econ
1. Imagine that you are trying to promote a product that you recently invented. Imagine, also, that the producers of The Oprah Winfrey Show (which, we assume, is still in existence) have notified you that Oprah has selected your new product to be featured on her show. Draw the supply and demand curves for your product and illustrate how the appearance of your product on her show will affect the equilibrium price and quantity.
(I can't draw a graph in MS Word—you can draw it) Since the appearance of the product and Oprah's endorsement of it will change people's tastes about the product, we expect the demand curve to shift. Since this is likely to have a positive effect on consumer preferences for the product, we expect this shift to be rightward. This would move the equilibrium point along the supply curve, increasing both the equilibrium quantity and price for the good.
3. Some argue that school vouchers programs will cause some teachers to lose their jobs. Explain why this is likely to not be the case.
(This was an actual exam question in a class where we spent more time discussing vouchers). The argument that teachers will lose jobs ignores the fact that the quantity of teachers demanded will not change because the quantity of students is unchanged—the private schools would need to hire teachers from somewhere. In fact, (both public and private) schools may reduce student / teacher ratios in order to attract kids with vouchers, thereby increasing the demand for teachers.
Education and training of workers would best be categorized as
(a) Land. (b) Labor. (c) Physical capital. *(d) Human Capital.
At a price of P0 in the above figure, which of the following statements is FALSE?
(a) Quantity demanded equals quantity supplied. (b) There is an equilibrium in the market. (c) P0 is the market clearing price. *(d) There is a surplus equal to Q0.
Which of the following statements is FALSE?
(a) The rationing function of prices is not allowed to freely operate when the government imposes price controls. (b) Price controls may take the form of price ceilings or price floors. (c) Price ceilings below the equilibrium price can cause black markets to develop. *(d) Rent controls are examples of price floors.
If a price floor is set below the current market clearing price, then
(a) a surplus must immediately occur. (b) a shortage must immediately occur. (c) there will be incentives for black markets to develop. *(d) quantity demanded will remain equal to quantity supplied at the current market clearing price.
According to the figure above, at a price of $1 a gallon, there is
(a) a surplus of 20,000 gallons per week. (b) a shortage of 40,000 gallons per week. (c) a shortage of 80,000 gallons per week. *(d) a shortage of 60,000 gallons per week.
If Apple's iTunes Music Store increases its "fee" for its music services, the law of demand predicts
(a) downloads would increase. (b) there would be no change in demand. *(c) downloads would decrease. (d) supply would change but demand would not.
Productive efficiency is the necessary result of
(a) economic profits. (b) cost advantage. *(c) competition. (d) comparative advantage.
The establishment of strong property rights will
(a) reduce employment. (b) reduce the power of monopoly. (c) increase the power of monopoly. *(d) promote economic activity
If goods X and Y are substitute goods, then an increase in the price of Y, other things constant,
(a) results in a decrease in the amounts of both X and Y consumed. (b) decreases the quantity demanded of Y, but has no effect on the amount of X consumed. *(c) results in a decrease in the quantity of Y consumed, but the amount of X consumed increases. (d) has no real effect on the quantity demanded of good Y, but increases the demand for X.
When a market has reached its equilibrium point:
(a) the demand curve is stable. *(b) the quantity of the goods demanded at the market price is equal to the quantity producers are willing to supply at that price. (c) the quantity of goods demanded is equal to the quantity of goods producers can make. (d) prices are fixed.
When consumer tastes for a product change
(a) the supply curve shifts. *(b) the demand curve shifts. (c) both the supply and demand curves shift. (d) the market price changes but the supply and demand curves do not.
Suppose the price of cheese rises. In the market for pizza, one would expect that
(a) the supply of pizza would increase and the price would fall. (b) the demand for pizza would increase and the price would increase. (c) the demand for pizza would decrease and price would fall. *(d) the supply of pizza would decrease and price would rise.
Allocative efficiency is achieved when
(a) the total amount of resources employed is maximized. (b) resources are fully employed. (c) the resources under consideration are competitively priced. *(d) resources are shifted to produce the goods consumers desire.
Which of the following statements is FALSE?
*(a) An increase in demand shifts the demand curve to the left, closer to the price axis. (b) When only the price of a good changes, there is movement along the demand curve but no change in demand. (c) A change in demand is graphically shown by shifting the entire demand curve. (d) When demand decreases, there is a drop in the quantity demanded at each price.
What is true of incentives?
*(a) Each of us is motivated by different incentives, and they can change over time. (b) Money is the only effective incentive. (c) All of the people in any particular nation are motivated by the same incentives. (d) An individuals incentives do not change over time.
Productive efficiency is achieved when
*(a) a firm's output is produced using the fewest possible inputs. (b) Consumers' needs are satisfied. (c) Economic growth is maximized. (d) Reductions in the supply of resources can't be achieved.
If demand increases while supply decreases, then prices
*(a) always increase. (b) always decrease. (c) may increase, decrease, or stay the same. (d) never change.
Suppose a change takes place and the new equilibrium is at point A in the above figure. This change could have been caused by
*(a) an increase in the per-unit tax on CDs. (b) a decrease in the income of consumers. (c) a reduction in the wages paid to workers in the CD industry. (d) a reduction in the price of CD players.
One of the most important characteristics of the price system is that
*(a) consumers are the ones who ultimately decide what is produced. (b) politicians are the ones who ultimately decide what is produced. (c) competition among sellers is reduced. (d) all exchanges are regulated by the government.
If the government imposes a per-unit tax on sales of an industry's product, then we would expect:
*(a) the supply curve in that industry would shift to the left. (b) the supply curve in that industry would shift to the right. (c) the demand curve for that industry would shift to the right. (d) the demand curve for that industry would shift to the left.
Explain why economists consider it to be one of the economic functions of government to provide a legal system.
A market economy relies heavily on contracts and property rights. Property rights must be defined and protected if people are going to make investments in resources, and if people are going to exchange assets. Contracts must also be enforced. By providing a legal system, the government can ensure that a market system will function better.
2. Explain how strong property rights help facilitate economic activity.
People who hold a strong property right to a good, can do with it what they please (eat it, keep it, sell it, give it away). If they choose to sell the good and potential buyers are confident that sellers have these strong rights, they will be confident in purchasing it. On the other hand, if they have questions about a seller's right to ownership, they may spend resources (investigating whether the seller actually owns the good or buying title insurance for it) before buying it. These additional transaction costs add to their cost of buying the good and reduce the quantity of goods sold. In addition, property and resource owners who have strong property rights have an incentive to produce those goods that people want to buy and to take proper care of their property and to use their property as efficiently as possible. This gives consumers the goods they desire at the lowest possible prices.
Explain how agricultural price supports work and what the effects of the supports are.
With price supports, the government sets the price of an agricultural product above the equilibrium price. Consequently, there is an excess quantity of the product supplied seeing the higher price causes quantity supplied to increase and quantity demanded to fall. To keep price at the targeted level, the government must buy the surplus and store it. Hence, taxpayers/consumers pay higher prices for the product plus higher taxes for the government to buy and store the surplus.
