Exam Prep 7th Edition Exchange and Markets Ch.3

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1) What are the goals of an economic system? What is the criterion to measure the effectiveness of a system?

2) Suppose Sam and Kevin can produce pens and pencils as shown in the table below.

(a) Who has a comparative advantage in producing pens? Who has a comparative advantage in producing pencils?
(b) Suppose Sam and Kevin have to each give Flip, a common friend, 10 pens and 10 pencils. Is there a trade that will make both of them better off? If a trade that would make both of them better off exists, describe such a trade. If there is no such trade that would make both of them better off, explain why.

3) If demand is represented bywhere I = $50,000 and supply is represented bywhere wages (W) = $15.00, compute the equilibrium price and quantity. What happens if income falls to I = $40,000?

4) Draw supply and demand curves. Show the impact of an increase in demand on the price and quantity exchanged in the market. Show the impact of a decrease in demand on the price and quantity exchanged in the market.

5) A bunch of elementary school kids sit down at a long lunch table. For several minutes, everyone trades food, but then the table becomes quiet as they begin to eat. What happened?

6) What are externalities and why is Ronald Coase an important figure in economics?

7) Markets can give a buyer everything a buyer needs to know about a product even though the buyer does not have the training to understand the specific knowledge needed to build or distribute the product. Explain.

8) Many products come with a warning about how to use the product without harming other people. Why?

9) A business manager has to decide whether to buy supplies from the marketplace or whether to build them inside the company. What do "information" and "contracting" have to do with this decision?

10) Faith and Hope are 30-year-old identical twins. The only difference between them is their credit score. Faith has a proven record of repaying debts. Faith can borrow money at 4.5 percent. Hope has often missed debt payments. Hope can borrow at 8.5 percent. They are considering enrolling in an evening MBA program. They plan on completing the program in two years. Assume the annual tuition is $16,000 for both years. They also anticipate that the nonmonetary costs of obtaining an MBA will be $40,000 per year. The twins anticipate that after graduation in two years, their earnings will be $10,000 per year higher until they retire at age 62. Should Faith enroll in the evening MBA program? Should Hope enroll in the evening MBA program?

11) A working knowledge of both markets and firms is important for managers to be effective because it

A) helps them make appropriate strategic and operational decisions.
B) helps them to exploit other executives.
C) helps them train their subordinates better.
D) helps them earn high bonuses.

12) The production and distribution of goods and services in an economy is said to be Pareto-efficient if

A) there exists no alternative that keeps all individuals at least as well off but makes even one person better off.
B) there is no alternative that reduces the cost of transportation and distribution of goods in a market.
C) the revenue generated from the sale of goods and services is more than the cost of production.
D) the quantity of goods demanded in an economy is more than the quantity supplied.

13) Tom and Jerry have been roommates for the past two years. During this period, they bought 11 CDs together. Now that each is taking his own apartment, they are deciding how to split their possessions. Tom suggests they take five CDs each and give the extra one to Arnold, their neighbor. Jerry, on the other hand, suggests they flip a coin to decide who gets the 11th CD. Assuming they neither like nor dislike being altruistic, which of the two suggestions is Pareto efficient?

A) Tom's suggestion is Pareto efficient.
B) Jerry's suggestion is Pareto efficient.
C) Both suggestions are Pareto efficient.
D) None of the suggestions is Pareto efficient.

14) A competitive price guarantees that

A) consumers who want to buy the product at the market price are satisfied.
B) producers can hoard the quantity they want at the current market price.
C) gains from trade are maximized only by the producers.
D) revenues generated are equal to the cost of production.

15) Assume the current market price of candles is such that there is a surplus (i.e., excess supply). Which of the following best describes the adjustment process in a competitive market?

A) As the price increases, the quantity demanded and the quantity supplied decrease.
B) As the price increases, the quantity demanded decreases while the quantity supplied increases.
C) As the price decreases, the quantity demanded increases while the quantity supplied decreases.
D) As the price decreases, the quantity demanded decreases while the quantity supplied increases.

