Econ exam 1 - chapter 4

If the absolute price of good X is $10 and the absolute price of good Y is $14, then what is (a) the relative price of good X in terms of good Y and (b) the relative price of good Y in terms of good X?

(a) 1X= 5/7Y(b) 1Y= 7/5Y

Consumers do not necessarily prefer ____

(lower) price ceilings to (higher) equilibrium prices. They may prefer higher prices and none of the effects of price ceilings to lower prices and some of the effects of price ceilings. All we can say for sure is that consumers prefer lower prices to higher prices, ceteris paribus.

Price Ceiling

A government-mandated maximum price above which legal trades cannot be made.

Price Floor

A government-mandated minimum price below which legal trades cannot be made.

What is the difference between a price ceiling and a price floor? What effect is the same for both a price ceiling and a price floor?

A price ceiling is a government-mandated maximum price for a good. When the price ceiling is below the equilibrium price, shortages, fewer exchanges, and buying and selling at prohibited prices occurs.A price floor is a government-mandated minimum price for a good. When the price floor is above the equilibrium price, surpluses and fewer exchanges occur.Both of them lead to fewer exchanges of goods or services.

Tie-in Sale

A sale whereby one good can be purchased only if another good is also purchased.

Many of the proponents of price ceilings argue that govern-ment-mandated maximum prices simply reduce producers' profits and do not affect the quantity supplied of a good on the market. What must the supply curve look like if the price ceiling does not affect the quantity supplied?

For a price ceiling to not affect the quantity supplied, the supply curve would have to be horizontal.

Should grades in an economics class be "rationed" according to dollar price instead of how well a student does on exams? If they were and prospective employers learned of it, what effect might this have on the value of your college degree?

No. If they were "rationed", rather than getting credit for their own hard work/ studying, students' grades would be dependent on how hard others worked as well. This would bring down the value of most people's educations.

What kind of information does price transmit?

Price is a transmitter of information that relates to the relative scarcity of a good.

James lives in a rent-controlled apartment and has for the past few weeks been trying to get the supervisor to fix his shower. What does waiting to get one's shower fixed have to do with a rent-controlled apartment?

Since the supervisor can't raise the rent, he has little incentive to do additional work (fix the shower).

Give a numerical example that illustrates how a tax placed on the purchase of good X can change the relative price of good X in terms of good Y.

Suppose the equilibrium price of good X is $10 and the equilibrium price of good Y is $15. Then the relative price would be:1X=2/3Y and 1Y=3/2XIf a tax is placed on good X, and the price rises from $10 to $20. Then the relative price would be:1X=4/3Y and 1Y=3/4X.

Deadweight Loss

The loss to society of not producing the competitive, or supply-and-demand determined, level of output.

Absolute (Money) Price

The price of a good in money terms.

Relative Price

The price of a good in terms of another good.

"If price were outlawed as the rationing device used in mar-kets, there would be no need for another rationing device to take its place. We would have reached utopia." Discuss.

This is not true. Scarcity will always exists so a need for a rationing device will always be needed. Another device, such as brute force, would have to take the place of price.

Explain why fewer exchanges are made when a disequilib-rium price (below the equilibrium price) exists than when the equilibrium price exists.

When the price that exists is below equilibrium, although there will be a higher quantity demanded by customers, there will be a lower quantity supplied by producers, therefore there must be fewer exchanges made.

Buyers always prefer lower prices to higher prices. Do you agree or disagree with this statement? Explain your answer.

Yes, but only if ceteris paribus applies. The buyers will only prefer the lower prices if things like quality, wait, and service.

Think of ticket scalpers at a rock concert, a baseball game, or an opera. Might they exist because the tickets to these events were originally sold for less than the equilibrium price? Why or why not? In what way is a ticket scalper like and unlike your retail grocer, who buys food from a wholesaler and then sells it to you?

Yes- scalpers are able to sell tickets for a typically higher price than they originally were. This is because the original seller underestimated the demand for the item, and sold them for less than people were willing/ able to buy them for. This is very similar to a retail grocer, in that they are sold food for less than the equilibrium price, and then are able to make a profit for selling it at the price that customers are willing/ able to buy them at.

As a result of scarcity, a rationing device is needed to ____

deter-mine who gets what of the available limited resources and goods. Price serves as a rationing device.

A price ceiling is a ____

government-mandated maximum price. If a price ceiling is below the equilibrium price, some or all of the following effects arise: shortages, fewer exchanges, nonprice-rationing devices, buying and selling at prohibited prices, and tie-in sales.

A price floor is a ____

government-mandated minimum price. If a price floor is above the equilibrium price, the following effects arise: surpluses and fewer exchanges.

Price acts as a transmitter of ____

information relating to the change in the relative scarcity of a good.

The relative price of a good is ____

the price of the good in terms of another good.

The absolute price of a good is ____

the price of the good in terms of money.