Question 1

The Hollywood Stock Exchange:

Accepted Answer

A)  allows people to buy stocks and bonds from movie theaters. 
B)  is a prediction market of expected film profits. 
C)  sets opening-day ticket prices for new movie releases. 
D)  allows movie producers to sell futures contracts to avoid the risk of poor ticket sales. 
A)  allows people to buy stocks and bonds from movie theaters. 
B)  is a prediction market of expected film profits. 
C)  sets opening-day ticket prices for new movie releases. 
D)  allows movie producers to sell futures contracts to avoid the risk of poor ticket sales.

Question 2

Land used to grow corn can also grow soybeans. As the demand for corn used in ethanol began to increase the price of corn, what happened to the price of soybeans?

Accepted Answer

A)  The price of soybeans fell due to lower demand for soybeans. 
B)  The price of soybeans rose since farmers began planting corn instead of soybeans, thus decreasing the supply of soybeans. 
C)  The price of soybeans rose since they were in limited supply and demand increased. 
D)  The price of soybeans stayed the same, since subsidies made up for any differences in the price between corn and soybeans. 
A)  The price of soybeans fell due to lower demand for soybeans. 
B)  The price of soybeans rose since farmers began planting corn instead of soybeans, thus decreasing the supply of soybeans. 
C)  The price of soybeans rose since they were in limited supply and demand increased. 
D)  The price of soybeans stayed the same, since subsidies made up for any differences in the price between corn and soybeans.

Question 3

Higher oil prices represent higher energy costs in general across the economy leading to increased use of bicycles and public transportation. Which answer BEST describes the idea that changes in one market can produce effects in previously unseen markets?

Accepted Answer

A)  The rise in the demand for bicycles causes a rise in the price of bicycles. 
B)  Increased bicycle demand increases the demand for rubber to make bicycle tires. Farmers in Southeast Asia switch from rice to rubber production and the price of rice increases. 
C)  The greater demand for public transportation offsets the demand for heating oil. 
D)  The rise in the demand for oil causes a rise in the demand for bicycles. 
A)  The rise in the demand for bicycles causes a rise in the price of bicycles. 
B)  Increased bicycle demand increases the demand for rubber to make bicycle tires. Farmers in Southeast Asia switch from rice to rubber production and the price of rice increases. 
C)  The greater demand for public transportation offsets the demand for heating oil. 
D)  The rise in the demand for oil causes a rise in the demand for bicycles.

Question 4

If speculators expect that the future price of corn will be higher, they will cause today's price of corn to ________ and the future price of corn to be ________ than it would have been without speculation.

Accepted Answer

A)  decrease; higher 
B)  increase; lower 
C)  decrease; lower 
D)  increase; higher 
A)  decrease; higher 
B)  increase; lower 
C)  decrease; lower 
D)  increase; higher

Question 5

The market solves the incentive problem when allocating resources because the:

Accepted Answer

A)  consumers will pay for the good only if its price is greater than the value of use. 
B)  consumers will pay for the good only if its value of use is greater than the price. 
C)  suppliers will produce the good only if its cost is less than the value of use. 
D)  suppliers will produce the good only if its value of use is less than the cost. 
A)  consumers will pay for the good only if its price is greater than the value of use. 
B)  consumers will pay for the good only if its value of use is greater than the price. 
C)  suppliers will produce the good only if its cost is less than the value of use. 
D)  suppliers will produce the good only if its value of use is less than the cost.

Question 6

Futures contracts are standardized agreements to buy or sell a specific amount of a commodity or financial instrument at a predetermined price at a defined point in the future.

Accepted Answer

A) True 
 B)False

Question 7

Suppose Chad believes that the price of oil will be higher in the future and buys an oil futures contract from Joe. The contract will give Chad the right to 1,000 barrels of oil at $50 per barrel to be delivered by Joe 30 months in the future. Which statement is correct?

