Exam 1 (Ch.4 & 5)
The _____ predicts the ANWR will produce about 800,000 barrels of oil per day.
Department of Energy's Energy Information Service (EIS)
How do elasticity and slope relate?
When two curves pass through the same point, their relative slopes can reveal their relative elasticities.
A decrease in quantity demanded is caused by:
a decrease in supply
The "gains from trade" can be defined as:
the difference between a good's value and its cost.
A surplus will occur in the market for oil if:
the price of oil is above the equilibrium price.
When the price at which sellers are willing to sell another unit exceeds the price at which buyers are willing to buy another unit, there must be _______, and the quantity is too _______.
waste; high
Economists believe that in free markets, potential gains from trade:
will eventually be found by buyers and sellers in a market.
Many new restaurants have opened in Collegetown in recent years. Given this change in supply, which type of demand curve would result in the largest change in the price of restaurant meals?
Relatively inelastic demand
Was Vernon Smith able to predict expected equilibrium price and quantity in his experiment?
Yes, because he knew what the demand and supply curves should look like.
At the market equilibrium:
all trades that can generate gains from trade take place, and no trades take place that would not generate gains from trade.
Movement downward along a fixed demand curve is called:
an increase in quantity demanded.
Movement upward along a fixed supply curve is called:
an increase in quantity supplied.
Frank recently lost his job as a photo lab technician. While he searches for a new occupation, his spaghetti purchases increases. For Frank, spaghetti is
an inferior good.
You can tell the difference between elastic and inelastic demand curves because elastic demand curves tend to
be flatter
In order to conduct his demand and supply model experiments, Vernon Smith assigned all of his students the roles of:
buyers or sellers
If the supply curve for slaves is not perfectly inelastic (i.e., not vertical), which of the following will happen as a result of a slave redemption program?
The program will free some slaves who would not have been slaves in the first place had it not been for the program.
In what way does time horizon affect the elasticity of a good's demand?
The shorter the time horizon, the less elastic the demand because it is harder for consumers to adjust their behavior.
In a market equilibrium, what differentiates suppliers who actually sell a good from suppliers who do NOT sell a good?
The suppliers who sell have lower costs than the sellers who don't sell.
Which of the following is NOT true about the free market equilibrium?
There are opportunities for further gains from trade between buyers and sellers.
At quantities lower than the equilibrium quantity, which of the following is true?
There are unexploited gains from trade because buyers are willing to pay more than sellers require for another unit.
Suppose you were a participant in Vernon Smith's experiment and you received a card that read, "Your value: $4." What does this mean?
This means that the most you should be willing to pay to buy the good is $4.
Why do we use the midpoint formula to calculate the elasticity of demand between two points on a demand curve?
To get the same answer regardless of the starting point
If a small increase in the price of a good leads to a large decrease in the quantity demanded of a good:
demand is elastic, and revenue would fall.
Since there are many different brands of tablet computers to choose from, demand in the tablet market is
elastic
Kshitij Batra mentions the U.S. requirement that prisoners have at least 50 square feet of living space per person in order to demonstrate that:
government land-use restrictions in Mumbai result in its citizens having very little space per person.
If a decrease in a good's price causes the quantity demanded to _______ just a little bit, then we say that demand is _______.
increase; inelastic
A slave redemption program:
increases the demand for slaves.
As the absolute value of the elasticity of demand rises from 0 to 1, demand goes from being:
inelastic to unit elastic.
Consumers are _______ concerned about price changes when goods feel _______, making the demand for these goods inelastic.
less; cheap
Reuben Abraham believes that if Mumbai were to double its FSI, ______ because ______.
more space would be available per capita; the population of Mumbai would not double as a result available housing could double, but population would not
There are _______ substitutes for McDonald's cheeseburgers than there are for cheeseburgers in general, so the demand for _______ is more elastic.
more; McDonald's cheeseburgers
Suppose the income elasticity of demand for pizza is 0.6. Pizza would be classified as:
normal
Gains from trade are maximized at market equilibrium because:
only the highest-value buyers buy and only the lowest-cost sellers sell.
In a market, buyers compete with ________, and sellers compete with ________ .
other buyers; other sellers
The elasticity of demand is calculated as the _______ divided by the _______.
percentage change in quantity demanded; percentage change in price
The equilibrium price in a market is the price at which:
quantity demanded equals quantity supplied.
A "change in demand" and a "change in quantity demanded" are:
related, but different, concepts.
The equilibrium price is the only ________ price.
stable
The work of Vernon Smith _______ the demand and supply model; this is _______.
supported; not what Smith expected
Whether or not a person considers coffee to be a necessity or a luxury depends primarily on:
that consumer's preferences.
The market equilibrium separates the demand curve into two parts: _______ and _______.
the buyers; the non-buyers
If in a market there are no unexploited gains from trade and no wasteful trades, it must be that:
the equilibrium quantity is being produced.
Graphically speaking, the equilibrium price and quantity can be found by locating:
the intersection of the supply and demand curves.
The Arctic National Wildlife Refuge (ANWR) is:
the largest of Alaska's 16 national wildlife refuges.
Public transportation has not been a viable solution for easing the housing problems in Mumbai because:
the low FSI means that people are very spread out and do not live near public transportation.
If revenue from the sale of a certain good remains constant despite a change in price, demand for that good is:
unit elastic.
Which of the following causes a change in demand?
