Module 4 (Markets) Flashcards
A new restaurant has introduced a wildly popular macaroni and cheese dish made with goat cheese. However, at approximately the same time, an outbreak of disease has decreased the local goat population (without impacting the safety of goat cheese).
How do the price and quantity of goat cheese change?
A - Price and quantity increase
B - Price increases and the effect on quantity cannot be determined
C - Quantity increases and the effect on price cannot be determined
D - Quantity decreases and the effect on price cannot be determined
B - Price increases and the effect on quantity cannot be determined
Demand has increased due to the new dish, but supply has decreased due to the goat disease. Price will definitely increase, but the effect on quantity depends on the magnitude of the impact of these two events.
A country has passed a law setting a minimum wage for factory workers 5% below the equilibrium price.
How will this law impact the labor market?
A - The law will likely cause a shortage of labor.
B - The law will likely increase unemployment.
C - The law will have no impact on the market.
D - The law will increase prices without affecting quantity.
C - The law will have no impact on the market.
Since the minimum wage is below the equilibrium price, it will have no impact on market outcomes.
After an earthquake disrupts the supply of clean drinking water to many residents of a city, the city restricts grocery stores from raising the prices they charge for bottled water.
If no side markets arise, which of the following statements is true?
A - The law restricting a price increase will exacerbate the water shortage (or “excess demand”).
B - Water will be allocated to the consumers with the highest willingness to pay for it.
C - Water will be allocated to the consumers who need it most.
A - The law restricting a price increase will exacerbate the water shortage (or “excess demand”).
Some residents might be able to limit their water consumption and would purchase less water if prices rose. If prices are kept low, the quantity of water demanded will be very high, creating more of a water shortage.
A year of unusually good rainfall has made it cheaper to irrigate farmlands. However, a popular new diet has persuaded some consumers to stop eating vegetable oil, a product often made from canola.
What impact have these two changes had on the equilibrium price and quantity sold of canola?
A - Price has decreased and the effect on quantity cannot be determined
B - Price has decreased and quantity has increased
C - Price has increased and quantity has decreased
D - Price and quantity have both decreased
A - Price has decreased and the effect on quantity cannot be determined
Supply increases and demand decreases. Price will certainly decline, but the effect on quantity will depend on the relative magnitude of the two shifts.
A day care program frequently has a few parents picking up their children late. In an attempt to curb this, the daycare decides to charge a fine to parents who are more than 10 minutes late. However, after the fine was implemented, the number of late parents increased.
Which of these conclusions can be true?
A - The fine eliminated the non-financial incentives to be on time
B - The fine was not high enough to discourage being late
C - The fine was perceived as a price
D - All of the above
D - All of the above
Parents may previously have felt guilty if they were late to pick up their children, and now, if they perceive the fine as a “price” of being late, they may consider it a fair trade to arrive late and pay for it.
Since the number of late parents increased, we can conclude that those parents are willing to pay at least the fine amount in order to be late.
Parents may previously have felt obliged to pick up their children on time, and now see the fine as a price which they can fairly pay in order to arrive late.
A bakery famous for its cupcakes opens its doors at 9 a.m. and allows each customer to purchase up to 2 cupcakes until the day’s supply of cupcakes runs out. Customers begin lining up around 8 a.m. each day and the cupcakes usually run out around 9:30, leaving dozens of unserved customers disappointed.
Which of the following statements about this market are true? Select all that apply.
A - The cupcakes are being sold below their equilibrium price.
B - The bakery is maximizing its short-run producer surplus.
C - The customers who receive cupcakes are the customers with the highest willingness to pay for cupcakes.
D - The bakery is not using price as the only means of allocating cupcakes to its customers.
E - Consumer surplus is being maximized.
A - The cupcakes are being sold below their equilibrium price.
D - The bakery is not using price as the only means of allocating cupcakes to its customers.
Three years ago, law school admits deciding whether or not to attend the schools they were admitted to typically underestimated the future demand for lawyers. This forecasted demand corresponded with salaries that many admits were unwilling to accept, and fewer students than usual ended up attending law school. Now that these students have completed law school, the small graduating classes have led to a more limited supply of lawyers than is generally available.
What will be the result of this mismatch?
A - The lower supply of lawyers will lead to high salaries, and current law school admits will be more likely to decide to attend
B - The lower supply of lawyers will lead to high salaries, and current law school admits will be less likely to decide to attend
C - The lower supply of lawyers will lead to low salaries, and current law school admits will be more likely to decide to attend
D - The lower supply of lawyers will lead to low salaries, and current law school admits will be less likely to decide to attend
A - The lower supply of lawyers will lead to high salaries, and current law school admits will be more likely to decide to attend
Salaries will rise as law firms compete to hire the smaller supply of lawyers, and higher salaries will attract more admits to law school.
