AGEC 203 Chapter 7

According to reports in the Chinese​ media, commuters in Beijing are facing a somewhat paradoxical​ situation: They find it difficult to get a cab while hundreds of cabs lie idle during rush hour. The demand for taxis in Beijing has increased as average incomes have risen.​ Government-determined gasoline prices have also increased. But the​ government, worried about rising prices for cab​ rides, has left the​ cabs' base fare unchanged. Based on your understanding of how the invisible hand​ works, which of the following decisions is likely to correct the problem of shortages of cabs in​ Beijing? A. The government should reduce the income tax rate of the citizens. B. The government should lift the price control imposed on the base fare of cabs. Your answer is correct. C. The government should restrict the entry of new cab services. D. The government should regulate the cabs market.

B

Imagine that the economy resembles a pie. In this​ analogy, ________ concerns with growing the size of the​ pie, while​________ concerns with how the pie if distributed among the people. A. ​equity; efficiency B. ​efficiency; equity C. ​efficiency; optimization D. ​equity; optimization

B

Using bilateral negotiation​ auctions, economist John List found that​ ________. A. his findings were very different from economist Vernon​ Smith's earlier double oral auction experiments B. exchanges converged fairly rapidly to the market equilibrium price C. sellers refused to strike deals with buyers in private negotiations D. buyers failed to capture any consumer surplus

B

How will the invisible hand move corn prices in response to the situation: A rise in the price of wheat (a substitute for corn)

This will increase corn prices by shifting the demand curve for corn rightward.

The reservation value of a buyer reflects her​ ________.

Willingness to pay for a good or service

The market equilibrium for drills in a certain country is characterized by a large number of buyers. The market for drills is in equilibrium. Does this also mean that it is pareto efficient?

Yes. with The market in equilibrium, no participant will can be made better off without someone else being harmed

Assume that some of the buyers in this market are now willing to pay more for a drill than they did earlier. Does this mean that the market for drills is pareto efficient?

Yes. As long as the market equilibrium still holds the out come is still pareto efficient.

Social surplus is maximized when the

buyers and sellers are distinct groups are doing as well as they possibly can, competitive market is in equilibrium, highest-value buyers are making a purchase and the lowest cost sellers are selling.

All else being equal, the steeper the supply curve, the ______ the social surplus in a market

larger

The equilibrium price and quantity of a good under perfect competition are determined by the intersection of the​ ________.

market demand and market supply curves

is based on price signals and strong economic incentives.

market economy

invisible hand directs consumers and producers to ______ their surplus. Leads to an increase of welfare

maximize

In a perfectly competitive​ market, if market price is higher than the average total cost of​ production, ________.

new firms will enter the industry

In a competitive market equilibrium, the allocation of the social surplus is such that

no individual can be made better off without making someone else worse off.

Pareto efficiency

no one can be better off without making someone worse off

Invisible hand

phenomenon of interacting and exchanging in market place

A non-market price imposition is a

price control

In a market economy, the alignment of interests is accomplished through the use of

prices

invisible hand directs firms to seek out

profits

_________ _______ economic profits in one industry will attract profit seeking producers in industries experiencing economic loss.

short run

All else being equal, the flatter the demand curve, the ______ the social surplus in a market

smaller

social surplus is the

sum of consumer surplus and producer surplus

How will the invisible hand move corn prices in response to the situation: A weather pattern that produces a bumper corn crop

this will decrease corn prices by shifting the supply curve for the corn rightward

How will the invisible hand move corn prices in response to the situation: A change in consumer taste away from corn dogs toward hot dogs

this will decrease corn process by shifting the demand curve for corn leftward

How will the invisible hand move corn prices in response to the situation: An increase in the number of demanders in the corn market

this will increase corn prices by shifting the demand curve for corn rightward

Which of the following would maximize social surplus?

trade at the competitive market equilibrium

free entry and exit allows reallocation of assets to their greatest __________ uses, even across industries

valued

reservation value

willingness to pay or accept

Efficiency is achieved in competitive markets because​ ________.

Social surplus is maximized (the economic pie is made as large as possible)

Suppose a market has only one seller and only one buyer of a good in the market. The buyer is willing to pay​ $50 for the good and the seller is willing to accept​ $15. The market price of the good is determined to be​ $30. If they​ trade, the social surplus will be​ ________.

