Chapter 7: Invisible Hand World
Are there real-world markets that resemble double oral auctions? A. Yes, trading on the New York Stock Exchange is very similar to a double oral auction. B. No, all real-world markets resembling double oral auctions have disappeared due to privacy laws. C. No, double oral auctions are merely experimental devices created by economists to test certain theories. Your answer is not correct. D. Yes, all transactions that entail bargaining between agents resemble double oral auctions.
A. Yes, trading on the New York Stock Exchange is very similar to a double oral auction.
Equity
a fair distribution of economic benefits
A deadweight loss
the decrease in social surplus that results from a market distortion.
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. A. No, these industries are declining not because of coordination problems but, rather, because of falling demand. B. Yes, government intervention is necessary to generate more buyers for these industries, thus coordinating buyers with existing sellers. C. No, these declining industries are plagued by coordination problems, but government intervention is never the answer. D. Yes, the coordination problems of these industries suggest that the invisible hand is failing, so government intervention would revive these industries.
A. No, these industries are declining not because of coordination problems but, rather, because of falling demand.
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. A. Yes, as long as the market equilibrium still holds, the outcome is still Pareto efficient. B. No, a greater willingness to pay will unbalance the social surplus, making the outcome less than Pareto efficient. C. Unable to determine. It depends on the extent of the increased willingness to pay.
A. Yes, as long as the market equilibrium still holds, the outcome is still Pareto efficient.
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? A. 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. B. Maybe, it depends on the nature (durable versus nondurable) of the good. C. No, the market for a good having a perfectly elastic demand is always in equilibrium, so examining the approach to equilibrium is pointless.
A. 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.
Hardware stores charge higher prices for snow shovels after a big snow storm. What role do prices play in the snow shovel market? A. Prices would signal when price gouging was taking place so authorities could step in to prevent it. B. It would incentivize distributors to ship more snow shovels into the area to meet the increased demand. C. In such a natural disaster, prices would not efficiently guide the invisible hand. D. In an emergency, prices must remain fixed; therefore, prices do not play a role in this case.
B. It would incentivize distributors to ship more snow shovels into the area to meet the increased demand.
The market for economics textbooks is in equilibrium. The government decides to impose export restrictions on paper, leading to a decrease in the demand for paper. How does social surplus in the market for textbooks change? Why? A. The social surplus decreases, and both consumer and producer surplus decrease. B. The social surplus increases, producer surplus may increase or decrease, and consumer surplus increases. C. The change in social surplus is indeterminate because a decrease in producer surplus is accompanied by an increase in consumer surplus. D. The social surplus increases because consumer surplus increases more than the accompanying decrease in producer surplus.
B. The social surplus increases, producer surplus may increase or decrease, and consumer surplus increases.
Which of the following would maximize social surplus? A. Set price floors above the equilibrium price. B. Trade at the competitive market equilibrium. C. Restrict the quantity sold in the market below the equilibrium quantity. D. Enforce trade beyond the equilibrium quantity.
B. Trade at the competitive market equilibrium.
In a perfectly competitive market, when firms enter and exit competitive markets: A. the market is not working well because firms are leaving the market. B. it is a good sign the market is working. C. the market is not working well because the market price is too low. D. the market is not working well because the market price is too high.
B. it is a good sign the market is working.
During peak demand, service-based companies using a surge-pricing model often charge more than during less busy times in order to A. decrease the amount of supply. B. move the market to equilibrium. C. increase the amount of supply. D. decrease the amount demanded.
B. move the market to equilibrium.
The market for economics textbooks is in equilibrium. The government decides to relax export restrictions on paper, leading to an increase in the demand for paper. How does social surplus in the market for textbooks change? Why? A. The change in social surplus is indeterminate because an increase in producer surplus is accompanied by a decrease in consumer surplus. B. The social surplus decreases because producer surplus increases less than the accompanying decrease in consumer surplus. C. The social surplus decreases, producer surplus may increase or decrease, and consumer surplus decreases. D. The social surplus increases, and both consumer and producer surplus increase.
C. The social surplus decreases, producer surplus may increase or decrease, and consumer surplus decreases.
Are all efficient outcomes also equitable? Explain. A. No, only those efficient outcomes that produce a rich-to-poor income ratio less than 5.0 are equitable. B. Yes, if an outcome is efficient, then by definition, it maximizes social surplus and consequently must be equitable. C. 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. D. No, the only efficient outcome that is equitable is the one that results in an equal distribution of goods across society.
C. 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.
Bilateral negotiations often lead to prices that: A. are the same as the theoretical equilibrium price. B. are often higher than the theoretical equilibrium price. C. approach the theoretical equilibrium price. D. are often lower than the theoretical equilibrium price.
C. approach the theoretical equilibrium price.
In a perfectly competitive market, a firm with multiple production plants will minimize total costs of production when A. each plant produces at maximum capacity. B. closing older plants with less advanced production technologies. C. each plant produces where marginal revenue equals marginal cost. D. the cost of production for all plants is equal.
C. each plant produces where marginal revenue equals marginal cost.
All of the following are issues faced by central planners in a command economy, except: A. incentive problems. B. aligning the interests of the agents. C. setting quantity targets of production. D. coordination problems.
C. setting quantity targets of production. The coordination problem of bringing agents together to trade is a difficult one for central planners. After solving the coordination problem, central planners must tackle the incentive problem, which is aligning the interests of the agents. In planned economies, rewards are based on meeting quantity targets.
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. A. No, both markets attain Pareto efficiency because both involve goods that have resale potential. B. Yes, social surplus is positively correlated with Pareto efficiency. C. No, market size has no bearing on the attainment of Pareto efficiency. D. Yes, the market for drills is clearly an important market while that for vintage buttons is of less significance.
C. No, market size has no bearing on the attainment of Pareto efficiency.
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? A. 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. B. 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. C. 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. D. All of the above
D. All of the above
How do economic profits and losses allocate resources in an economy? A. 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. B. 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. C. 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.
D. All of the above.
In what type of economy does the government decide how economic resources will be allocated?
a centrally planned economy
double oral auction
a market where sellers orally state asks and buyers orally state offers
In a command/ market economy a central authority determines the goods and services produced, while a command/ market economy is based on price signals and strong economic incentives.
command- market
Pareto efficient
if no individual can be made better off without making someone else worse off. -> social surplus is maximized
bilateral negotiation
in which a single buyer and a single seller confront each other with bids and asks- rather than yelling out the offers to the groups ->There is a strong tendency for bilateral negotiations to result in prices that approach the competitive equilibrium.
All else being equal, the steeper the demand curve, the larger/smaller the social surplus in a market. All else being equal, the flatter the supply curve, the smaller/ larger the social surplus in a market.
larger- smaller
