econ CH 7 quiz

Andy enters into a futures contract, allowing him to sell 5,000 troy ounces of gold at $1,000 per ounce in 36 months. After that time passes, the market price of gold is $950 per troy ounce. How much does Andy make or lose?

Andy makes $250,000.

Suppose a new invention comes along that makes it easier and much less expensive to recycle clothing. This new device, about the size of a washing machine, can bleach, reweave, and re-dye cotton fabric to closely resemble any cotton item you see in a fashion magazine. Head into the laundry room, drop in a batch of old clothes, scan in a couple of pages from Vogue, and come back in an hour. If you think of the "market for clothing" as "the market for new clothing," does this new invention shift the demand curve or the supply curve, and in which direction?

Demand will shift left

The supply and demand for copper change constantly. New sources of copper are discovered, mines collapse, workers go on strike, products that use copper wax and wane in popularity, weather affects shipping conditions, and so on. Suppose you learned that growing political instability in Chile (the largest producer of copper) would greatly reduce the productivity of its mines in two years. How will this affect the price of copper in two years? Given this future change in price, would a reasonable person buy copper to store for later? (Ignore storage costs.)

Price will increase, so a reasonable person should buy copper today.

Suppose a new invention comes along that makes it easier and much less expensive to recycle clothing. This new device, about the size of a washing machine, can bleach, reweave, and re-dye cotton fabric to closely resemble any cotton item you see in a fashion magazine. Head into the laundry room, drop in a batch of old clothes, scan in a couple of pages from Vogue, and come back in an hour. After this invention, will society's scarce productive resources (machines, workers, retail space) flow toward the "new clothing" sector or away from it?

Resources will flow away from the production of new clothing.

The supply and demand for copper change constantly. New sources of copper are discovered, mines collapse, workers go on strike, products that use copper wax and wane in popularity, weather affects shipping conditions, and so on. Suppose you learned that growing political instability in Chile (the world's largest producer of copper) would greatly reduce the productivity of its mines in two years. Ignoring all other factors, which curve (supply or demand) will shift in which direction (left or right) in the market for copper two years from now?

Supply will shift left.

Suppose you are bidding on a used car. Someone else bids above the highest amount that you are willing to pay. What can you say for sure about that person's monetary value of the car compared with yours?

The other person values the car more than you.

Suppose a new invention comes along that makes it easier and much less expensive to recycle clothing. This new device, about the size of a washing machine, can bleach, reweave, and re-dye cotton fabric to closely resemble any cotton item you see in a fashion magazine. Head into the laundry room, drop in a batch of old clothes, scan in a couple of pages from Vogue, and come back in an hour. What will this new invention do to the price of new, not recycled, clothing?

The price of new clothing will fall

In 1980, University of Maryland economist Julian Simon bet Stanford entomologist Paul Ehrlich that the price of any five metals of Ehrlich's choosing would fall over 10 years. Ehrlich believed that resources would become scarcer over time as population grew, while Simon believed that people would find good substitutes, putting less pressure on prices. The price of all five metals that Ehrlich chose (nickel, tin, tungsten, chromium, and copper) fell over the next 10 years and Simon won the bet. Ehrlich, an honorable man, sent a check in the appropriate amount to Simon. What does the falling price tell us about the relative scarcity of these metals?

These metals were becoming less scarce.

Suppose a new invention comes along that makes it easier and much less expensive to recycle clothing. This new device, about the size of a washing machine, can bleach, reweave, and re-dye cotton fabric to closely resemble any cotton item you see in a fashion magazine. Head into the laundry room, drop in a batch of old clothes, scan in a couple of pages from Vogue, and come back in an hour. If you think of the "market for clothing" as "the market for clothing, both new and used," does this shift the demand curve or the supply curve, and in which direction?

Supply will shift right

In 1980, University of Maryland economist Julian Simon bet Stanford entomologist Paul Ehrlich that the price of any five metals of Ehrlich's choosing would fall over 10 years. Ehrlich believed that resources would become scarcer over time as population grew, while Simon believed that people would find good substitutes. The price of all five metals that Ehrlich chose (nickel, tin, tungsten, chromium, and copper) fell over the next 10 years and Simon won the bet. Ehrlich, an honorable man, sent a check in the appropriate amount to Simon. Changes in either supply or demand could have pushed these prices down. How would demand have needed to change if it had been the cause of the price change? What about supply?

