Micro/Macro Chapter 4

Fred participates in a supply and demand experiment in his managerial economics course. What can he expect the laboratory experiment to reveal about the supply and demand model?

It successfully predicts real-life behavior.

By the early 1970s, nationalizations in the OPEC countries made it possible for OPEC countries to act together to:

reduce supply and raise prices. A reduction in supply would shift supply to the left along a fixed demand curve and raise prices.

Equilibrium occurs when:

the quantity demanded equals the quantity supplied. In equilibrium, sellers have the precise amount available to sell that buyers want to buy. Therefore, there is no incentive for price to change.

Carla participates in a supply and demand experiment in her economics course. What can she expect the laboratory experiment to reveal about the supply and demand model?

It successfully predicts real-life behavior. Vernon Smith was expecting to find that the supply and demand model was a poor predictor of real-life behavior, but instead his experiments confirmed the usefulness of the supply and demand model.

"According to the supply and demand model, all else equal, if the price of one of a good's substitutes increases, the price of the good will increase." This statement is:

true. This is because an increase in the price of a substitute will increase the demand for the good in question.

Suppose that when good M is free, sellers will not supply any, but quantity supplied rises by 20 units for every $6 increase in the price. If the quantity demanded is fixed at 150 units, the equilibrium price will be:

$45. At $45, the quantity supplied would be 20 × ($45 ÷ $6) = 150. In other words, quantity supplied will be equal to quantity demanded.

What would happen if the supply of oil decreased?

Quantity demanded would decrease. A decrease (shift to the left) of supply along a fixed demand curve leads to a rise in price and decrease in quantity demanded.

A surplus occurs when the _____ is greater than the quantity demanded.

Quantity supplied

When there is a shortage of a product:

price will rise A shortage occurs when quantity demanded exceeds quantity supplied. To persuade buyers to buy less and sellers to sell more, prices will increase until buyers want the precise amount sellers have available to sell. example: Toilet Paper and Covid

A shortage occurs when the _____ is greater than the quantity supplied.

quantity demanded A shortage occurs when sellers have more of a good to sell than buyers want to buy at a particular price.

Suppose that when good Y is free, buyers will demand 200 units of it, but the quantity demanded falls by 5 units for every $2 increase in the price. If the price is $40 and the quantity supplied is 125 units:

the price will eventually fall below $40. The quantity demanded is 200 − (5 × ($40 ÷ $2)) = 100. The difference in quantity supplied and quantity demanded is 125 − 100 = 25. The surplus should lead to price decreases until the surplus is eliminated.

Suppose that when good Z is free, buyers will demand 200 units of it, but the quantity demanded falls by 5 units for every $2 increase in the price. If the price is $24 and the quantity supplied is 125 units:

the price will eventually rise above $24. The quantity demanded is 200 − (5 × ($24 ÷ $2)) = 140. The difference in quantity demanded and quantity supplied is 140 − 125 = 15. The shortage should lead to price increases until the shortage is eliminated

Suppose that when good X is free, buyers will demand 200 units of it, but the quantity demanded falls by 5 units for every $2 increase in the price. If the price is $30 and the quantity supplied is 125 units

this market is in equilibrium. The quantity demanded is 200 − (5 × ($30 ÷ $2)) = 125. The difference in quantity supplied and quantity demanded is 125 − 125 = 0. Unless something changes, there will be no pressure on the price to rise or fall.

In Vernon Smith's classroom experiments, prices, quantities, and gains from trade all converged quickly to those predicted by economic theory:

despite the fact that students knew only their own willingness to buy or sell. Maximizing gains from trade in the free market is the product of human action, not human design.

"Government subsidies of an industry will not affect the total gains from trade achieved by the free market." This statement is:

false, because subsidized industries are likely to be characterized by wasted resources. At quantities higher than the equilibrium quantity, the value to buyers is lower than the cost to sellers.

Jean is a seller in Vernon Smith's classroom experiment of the market model. Which does she know?

her own willingness to sell The seller does know her own willingness to sell.

An increase in the demand for Swedish watches will result in a(n):

increase in the equilibrium price and quantity of Swedish watches supplied. The increase in demand causes an increase in price, which in turn causes an increase in quantity supplied.

Assume stainless steel jewelry is an inferior good. As the incomes of consumers decrease, the equilibrium price of stainless steel jewelry _____, and the equilibrium quantity of stainless steel jewelry increases.

increases When income decreases, the demand for an inferior good increases, shifting the demand curve up and to the right along a fixed supply curve.

As families move away from mining towns in search of safer jobs, the equilibrium price of coal will _____, and the equilibrium quantity of coal will decrease.

increase A decrease in the number of miners leads to a decrease in supply along a fixed demand curve.

An increase in quantity demanded is a:

movement down a fixed demand curve. This is the definition of an increase in quantity demanded.

Bennett is a buyer in Vernon Smith's classroom experiment of the market model. Which does he know?

his own willingness to buy The buyer does know his own willingness to buy.

Lower production costs result in:

a lower equilibrium price

A decrease in demand along a fixed supply curve results in

a lower equilibrium quantity. A decrease in demand is represented by a shift of the demand curve down and to the left.

Assume that plastic lawn furniture is an inferior good. If the incomes of consumers increase, the equilibrium price of plastic furniture would _____, and the equilibrium quantity of plastic furniture would decrease.

decrease An increase in income leads to a decrease in demand if the product is an inferior good.

Who competes with whom to determine the price of a good?

Sellers compete with sellers, and buyers compete with buyers. If the price at which you buy is high, you should not blame the seller; blame other buyers for outbidding you.

What would happen if the demand for oil increased?

The market price would rise. If demand increased (shifted to the right), then price would rise.

What happened to oil prices from the early twentieth century to the 1970s?

There were modest declines in oil prices since increases in supply outpaced increases in demand.

Imagine that a major car company is producing large, fuel-inefficient SUVs during a period of rising gas prices. As a result, dealerships are overstocked with inventory that is not selling. How can this phenomenon be BEST described?

This is a surplus, because the quantity supplied is greater than the quantity demanded. A surplus occurs because more SUVs are available than buyers want to buy. Therefore, dealerships will usually cut their price for SUVs to sell more SUVs and reduce inventory

Which happened in Vernon Smith's test of the market model?

Total surplus was maximized in the market model experiments.