35$

All of the following are issues faced by central planners in a command​ economy, except: A. setting quantity targets of production. Your answer is correct. B. coordination problems. C. aligning the interests of the agents. D. incentive problems.

A

Reservation value

The price at which a trading partner is indifferent between making the trade and not doing so.

According to reports in the Chinese​ media, commuters in Beijing are facing a somewhat paradoxical​ situation: They find it difficult to get a cab while hundreds of cabs lie idle during rush hour. The demand for taxis in Beijing has increased as average incomes have risen.​ Government-determined gasoline prices have also increased. But the​ government, worried about rising prices for cab​ rides, has left the​ cabs' base fare unchanged. Which of the following statements is true of the market for cabs in Beijing? A. There has been a rightward shift of the supply​ curve, while the demand curve has remained unchanged. B. There has been a leftward shift of both the supply and demand curves. C. There has been a rightward shift of both the supply and demand curves. D. There has been a rightward shift of the demand​ curve, while the supply curve has remained unchanged.

D

Imagine you are a buyer in a double oral auction with a reservation value of $13 and there is a seller asking for $9. If you accept this​ offer, you will gain ​$4. ​(Enter your answer as an integer​.) If you are the only​ buyer, and you know that the lowest ask price is $$2​, should you accept this​ offer? A. ​Yes, accepting an offer from any other seller will reduce your surplus. B. ​No, as the only buyer you can extract a lower ask price. C. ​Yes, since you will gain $ 11$11. D. Both A and C are correct.

D

Price control

is a government restriction on the price of a good or service

Double oral action

is a market where sellers orally state asks and buyers orally state offers

A market where sellers orally state asks and buyers orally state offers is known as​ a:

Double oral auction

Pareto efficient

If no individual can be made better off without making someone else worse off

bilateral negotiation

Is a market mechanism in which a single seller and a single buyer privately negotiate with bids and asks.

Gross domestic product (GDP)

Is the market value of final goods and services produced un a country un a given period of time

Equity

is concerned with the distribution of resources across society

Deadweight loss

is the decrease in social surplus from a market distortion

social surplus

is the sum of consumer surplus and producer surplus

Incentives

getting paid, efficiency

efficiency

getting the most out of scarce resources

Consumer surplus

how much consumer saves (Equilibrium price-reservation value)

Once planners have successfully brought economic agents​ together, a second problem of aligning the interests of the economic agents must be solved. This is known as the​ ___________ problem.

incentive

When the optimizing actions of two economic agents are not aligned, these agents face an ___________ ________

incentive problem

In a perfectly competitive market, when firms enter and exit competitive markets,

it is a good sign the market is working.

Compared to the market for electric drills, the market for vintage buttons has fewer buyers and sellers. Social surplus is likely to be higher in the market for drills than in the vintage button market. Is it then correct to assume that the outcome in the drills market is pareto efficient while in the vintage button market it is not?

No. Market size has no bearing on the attainment of pareto efficiency

Sofia, a political science student, thinks the government should intervene to revive declining industries like video stores and print newspapers. The government, she reasons, can resolve the coordination problem of getting the agents in these markets to trade. Do you agree with her? Explain.

No. These industries are declining not because of coordination problems but, rather, because of falling demand.

The price at which a seller is indifferent between making a sale and not doing so is known as his

Reservation point and willingness- to -sell value

What could explain why South Koreas gross domestic product (GDP) per capita increased so much faster since the 1970s than North Koreas GDP per capita?

Resource allocation in South Korea is done much more efficiently than in North Korea, South Korea has been better able to solve the coordination and incentive problems, South Korea has a market economy, while north Korea is a command economy.

maximize profit

MR=MC

a central authority determines the goods and services produced

command economy

A difficult problem for central planners is bringing together those economic agents whose interests coincide in order to trade. This is known as the​ ____________ problem.

coordination

When the interests of economic agents coincide, a _______________ __________ of bringing the agents together to trade arises.

coordination problem

Social surplus

cs + ps

When economists speak of a deadweight​ loss, they are referring to a _______ in _________ caused by a market distortion.

decrease in social surplus

In a perfectly competitive market, a firm with multiple production plants will minimize total costs of production when

each plant produces where marginal revenue equals marginal costs

In a perfectly competitive​ market, if market price is lower than the average total cost of​ production, ________.

existing firms will leave the market