Chapter 4

In Vernon Smith's supply and demand lab experiment:

Smith knew the true demand and supply curves, but the subjects did not.

When a surplus exists in a market, we know that the actual price is:

above equilibrium price, and quantity supplied is greater than quantity demanded.

What can cause both equilibrium price and quantity to increase?

consumer tastes becoming more favorable toward the good

Immediately after a hurricane, it is likely that the quantity demanded for tree cutting/removal services will ______ the quantity supplied, causing the price of tree cutting/removal services to ______.

exceed; rise

If the market for iPads experiences a surplus, then the:

price of iPads will fall.

A shortage occurs when:

the quantity demanded is greater than the quantity supplied.

If supply increases, ceteris paribus, market price will be ______ at the new equilibrium point.

lower

In a market, the equilibrium condition is given by the following:

quantity demanded = quantity supplied.

Technological advances have increased the supply of digital cameras. As a result the:

quantity demanded for digital cameras will increase.

Imagine a free market in equilibrium. After a sudden increase in supply (but before the price can adjust), the market experiences a:

surplus.

There is a positive relationship between price and quantity demanded. True or False.

False

An increase in supply and a decrease in demand occur in a market. What happens to the equilibrium price and quantity? -The equilibrium price decreases; the change in the equilibrium quantity is uncertain. -The equilibrium price decreases; the equilibrium quantity increases. -The equilibrium price increases; the change in the equilibrium quantity is uncertain. -The equilibrium price increases; the equilibrium quantity decreases.

The equilibrium price decreases; the change in the equilibrium quantity is uncertain.

An increase in quantity demanded is a movement along a fixed demand curve caused by a shift in the supply curve. True or False?

True

What is the difference between a shift in the demand curve and a movement along the demand curve?

A shift implies a change in the whole demand curve; a movement does not.

In a free market equilibrium, the gains from trade are always greater for consumers than for producers. True or False.

False

In order for the gains of trade to be maximized, everyone whose willingness to pay for the good is greater than zero must receive it. True or False?

False