A change in the personal income of buyers
_______ is caused by a reduction in costs, while _______ is caused by an increase in demand.
An increase in supply; an increase in quantity supplied
Nobel laureate Vernon Smith, one of the founders of _______, first tested the supply and demand model in 1956.
experimental economics
At the equilibrium price for oil, only the _______ buyers buy oil and only the _______ sellers sell oil.
high-value; low-cost
The concept of elasticity:
is a foundational concept in microeconomics that is relevant in many different situations.
When there is a surplus in a market:
sellers have an incentive to reduce their prices so they can outcompete other sellers and sell more.
The equilibrium price is the price where:
the quantity demanded is equal to the quantity supplied.
A free market maximizes:
the sum of producer and consumer surplus.
Who lives in the slums in Mumbai?
Low- and middle-income individuals
Which of the following goods would likely be very inelastic?
Medication for a sick pet.
Suppose that at a price of $25 per unit, revenues in a certain industry equal $1 million, but at a price of $20 per unit, revenues fall to $900,000. Demand in this industry must be:
inelastic because price and revenue move together.
Suppose the income elasticity of demand for good A is −1. This good would be classified as:
inferior.
At a price lower than the equilibrium price, there is a _______, and buyers _______.
shortage; demand more than sellers are willing to sell
The rent-seeking opportunities that Kshitij Batra mentions most likely include:
government officials receiving kickbacks in exchange for allowing builders to have a higher FSI.
If the demand for illegal drugs is inelastic, then prohibition, which tends to raise the price of illegal drugs, will:
greatly increase drug dealer revenues while having only a small effect on quantity demanded.
The elasticity of demand explains _______ quantity demanded changes in response to a price change.
how much
What does FSI stand for?
Floor Space Index
Which of the following would be the MOST elastic?
The supply of toothpicks in Baton Rouge, Louisiana
Which of these is mentioned by Reuben Abraham as a reason that some people may live in the slums of Mumbai?
- low FSI in Mumbai has led to a very low supply of housing. - They have been priced out of the formal housing market. - slums are close to their place of employment.
Which of the following is among the determinants of the elasticity of supply?
- share of the input market represented by the good - geographic scope of the market under consideration - rate at which per-unit costs rise with increased production
Which of the following causes a change in quantity demanded?
A change in the good's price
Which of the following is true about a good with elastic supply?
An increase in price will increase the quantity supplied by a lot.
Which if the following correctly states the formula for the elasticity of demand?
Elasticity of demand = %ΔQd ÷ %ΔP
Economists understand that gun buyback programs are less effective than their proponents hope they will be because economists incorporate their understanding of the:
Elasticity of supply
In addition to experiments like those that Vernon Smith conducted, which additional method does Professor Tabarrok discuss to test the demand and supply model?
Examining its predictions about what happens when the demand or supply curve shifts
What happens at any price other than the equilibrium price?
Forces are put into play that move the price toward the equilibrium price.
Which economist suggested that a tax could be set that would raise drug seller costs to the level that would exist with effective government law enforcement?
Gary Becker
How did Vernon Smith create realistic incentives for his students to maximize the gains from trade?
He paid them an amount of money equal to the consumer or producer surplus they earned.
For most automobile manufacturers, what happens to the elasticity of supply over time?
It increases.
Which of the following is true about the value of the elasticity of demand?
It is always negative, so economists generally drop the negative sign and use the absolute value.
How does Mumbai's FSI compare to FSIs in other densely populated cities in the world?
It is substantially lower.
What impact does a slave redemption program hope to have on the price of slaves, and why?
The goal is to raise the price of slaves so that potential slave owners are priced out of the market.
Which of the following goods is most likely to have elastic demand?
A luxury that has a lot of substitutes
What basic question is the most useful in assessing the elasticity of supply for a good?
How easily can producers expand or reduce production of this good?
If demand for a good is inelastic, what would the demand curve for this good look like?
It would be downward sloping and relatively steep.
Which of the following is surprising about Mumbai, considering that the price of land is high?
The average height of the buildings in Mumbai is low.
How well does the demand and supply model explain changes in the price of oil over time?
The model is useful in explaining major changes in the price of oil.
Which of the following causes a change in supply?
a change in cost
A shift in the demand curve refers to:
a change in demand
Which of the following can cause a change in quantity supplied?
a change in demand
If there is no waste and all potential gains from trade have been exploited, then a market must:
be in equilibrium.
If two supply curves pass through the same point, the curve that is less elastic will:
be steeper
The equilibrium quantity is equal to:
both quantity demanded and quantity supplied at the equilibrium price.
Markets find equilibrium, and maximize gains from trade, when:
buyers and sellers act in their own self interest.
The demand and supply model predicted all of the following outcomes of Vernon Smith's experiment EXCEPT:
consumer surplus and producer surplus were equal.
The demand and supply curves show how buyers and sellers ________; the interaction of buyers and sellers ________.
respond to prices; determines the price
The price for slaves will _______ as a result of a slave redemption program if the supply curve for slaves _______.
rise less; slopes up and to the right
If turkey and ham have a cross-price elasticity of demand of 2, they would be classified as:
substitutes
If soymilk and dairy milk have a cross-price elasticity of demand of 2.6, they would be classified as:
substitutes.
In Vernon Smith's experiment, the distribution of cards with the seller costs determined the:
supply curve
The key determinant of the elasticity of demand is:
the availability of substitutes.
Professor Tabarrok concludes that the supply of Picasso paintings is probably inelastic because:
the price of Picasso paintings can rise significantly, but the supply of Picasso paintings is not likely to increase much in response.
The elasticity of supply measures how responsive:
the quantity supplied is to a change in price.
The elasticity of supply measures:
the responsiveness of quantity supplied to a change in price.