Accepted Answer

A)  Chad has to pay Joe $50,000 upon the purchase and waits for 30 months for delivery of 1,000 barrels of oil. 
B)  Chad will receive the cash difference from Joe if the per barrel oil price rises higher than $50 after 30 months. 
C)  Joe will receive the cash difference from Chad if the per barrel oil price rises higher than $50 after 30 months. 
D)  Joe will deliver the oil to Chad after 30 months and receive $50,000 from Chad. 
A)  Chad has to pay Joe $50,000 upon the purchase and waits for 30 months for delivery of 1,000 barrels of oil. 
B)  Chad will receive the cash difference from Joe if the per barrel oil price rises higher than $50 after 30 months. 
C)  Joe will receive the cash difference from Chad if the per barrel oil price rises higher than $50 after 30 months. 
D)  Joe will deliver the oil to Chad after 30 months and receive $50,000 from Chad.

Question 8

Both ethanol and sugar are made from sugar cane and ethanol can be used as a substitute for oil. As the price of oil increases, Brazilians shift sugar cane from sugar production to ethanol production, thereby:

Accepted Answer

A)  increasing the price of ethanol. 
B)  increasing the price of sugar. 
C)  increasing the price of both ethanol and sugar. 
D)  decreasing the price of both ethanol and sugar. 
A)  increasing the price of ethanol. 
B)  increasing the price of sugar. 
C)  increasing the price of both ethanol and sugar. 
D)  decreasing the price of both ethanol and sugar.

Question 9

The Hollywood Stock Exchange allows users to bet on the success of movies already produced. Imagine that a new exchange develops that allows users to bet on the success of movies not yet produced. A contract would pay some fraction of the film's future gross earnings if the film actually gets produced, and users would have their money returned to them if the film were not made. Which statement is NOT true?

Accepted Answer

A)  Studios could use such information to make films that are more popular and profitable. 
B)  Studios could make better decisions about budgeting and marketing. 
C)  Studios would know in advance whether the prediction market was accurate. 
D)  Studios have an incentive to set up such a market. 
A)  Studios could use such information to make films that are more popular and profitable. 
B)  Studios could make better decisions about budgeting and marketing. 
C)  Studios would know in advance whether the prediction market was accurate. 
D)  Studios have an incentive to set up such a market.

Question 10

The advantages of prediction markets include:

Accepted Answer

A)  the ability of predicted outcomes to always beat actual outcomes in markets. 
B)  the fact that such markets encourage sales teams and traders at firms to divulge the true information on expected outcomes. 
C)  the fact that such markets are only useful at forecasting political outcomes. 
D)  the ability for strong prediction markets to swing actual market outcomes toward the predicted outcome. 
A)  the ability of predicted outcomes to always beat actual outcomes in markets. 
B)  the fact that such markets encourage sales teams and traders at firms to divulge the true information on expected outcomes. 
C)  the fact that such markets are only useful at forecasting political outcomes. 
D)  the ability for strong prediction markets to swing actual market outcomes toward the predicted outcome.

Question 11

Modern Bytes Computers allows its sales team to buy and sell shares that pay out $1 only if the sales in the future fall in a certain range. Suppose that currently shares for sales between 15,000 and 20,000 computers are selling for 20 cents each. Shares for sales between 20,000 and 25,000 computers are selling for 30 cents each. Shares for sales between 25,000 and 30,000 computers are selling for 30 cents each. Based on this information, what is the probability of Modern Bytes Computers selling between 15,000 and 25,000 computers?

Accepted Answer

A)  20% 
B)  60% 
C)  30% 
D)  50% 
A)  20% 
B)  60% 
C)  30% 
D)  50%

Question 12

When Walmart arrives in a small town, many existing mom-and-pop stores go out of business in 6 to 12 months. In terms of economic efficiency, is Walmart's presence good or bad? Is it possible for a smaller store to successfully compete with a national retailer such as Walmart? Explain.