16) Assume the market for ceiling fans is perfectly competitive and is currently in equilibrium. If the demand increases while the supply decreases, then we can be certain that

A) the equilibrium price will increase.
B) the equilibrium quantity will increase.
C) both price and quantity will increase.
D) both price and quantity will decrease.

17) Assume the demand function for basketballs is given by Q _D = 150 −3P + 0.1I, where P = price of a basketball, and I = average income of consumers. Also, assume the supply of basketballs is given by Q _S = 2P. If the market for basketballs is perfectly competitive, and the average income is equal to $1,500, what is the equilibrium price and quantity? What if a 20 percent income tax is introduced?

A) Before the tax, the equilibrium price was $60, and 120 basketballs were traded. The introduction of an income tax would have no effect on the equilibrium price and quantity.
B) Before the tax, the equilibrium price was $60, and 120 basketballs were traded. Once the income tax is introduced, the price would decrease by $6, and only 108 basketballs would be traded.
C) Before the tax, the equilibrium price was $60, and 120 basketballs were traded. Once the income tax is introduced, the price would decrease by $6, which would cause the quantity of basketballs traded to increase.
D) Before the tax, the equilibrium price was $60, and 108 basketballs were traded. Once the income tax is introduced, the price would decrease by $6, and only 120 basketballs would be traded.

18) Assume the demand function for scooters is given by Q _D = 20,000 - 10P + 0.2I, where P = price of a scooter, and I = average income of consumers. Also, assume the supply function of scooters is given by Q _S = 20P. If the market for scooters is perfectly competitive, and the average income of consumers is $20,000, what are the equilibrium price and quantity in this market?

A) The equilibrium price is $16,000, and 800 scooters are traded.
B) The equilibrium price is $1,600, and 32,000 scooters are traded.
C) The equilibrium price is $800, and 16,000 scooters are traded.
D) The equilibrium price is $800, and 32,000 scooters are traded.

19) Assume the market for hammers is perfectly competitive and the current price is $15. If, at this price, the quantity of hammers demanded is 15,000, while the quantity supplied is 25,000, then

A) the market for hammers is in equilibrium.
B) the price of hammers is likely to increase.
C) the price of hammers is likely to decrease.
D) there would be no change in price.

20) If the price of movie tickets doubles, then

A) the demand for Internet streaming is likely to increase.
B) the demand for Internet streaming is likely to decrease.
C) the quantity of movie tickets sold is likely to increase.
D) the quantity of popcorn sold at the movies is likely to increase.

21) Assume the market for pencils is competitive and originally in equilibrium. As a result of an increase in the price of graphite, the supply of pencils decreases. What is true of the new equilibrium?

A) The price is higher while the quantity exchanged decreases.
B) The price is higher and the quantity exchanged increases.
C) The price is lower and the quantity exchanged decreases.
D) The price is lower while the quantity exchanged increases.

22) There is an increase in incomes due to a tech boom. Which of the following correctly captures the effect of this change on the market for gasoline?

A) Both equilibrium quantity and price will increase.
B) Both equilibrium quantity and price will decrease.
C) Equilibrium quantity will increase, but equilibrium price will decrease.
D) Equilibrium quantity will decrease, but equilibrium price will increase.

23) There is an increase in availability of alternative fuels through research and development. Which of the following correctly captures the effect of this change on the market for gasoline?

A) Both equilibrium quantity and price will increase.
B) Both equilibrium quantity and price will decrease.
C) Equilibrium quantity will increase, but equilibrium price will decrease.
D) Equilibrium quantity will decrease, but equilibrium price will increase.

24) There is an OPEC cartel that reduces the production of world oil by several million barrels a day. Which of the following correctly captures the effect of this change on the market for gasoline?

A) Both equilibrium quantity and price will increase.
B) Both equilibrium quantity and price will decrease.
C) Equilibrium quantity will increase, but equilibrium price will decrease.
D) Equilibrium quantity will decrease, but equilibrium price will increase.

