Micro Exam (Chapter 4)
In a free market setting where quantity supplied is 50 units and quantity demanded is 40 units, price will:
fall.
A _____ maximizes the total of producer surplus and consumer surplus.
free market.
What is the difference between a change in the demand and a change in quantity demanded?
A change in demand shifts the entire curve, a change in quantity demanded means price changed.
Unexploited gains from trade exist at:
quantities below the equilibrium. → At quantities below the equilibrium, there remain buyers who value the good highly enough, and sellers who can produce the good at low enough cost, that additional mutually beneficial trades could be made.
Which would happen if the demand for oil increased in U.S.?:
market price would rise in U.S. → Price would increase if supply fell.
By the early 1970s, OPEC countries were able to act together to _____ supply and _____ prices.
reduce; raise
"According to the supply and demand model, all else equal, if the technology used to produce a good improves, supply will increase, causing the price to fall, which causes the quantity demanded to rise as well." This statement is:
true. → The supply curve moved, and the equilibrium point moved along the fixed demand curve.
An increase in demand is:
a shift in the demand curve up and to the right. → Because buyers are willing to purchase more at any given price.
An early frost in the vineyards of Napa Valley would cause a(n):
decrease in the supply of wine, increasing price.
A(n) ______ occurs when the quantity demanded is equal to the quantity supplied.
equilibrium
Lower production costs:
result in higher equilibrium price. → Lower production costs shift the supply curve to the right.
Laboratory experiments by Vernon Smith support:
the supply and demand model's usefulness in predicting changes in a free market.
Which economist began testing the supply and demand model by running experiments with his undergraduate students in 1956?
Vernon Smith
A technological innovation in the production of golf balls increases ______, causing the price to ______ and the ______.
supply; fall; quantity demanded to increase
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. → There is a shortage in this market: quantity demanded is greater than quantity supplied.
How does a shortage affect prices?
A shortage will push prices up. → The higher price reduces quantity demanded and increases quantity supplied, thus reducing the shortage.
Assuming chinos and khakis are substitute goods, what happens to the equilibrium price and equilibrium quantity of khakis if chinos become less expensive?
Both the equilibrium price and equilibrium quantity decrease. → If a substitute for khakis becomes cheaper, demand for khakis will fall.
The financial crisis of 2007-2010 had a huge impact on the U.S. housing market, causing the number of uninhabited houses to be far greater than the number of people able and willing to buy a house. What probably happened in the housing market?
Housing prices fell. → Housing prices dropped over 25% between 2006 and 2010.
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. → 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.
Tim values treats for his dog at $10 per box, and John values them at $6 per box. If the price of dog treats is $3 per box but only one box is available between these two buyers, then gains from trade will be maximized when:
Tim buys the treats.
Economic growth in China has led to more Chinese people owning cars, which:
increased demand for oil, causing oil prices to rise.
A decrease in supply results in:
lower equilibrium quantity. → A decrease in supply is illustrated by a leftward shift of the supply curve.
An increase in demand causes a:
temporary shortage at the old equilibrium price and a higher new equilibrium price and quantity.
When the free market maximizes the total gains from trade, the supply of goods is bought by:
the buyers with the highest willingness to pay. → The market price keeps the buyers with the lowest willingness to pay out of the market.
Suppose there is an increase in demand in a market and no change in the supply. What will happen to the market equilibrium price and quantity?
Equilibrium price will rise; equilibrium quantity will rise.
Imagine that a major car company has been able to plan production to coincide with sales forecasts. As new inventory comes into the showroom, customers purchase it, and there is no unsold inventory and no unfilled orders. How can we BEST describe this phenomenon?
This is a market in equilibrium.
The industrial revolution under way in China and India has induced millions of people to buy automobiles for the first time. This will drive oil prices:
up because of an increase in demand. → And the rising price will lead to an increase in quantity supplied.
What would happen if the demand for oil increased?
Quantity supplied would increase. → Quantity demanded would increase if demand increased.
Brazilian rosewood is renowned for its tonal qualities and gorgeous figuring on acoustic guitars. However, Brazilian rosewood is now banned from use in the construction of new guitars. What will likely happen to the price of used Brazilian rosewood guitars over time?
The price for used Brazilian rosewood guitars will increase because there will be a smaller supply of those guitars on the used market.
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.
If demand increases, ceteris paribus, market price will be ______ at the new equilibrium point.
higher.
Which choice explains how the OPEC crisis of 1973 affected oil prices?
The supply of oil was reduced, leading to a rise in oil prices.
"According to the supply and demand model, all else equal, if consumer preferences change in favor of a good, demand for the good will rise, causing the price to rise, which causes the supply to rise as well." This statement is:
false, because quantity supplied, not supply, will rise. → Because the supply curve does not move, it is not accurate to say that supply has changed.