Accepted Answer

In terms of economic efficiency, if the

Question 13

When the prices of necessities such as gas and bottled water rise as a result of a natural disaster, it is efficient for the government to impose price controls to keep suppliers from "price gouging" consumers.

Accepted Answer

A) True 
 B)False

Question 14

Speculators:

Accepted Answer

A)  help stabilize prices over time. 
B)  profit at the expense of consumers. 
C)  cause prices to rise but never to fall. 
D)  profit by setting market prices at monopoly levels. 
A)  help stabilize prices over time. 
B)  profit at the expense of consumers. 
C)  cause prices to rise but never to fall. 
D)  profit by setting market prices at monopoly levels.

Question 15

Suppose that a hurricane hits both North Carolina and South Carolina. North Carolina has severe price-gouging laws in place while South Carolina has none. Both states have a shortage of ice. Which state will recover from its ice shortage more quickly?

Accepted Answer

A)  North Carolina will recover more quickly because prices can adjust to make businesses willing to invest in ice production. 
B)  South Carolina will recover more quickly because prices can adjust to make businesses willing to invest in ice production. 
C)  North Carolina will recover more quickly because the anti-gouging laws create incentives to invest in ice production. 
D)  South Carolina will recover more quickly because the anti-gouging laws create incentives to invest in ice production. 
A)  North Carolina will recover more quickly because prices can adjust to make businesses willing to invest in ice production. 
B)  South Carolina will recover more quickly because prices can adjust to make businesses willing to invest in ice production. 
C)  North Carolina will recover more quickly because the anti-gouging laws create incentives to invest in ice production. 
D)  South Carolina will recover more quickly because the anti-gouging laws create incentives to invest in ice production.

Question 16

Can speculators who expect prices to rise actually cause those prices to rise in the short run?

Accepted Answer

A)  Yes, if they buy up enough of the good, they will increase demand and thus raise the price of the product. 
B)  Yes, if they expect the price to rise, sellers will automatically raise prices for their products. 
C)  No, because speculators do not have enough power to cause an increase in demand. 
D)  No, because speculators' actions cannot influence a market equilibrium. 
A)  Yes, if they buy up enough of the good, they will increase demand and thus raise the price of the product. 
B)  Yes, if they expect the price to rise, sellers will automatically raise prices for their products. 
C)  No, because speculators do not have enough power to cause an increase in demand. 
D)  No, because speculators' actions cannot influence a market equilibrium.

Question 17

From the chapter discussion, why did increased ethanol production and consumption in Brazil result in higher sugar prices?

Accepted Answer

A)  Sugar is the primary ingredient in ethanol production and thus when the demand for ethanol increased the demand for sugar also increased. 
B)  Farmers reallocated sugar cane to ethanol production, decreasing the production of sugar, and leading to higher sugar prices. 
C)  Brazil's demand for sugar increased. 
D)  The sugar crop was attacked by disease, which caused a decrease in sugar production. 
A)  Sugar is the primary ingredient in ethanol production and thus when the demand for ethanol increased the demand for sugar also increased. 
B)  Farmers reallocated sugar cane to ethanol production, decreasing the production of sugar, and leading to higher sugar prices. 
C)  Brazil's demand for sugar increased. 
D)  The sugar crop was attacked by disease, which caused a decrease in sugar production.

Question 18

Which statement explains why many economists have often compared the functioning of worldwide markets to the functioning of a computer?

Accepted Answer

A)  Worldwide markets can allocate resources randomly just as a computer can generate random data. 
B)  Without the use of computers, markets cannot solve the information problem of resource use. 
C)  Without the use of computers, markets cannot solve the allocation problem of resource use. 
D)  Worldwide markets can solve very large resource-allocation problems by simply using the price signal mechanism. 
A)  Worldwide markets can allocate resources randomly just as a computer can generate random data. 
B)  Without the use of computers, markets cannot solve the information problem of resource use. 
C)  Without the use of computers, markets cannot solve the allocation problem of resource use. 
D)  Worldwide markets can solve very large resource-allocation problems by simply using the price signal mechanism.