A state has strict laws stating that all employees, including part-time workers, must be compensated with employer-provided health benefits.
Which of the following could result from this legislation?
A - More workers will be hired “informally” and be paid surreptitiously in cash.
B - Wages will decrease.
C - Unemployment will increase.
D - Any of the above could result from the legislation.
D - Any of the above could result from the legislation.
The mandated health benefits act as a price floor, and some employers may prefer to hire workers unofficially, in order to avoid paying the benefits.
Employers could offset the cost of the health benefits by decreasing wages, and, assuming that employees derive value from the health benefits, they will be willing to accept lower wages.
The mandated health benefits act similarly to a price floor, and could lead to increased unemployment.
In an unregulated, competitive market consumer surplus exists because:
A - some sellers are willing to take a lower price than the equilibrium price.
B - some consumers are willing to pay more than the equilibrium price.
C - some sellers will only sell at prices above equilibrium price (or actual price).
D - some consumers are willing to make purchases only if the price is below the actual price.
B - some consumers are willing to pay more than the equilibrium price.
Consumer surplus is defined as the difference between equilibrium price and willingness to pay.
A city government hopes to decrease the quantity of sugary drinks consumed, and is planning to implement a tax on the drinks.
Should the government tax companies that sell sugary drinks, or the consumers who purchase them?
A - The companies that sell the drinks
B - The consumers who purchase the drinks
C - The impact of the tax will be the same regardless of who pays the tax
D - The quantity of drinks consumed will not decrease as a result of the tax
C - The impact of the tax will be the same regardless of who pays the tax
Prices will adjust so that the impact on consumers and producers will be the same regardless of who officially pays the tax.
A movie theater substantially decreases the price of its soda during the same week that a heavily advertised new movie is being released to theaters.
Assuming consumers like to enjoy movies, soda, and popcorn together, how does this impact the equilibrium price and quantity of popcorn?
A - Price and quantity both increase.
B - Price decreases and quantity increases.
C - Price increases and the impact on quantity cannot be determined.
D - Quantity decreases and the impact on price cannot be determined.
A - Price and quantity both increase.
The new movie and the low soda prices will both lead to an increase in demand for popcorn, leading to an increase in both price and quantity.
A price ceiling on apartment rentals, commonly called “rent control,” can lead to all of the following except:
A - increases in landlords discriminating against potential renters
B - improvements in apartment quality
C - decreases in efficiency of the rental market
D - decreases in future supply of apartments
B - improvements in apartment quality
If landlords are restricted from raising rents, they have less motivation to improve their apartments.
The Namibian government has assigned ownership rights of many endangered species to local communities, who have in turn sold hunting licenses for some of the species.
Will this process preserve the endangered species?
A - No, the hunting will reduce the population and lead to its eventual extinction.
B - No, the black market for species will definitely lead to the population’s extinction.
C - Yes, if the price of licenses motivates the local community to protect the endangered population.
D - Yes, since poachers (people who hunt illegally) will respect the new ownership rights.
C - Yes, if the price of licenses motivates the local community to protect the endangered population.
The local community may believe that the revenues it will receive over time from legal hunting are worth the cost of protecting the animals from poaching.
Which of the following statements is true of active secondary markets?
A - They can undo some of the intended effects of a price ceiling
B - They exacerbate excess demand for a product
C - They exacerbate excess supply for a product
D - All of the above
A - They can undo some of the intended effects of a price ceiling
A secondary market can allow consumers with low WTP to resell the product to consumers with high WTP, undermining a price ceiling.
A market’s equilibrium outcome maximizes:
A - producer surplus.
B - consumer surplus
C - the sum of producer surplus and consumer surplus.
D - All of the above
C - the sum of producer surplus and consumer surplus.
Total surplus is maximized at the market outcome.
Consider this graph depicting a price ceiling, representing the maximum rate that taxi drivers are permitted to charge for a ride from the airport in a city.
Assuming that the price ceiling is effective, what regions on the graph represent total surplus and deadweight loss?
Total surplus is A+B+D and deadweight loss is C
Total surplus is the difference between the demand curve and supply curve for all of the units sold, A+B+D. Deadweight loss (C) is the difference between the demand curve and the supply curve for all of the units that could have been sold, but were not, due to the price ceiling.
A price ceiling is set at 10% below the market equilibrium price.
Which of the following must result from the price ceiling? Select all that apply.
A - Consumer surplus decreases
B - Producer surplus decreases
C - Deadweight loss increases
D - Total surplus decreases
E - There is no effect because the price ceiling is below the market equilibrium price.
B - Producer surplus decreases
C - Deadweight loss increases
D - Total surplus decreases