25) The war in Iraq comes to an end. Iran and Afghanistan lay pipes to generate more oil. The United States and Venezuela enter into an era of friendship. Which of the following correctly captures the effect of this change on the market for gasoline?

A) Both equilibrium quantity and price will increase.
B) Both equilibrium quantity and price will decrease.
C) Equilibrium quantity will increase, but equilibrium price will decrease.
D) Equilibrium quantity will decrease, but equilibrium price will increase.

26) Let Q _d = 10 – 2P and Q _s = 3P be the demand and supply curves for Beer. The equilibrium combination (P* and Q*) in the market is ________.

A) P* = 2; Q* = 5
B) P* = 5; Q* = 0
C) P* = 2; Q* = 6
D) P* = 6; Q* = 2

27) Which one of the following does not cause a shift in the demand curve for gasoline?

A) an increase in the amount of alternative fuels
B) an increase in gas tax
C) an increase in the price of gasoline
D) an increase in oil imports from the Gulf

28) Assume the government introduces a $0.50 per gallon tax on gasoline. Which of the following is true?

A) The quantity of subway and bus tickets sold is likely to increase.
B) The quantity of cars sold is likely to increase.
C) The quantity of gasoline sold is likely to increase.
D) The quantity of cars manufactured by producers will increase.

29) Externalities exist when the actions of one agent

A) benefit or hurt another agent who is not part of the exchange relationship.
B) hurt the agent committing the action.
C) benefit the agent committing the action.
D) benefit or hurt another agent who is a part of the exchange relationship.

30) Assume Pollutex Inc. produces paper in its plant located on Lake Ontario, half a mile away from CleanAir Camping. Pollutex employs an obsolete production process, dumping pollutants in the lake. The camp has experienced a steady decline in the number of attendees since Pollutex moved nearby. In particular, the owners forecast that CleanAir Camping will generate a profit of only $50,000 a year in the future, which is $150,000 less than the one generated before Pollutex moved nearby. A cleaner production process is available, which would not require dumping the pollutants in the lake. However, converting the plant would increase yearly costs by $100,000. Is the current situation Pareto efficient?

A) Yes, since there is no alternative that would make CleanAir better off without hurting Pollutex, and vice versa.
B) No, as Pollutex could convert its plant and make CleanAir better off by $200,000.
C) No, In fact, CleanAir owners could pay Pollutex a sum between $100,000 and $150,000 a year to convert its plant and increase profits between $0 and $50,000.
D) No.In fact, Pollutex owners could pay CleanAir a sum between $0 and $150,000 to move to a different location.

31) According to Ronald Coase, allocation of resources in a free-market economy will be efficient as long as

A) property rights are clearly assigned but not enforced.
B) contracting costs are sufficiently high.
C) property rights are clearly assigned and can be enforced with low contracting costs.
D) property rights are assigned only to the rich.

32) According to Ronald Coase, for a free-market economy to work efficiently, there needs to be

A) allocation of private property rights with low transaction costs.
B) allocation of private property rights with high transaction costs.
C) a well-developed tax code.
D) an autocratic form of government in the country.

33) Which of the following is an example of positive externalities?

A) Your neighbor's garden is always well taken care of.
B) Your neighbor's barbecue smoke comes through your window.
C) Your neighbor always listens to music at an unbearable volume.
D) You allow weeds to grow on your yard.

34) Consumer surplus is

A) the result of a shortage.
B) the result of a surplus.
C) a measure of the quantity traded by consumers.
D) a measure of the gains from trade to consumers.

35) The minimum wage is a

A) cost ceiling.
B) positive externality.
C) price floor.
D) price ceiling.

36) The minimum wage

A) increases economic efficiency.
B) creates a shortage of labor.
C) creates a surplus of labor.
D) increases producer surplus.

37) Price controls on gasoline

A) increase consumer surplus.
B) create a shortage of gasoline.
C) create a surplus of gasoline.
D) increase producer surplus for all producers.