Question 19

The Iowa Electronic Markets:

Accepted Answer

A)  predicted that Obama would lose the election for president in 2008. 
B)  have an excellent track record in predicting political events. 
C)  create biased predictions because they do not use price signals. 
D)  are where farmers buy and sell futures contracts. 
A)  predicted that Obama would lose the election for president in 2008. 
B)  have an excellent track record in predicting political events. 
C)  create biased predictions because they do not use price signals. 
D)  are where farmers buy and sell futures contracts.

Question 20

When firms go bankrupt, the bankruptcy:

Accepted Answer

A)  indicates that capitalism is inefficient. 
B)  frees up resources to go to higher-valued uses. 
C)  reveals a faulty price system. 
D)  usually results from other firms practicing predatory pricing. 
A)  indicates that capitalism is inefficient. 
B)  frees up resources to go to higher-valued uses. 
C)  reveals a faulty price system. 
D)  usually results from other firms practicing predatory pricing.

Exam 7: The Price System

The Hollywood Stock Exchange:

Land used to grow corn can also grow soybeans. As the demand for corn used in ethanol began to increase the price of corn, what happened to the price of soybeans?

Higher oil prices represent higher energy costs in general across the economy leading to increased use of bicycles and public transportation. Which answer BEST describes the idea that changes in one market can produce effects in previously unseen markets?

If speculators expect that the future price of corn will be higher, they will cause today's price of corn to ________ and the future price of corn to be ________ than it would have been without speculation.

The market solves the incentive problem when allocating resources because the:

Futures contracts are standardized agreements to buy or sell a specific amount of a commodity or financial instrument at a predetermined price at a defined point in the future.

Suppose Chad believes that the price of oil will be higher in the future and buys an oil futures contract from Joe. The contract will give Chad the right to 1,000 barrels of oil at $50 per barrel to be delivered by Joe 30 months in the future. Which statement is correct?

Both ethanol and sugar are made from sugar cane and ethanol can be used as a substitute for oil. As the price of oil increases, Brazilians shift sugar cane from sugar production to ethanol production, thereby:

The advantages of prediction markets include:

When Walmart arrives in a small town, many existing mom-and-pop stores go out of business in 6 to 12 months. In terms of economic efficiency, is Walmart's presence good or bad? Is it possible for a smaller store to successfully compete with a national retailer such as Walmart? Explain.

When the prices of necessities such as gas and bottled water rise as a result of a natural disaster, it is efficient for the government to impose price controls to keep suppliers from "price gouging" consumers.

Speculators:

Suppose that a hurricane hits both North Carolina and South Carolina. North Carolina has severe price-gouging laws in place while South Carolina has none. Both states have a shortage of ice. Which state will recover from its ice shortage more quickly?

Can speculators who expect prices to rise actually cause those prices to rise in the short run?

From the chapter discussion, why did increased ethanol production and consumption in Brazil result in higher sugar prices?

Which statement explains why many economists have often compared the functioning of worldwide markets to the functioning of a computer?

The Iowa Electronic Markets:

When firms go bankrupt, the bankruptcy:

The Big Ideas

The Power of Trade and Comparative

Supply and Demand

Equilibrium

Elasticity and Its Applications

Taxes and Subsidies

Price Ceilings and Floors

International Trade

Externalities- When the Price Is Not Right

Costs and Profit Maximization Under Competition

Competition and the Invisible Hand

Monopoly

Price Discrimination

Oligopoly and Game Theory

Competing for Monopoly

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Managing Incentives

Stock Markets and Personal Finance

Price Discrimination

Consumer Choice

Filters

If speculators expect that the future price of corn will be higher, they will cause today's price of corn to and the future price of corn to be than it would have been without speculation.