delicacy which requires a toothpick to extract from its shell. They are taken to the local fish market each morning and sold to local fishmongers and restaurants; around 50 kilos in boxes of 2 kilos are brought in by the fishermen each day. A French restaurateur from the capital city some 100 kilometres away arrived at the market this morning and outbid all the local fishmongers and restaurant owners for every box of winkles pushing the price way up. The winkle pickers were delighted and stated they would rise much earlier tomorrow when there would be winkles for all.

Which of the following identifies the price elasticity of supply today versus tomorrow?

A. elastic today, less elastic tomorrow
B. inelastic today, less inelastic tomorrow
C. inelastic today, more inelastic tomorrow
D. elastic today, more elastic tomorrow

The correct answer is B. Since the quantity of winkles is given, i.e. no more can be collected instantaneously and brought to market, the supply will not vary with the price offered. The supply in the market period is completely price inelastic. The increase in today’s price however has apparently motivated the winkle pickers to bring more than usual to market tomorrow – at least that is their stated intention, i.e. to supply a larger quantity at an expected higher price. Thus the short run (tomorrow) supply curve is less inelastic than today’s supply curve.

27

The winkle pickers pick winkles at low tide, the small crustacean being a delicacy which requires a toothpick to extract from its shell. They are taken to the local fish market each morning and sold to local fishmongers and restaurants; around 50 kilos in boxes of 2 kilos are brought in by the fishermen each day. A French restaurateur from the capital city some 100 kilometres away arrived at the market this morning and outbid all the local fishmongers and restaurant owners for every box of winkles pushing the price way up. The winkle pickers were delighted and stated they would rise much earlier tomorrow when there would be winkles for all.

Up to the final price bid for the winkles which of the following describes the price elasticity of demand of the French restaurateur and the local buyers?

A. French Restaurateur: Completely elastic Local Buyers: completely inelastic
B. French Restaurateur: Completely inelastic Local Buyers: not completely inelastic
C. French Restaurateur: Completely inelastic Local Buyers: completely elastic
D. French Restaurateur: Completely elastic Local Buyers: completely elastic

The correct answer is B. The French restaurateur bid for every basket until he had outbid everyone else, i.e. in this price range his demand was price inelastic. Thus A and D are wrong. The local buyers were bidding at lower prices and thus their demand was not completely elastic but they did stop when a certain price was reached and therefore their demand was not completely inelastic. Thus C is wrong and B is true.

28

At the University Raquets Centre the demand for tennis court bookings of professors is completely price inelastic whereas the demand of students is price elastic. The courts have an overall occupancy rate around 60% shared equally between professors and students. Professors pay $20 per court hour, students $10 per court hour.

What would happen if the Director set a common price of $15 per court hour?
A. Number of Professors: same Number of Students: fewer Court Revenue: same
B. Number of Professors: more Number of Students: same Court Revenue: same
C. Number of Professors: same Number of Students: fewer Court Revenue: decrease
D. Number of Professors: more Number of Students: same Court Revenue: increase

The correct answer is C. Since the demand of professors is completely inelastic the lower price will not attract more players and the professors court fees revenue will decrease. Since the students’ demand is price elastic the higher price will attract fewer players and their collective fee revenue will decrease. Thus total revenue will decrease.

29

At the University Raquets Centre the demand for tennis court bookings of professors is completely price inelastic whereas the demand of students is price elastic. The courts have an overall occupancy rate around 60% shared equally between professors and students. Professors pay $20 per court hour, students $10 per court hour.

What would happen if the Director imposed a $5 per court hour tax on professors and gave a $5 per court hour subsidy to students?

A. Number of Professors: same Number of Students: more Court Revenue: increase
B. Number of Professors: fewer Number of Students: more Court Revenue: same
C. Number of Professors: same Number of Students: same Court Revenue: decrease
D. Number of Professors: fewer Number of Students: same Court Revenue: decrease

The correct answer is A. Since the demand of professors is price inelastic the tax will not alter the number of court hours demanded but fee revenue will increase. Since the demand of students is price elastic the subsidy will increase the number of court hours demanded and also increase fee revenue. Thus total court fee revenue will increase as will court utilisation.

30

Weaknesses in the non convergent cobweb model are
I. producers never learn from experience
II. speculators are absent from the market
Which of the following is correct?

A. I only
B. II only
C. Both I and II
D. Neither I nor II

The correct answer is C. In the non convergent cobweb model cyclical movements in price do not converge towards equilibrium but move further from equilibrium over time with increasing gaps developing between demand and supply. In the real world it would be expected that some producers recognising this fact would, to maximise profit, adjust their behaviour counter cyclically and/or speculators observing such behaviour would buy and store in ‘surplus’ periods and resell in ‘tight’ periods both of which would lead towards convergence. Thus I and II are both true.

31

How does the price system react to excess supply of a good? It

A. raises price
B. shifts demand
C. lowers producer surplus and decreases consumer surplus
D. lowers price

The correct answer is D. The presence of excess supply will cause suppliers to lower price in an attempt to clear the market. Thus A is wrong and D is true. The position of the demand curve is independent of supply conditions. Thus B is wrong. Consumer surplus will increase when equilibrium is reached because a larger quantity is being sold at a lower price. Thus C is wrong.

32

In an attempt to persuade people to use public transport and to reduce the number of new cars coming on the roads the government is proposing a 100% tax on new cars, i.e. their prices will double. What impact will this have on the market for used cars?

A. The equilibrium price will increase, the equilibrium quantity will decrease
B. The equilibrium price will decrease, the equilibrium quantity may decrease or increase
C. The equilibrium price will increase, the equilibrium quantity may decrease or increase
D. The equilibrium price will decrease, the equilibrium quantity will increase

The correct answer is C. The demand for new cars will decrease; the demand for second hand cars will increase. The supply of second hand cars will decrease as individuals who would have bought a new car will hang on to their old one. Therefore the price of second hand cars must increase but the quantity exchanged will be indeterminate.