38) The following diagram shows a market in equilibrium. If there was a $3.00 price floor,

A) the quantity demanded would be 65 units.
B) the quantity demanded would be 30 units.
C) there would be a shortage of 30 units.
D) there would be a surplus of 30 units.

39) The following diagram shows a market in equilibrium. If there was a $1.50 price ceiling,

A) the quantity demanded would be 65 units.
B) the quantity demanded would be 80 units.
C) there would be a shortage of 30 units.
D) there would be a surplus of 30 units.

40) The following diagram shows a market in equilibrium. If there was a $3.50 price floor,

A) the quantity demanded would be 65 units.
B) the quantity demanded would be 60 units.
C) there would be a shortage of 60 units.
D) there would be a surplus of 60 units.

41) A price cap on a good will usually

A) shift both the demand and supply curves to the right.
B) shift both the demand and supply curves to the left.
C) shift the demand curve to the left and the supply curve to the right.
D) shift neither the demand curve nor the supply curve.

42) The demand and supply curves in the market for gasoline are illustrated in the graph below.

Starting at the equilibrium point, if the government imposes a price cap of $10, consumer surplus will then be given by the area ________

A) A.
B) A + B.
C) A + D.
D) C.

43) The demand and supply curves in the market for gasoline are illustrated in the graph below.

Starting at the equilibrium point, if the government imposes a price cap of $10, producer surplus will fall by an amount given by the area ­­­­________

A) A.
B) B + C.
C) B + E.
D) C.

44) The demand and supply curves in the market for gasoline are illustrated in the graph below.

Starting at the equilibrium point, if the government imposes a price cap of $10, the deadweight loss will be the area ________.

A) D + E
B) F + G
C) D
D) E

45) Which of the following is a factor that can motivate changes in the costs of transferring knowledge?

A) changes in technology
B) the nature of knowledge to be transferred
C) the prevailing tax rates
D) the form of government in the country

46) Currently XYZ's compensation system is such that only top managers receive compensation based on the company's performance, while everybody else in the company receives a fixed salary. Moreover, top managers have full discretion over the launch of new products. Due to the failure of the last three products launched by XYZ, top managers are contemplating modifying the allocation of decision rights concerning new products. What changes would make more economic sense?

A) delegating decision rights down the ladder to those employees who are likely to have more specific knowledge and leaving their current compensation scheme unchanged
B) delegating decision rights down the ladder to those employees who are likely to have more specific knowledge and changing their compensation by awarding them bonuses based on their performance
C) leaving the allocation of decision rights unchanged, but changing the compensation of all the employees by awarding them bonuses based on their performance
D) giving themselves good bonuses and reducing benefits for all other employees

47) MACROSOFT's top management is contemplating the development and marketing of three new software products (a word processor, a spreadsheet application, and a web browser). However, it needs to decide whether to launch them separately or as a package. The CEO proposes to delegate the decision to a team formed with representatives from each department. Why does this proposal make economic sense?

A) Ultimately, they are the ones who have to implement whatever decision is made, so one might as well ask their opinion.
B) They are likely to make a more informed decision.
C) Their differences are likely to prove to be advantageous to the management.
D) If the project fails, the management will have someone to blame.

48) Which of the following is an advantage of carrying out economic transactions through firms?

A) The number of transactions carried out by a firm is fewer than that carried out in a market, thereby reducing the contracting cost.
B) Firms lack knowledge about the products they produce and distribute in a market.
C) Transactions made by or with a firm involve no opportunity cost.
D) The number of transactions carried out by a firm is more than that carried out in a market, thereby reducing the contracting cost.

49) Suppose you purchase a bond with a 5 percent risk-free rate that matures in three years. The bond pays $250 at the end of each year and a principal amount of $2,000 on maturity. The present value of the bond is

A) $3,000.
B) $2,408.51.
C) $2,123.
D) $3,433.62.