Econ Chapter 7
Which of the following would maximize social surplus?
Trade at the competitive market equilibrium.
A deadweight loss is the ________, in a social surplus that results from a market distortion
decrease, distortion
All else being equal the flatter the supply curve, the ______ the social surplus in a market
the smaller
What could explain why South Korea's gross domestic product (GDP) per capita increased so much faster since the 1970s than North Korea's GDP per capita?
-South Korea has a market economy, while North Korea is a command economy. -South Korea has been better able to solve the coordination and incentive problems. -Resource allocation in South Korea is done much more efficiently than in North Korea. D. All of the above.
In a command economy, a planning agency sets prices for various inputs and final goods. In a market economy, supply and demand decide the prices of various goods. In both cases, there is a set of prices operating in the economy. Then why are market economies considered more efficient than planned economies?
-The price mechanism utilized by market economies reflects all that is collectively known and thus ensures that economic agents make trades that are in their best interest and maximize social surplus. -The prices set by central planners tend to be inflexible, responding to changing conditions only when planners recognize that circumstances are changing and then figure out the significance of the underlying change. -The prices set by central planners reflect their very incomplete knowledge regarding the multitude of factors that determine the interests and decisions of economic agents. D. All of the above.
How do economic profits and losses allocate resources in an economy?
-When an industry's goods (or services) become less highly valued by society, firms in the industry suffer losses and thus become motivated to put their resources to more profitable uses elsewhere. -Businesses always seek to improve their profits and in so doing, they move resources into the production of goods and services that society values the highest. -When an industry's goods (or services) become more highly valued by society, positive economic profits emerge for firms in the industry, attracting new firms and their resources to that industry. D. All of the above.
In a _____ economy a central authority determines the goods and services produced while a __________, economy is based on price signals and strong economic incentives.
Command, Market
Imagine you are a buyer in a double oral auction with a reservation value of $ 16 and there is a seller asking for 11$.
If you accept this offer, you will gain $5.
Hardware stores charge higher prices for snow shovels after a big snow storm. What role do prices play in the snow shovel market?
It would incentivize distributors to ship more snow shovels into the area to meet the increased demand.
Suppose a market for cheap sunglasses is in a long-run competitive equilibrium and that the price is $10. Every producer of sunglasses sells 5,000 pairs. A cloudy summer decreases the demand for sunglasses, which causes the market price to change
The decrease in demand will lower the market price. This means marginal revenue will equal marginal cost at a lower quantity. Therefore, firms will produce and sell fewer than 5,000 pairs of sunglasses. Firms will now be incurring an economic loss. This will lead to some firms exiting the market. As this happens, the market supply curve will shift to the until the remaining firms are earning zero economic profit. This will occur at a market price of $10. Given no factors affecting the cost curves have changed, each remaining firm will produce 5,000 pairs of sunglasses, once again. fewer than, exactly
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?
The government should lift the price control imposed on the base fare of cabs.
Compared to the market for cars, the market for vintage buttons has fewer buyers and sellers. Social surplus is likely to be higher in the market for cars than in the vintage button market. Using the concept of Pareto efficiency, which of the following statements is likely to be true?
The outcome in the market for cars is Pareto efficient because it is a perfectly competitive market.
The market for economics textbooks is in equilibrium. The government decides to relaxrelax export restrictions on paper, leading to anan increaseincrease in the demand for paper. How does social surplus in the market for textbooks change? Why?
The social surplus decreases, producer surplus may increase or decrease, and consumer surplus decreases.
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?
There has been a rightward shift of the demand curve, while the supply curve has remained unchanged.
Are all efficient outcomes also equitable? Explain.
There is really no definitive answer to this question since issues surrounding efficiency and equity are the domain of normative economics, where subjective value judgments are made.
Suppose you had to organize a double oral auction for a good that has perfectly elastic demand. Do you expect prices to approach the competitive equilibrium?
Yes, there is no reason why price in a double oral auction for a good with perfectly elastic demand would not be expected to approach the equilibrium price.
Are there real-world markets that resemble double oral auctions?
Yes, trading on the New York Stock Exchange is very similar to a double oral auction.
The market for electric 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? Explain your answer.
Yes, with the market in equilibrium, no one participant can be made better off without someone else being harmed
Bilateral negotiations often lead to prices that
approach the theoretical equilibrium price.
If your professor decided to give all students the highest grade in the class, your classmates' incentives to study would
decrease
A market where sellers orally state asks and buyers orally state offers is known as a
double-oral auction
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 cost.
In a perfectly competitive market, when firms enter and exit competitive markets
is a good sign the market is working
All else equal the steeper the demand curve,
larger the social surplus in a market
During peak demand, service-based companies using a surge-pricing model often charge more than during less busy times in order to
move the market to equilibrium.
An outcome is Pareto efficient if
no individual can be made better off without making someone else worse off.
All of the following are issues faced by central planners in a command economy, except
setting quantity targets of production.
All else being equal, the flatter the demand curve, the social surplus in a market.
smaller
all else equal the steeper the supply curve
the larger the social surplus in market
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? Explain.
No, market size has no bearing on the attainment of Pareto efficiency.
Sofia, a political science student, thinks that 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 your answer
No, these industries are declining not because of coordination problems but, rather, because of falling demand.
If you are the only buyer, and you know that the lowest ask price is $3, should you accept this offer?
Yes, accepting an offer from any other seller will reduce your surplus. Yes, since you will gain $ 13.
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? Explain your answer.
Yes, as long as the market equilibrium still holds, the outcome is still Pareto efficient.