Demand would have needed to decrease. Supply would have needed to increase.

In the months before the 1990-1991 Persian Gulf War, speculators drove up the price of oil. The average price in October 1990 was $36 per barrel, more than double the price in 1988. Oil speculators, like many people around the world, expected the Gulf War to last for months, disrupting the oil supply throughout the Gulf region. Thus, speculators either bought oil on the open market (almost always at the high speculative price) or they already owned oil and just kept it in storage. Either way, their plan was the same: to sell it in the future, when prices might even be higher. As it turned out, the war was swift: After one month of massive aerial bombardment of Iraqi troops and a 100-hour ground war, President George H.W. Bush declared a cessation of hostilities. Despite the fact that Saddam Hussein set fire to many of Kuwait's oil fields, the price of oil plummeted to about $20 per barrel, a price at which it remained for years. When the speculators sold their stored oil in the months after the war, how did this massive resale affect the oil market?

Supply increased and the price of oil fell.

The supply and demand for copper change constantly. New sources of copper are discovered, mines collapse, workers go on strike, products that use copper wax and wane in popularity, weather affects shipping conditions, and so on. Suppose you learned that growing political instability in Chile (the largest producer of copper) would greatly reduce the productivity of its mines in two years. What happens to the current price of copper? Will people use more or less copper today?

The current price of copper will rise and people will use less today.

Since laptop computers are increasingly easy to build and since they allow people to use their computers wherever they like, a wise, benevolent dictator would probably decree that most people buy laptops rather than desktop computers. This is especially true now that laptops are about as powerful as most desktops. Let's see if the forces of the market can be as efficient as a benevolent dictator. As laptops become easier to build, the supply of laptops increases. How does this affect the price of laptops? How does it affect the demand for desktop computers (a substitute for laptops)?

The price of laptops fell and the demand for desktops fell.

In the months before the 1990-1991 Persian Gulf War, speculators drove up the price of oil. The average price in October 1990 was $36 per barrel, more than double the price in 1988. Oil speculators, like many people around the world, expected the Gulf War to last for months, disrupting the oil supply throughout the Gulf region. Thus, speculators either bought oil on the open market (almost always at the high speculative price) or they already owned oil and just kept it in storage. Either way, their plan was the same: to sell it in the future, when prices might be even higher. As it turned out, the war was swift: After one month of massive aerial bombardment of Iraqi troops and a 100-hour ground war, President George H.W. Bush declared a cessation of hostilities. Despite the fact that Saddam Hussein set fire to many of Kuwait's oil fields, the price of oil plummeted to about $20 per barrel, a price at which it remained for years. Why did the speculators follow this plan?

The speculators had incorrect expectations about the length of the war and the future of oil prices.

In the months before the 1990-1991 Persian Gulf War, speculators drove up the price of oil. The average price in October 1990 was $36 per barrel, more than double the price in 1988. Oil speculators, like many people around the world, expected the Gulf War to last for months, disrupting the oil supply throughout the Gulf region. Thus, speculators either bought oil on the open market (almost always at the high speculative price) or they already owned oil and just kept it in storage. Either way, their plan was the same: to sell it in the future, when prices might be even higher. As it turned out, the war was swift: After one month of massive aerial bombardment of Iraqi troops and a 100-hour ground war, President George H. W. Bush declared a cessation of hostilities. Despite the fact that Saddam Hussein set fire to many of Kuwait's oil fields, the price of oil plummeted to about $20 per barrel, a price at which it remained for years. How much profit did speculators earn, or how much money did they lose, on each barrel?

They lost $16 a barrel.

You manage a department store in Florida, and one winter day you read in the newspaper that orange juice futures have fallen dramatically in price. Should your store stock up on more sweaters than usual, or should your store stock up on more Bermuda shorts?

You should stock up on Bermuda shorts.

Take a look at the figure above showing the Hollywood Stock Exchange. If investors in the Hollywood Stock Exchange were too optimistic on average, where would you expect the dots to cluster?

below the red line