Exam 7: The Price System

A wheat farmer plans to retire at the end of the growing season, or about three months from now, and take up the leisure activity of fishing. The farmer would like to purchase a $20,000 fishing boat from selling his last crop of wheat. It's possible that when the wheat is harvested in three months that its price will be lower than it is today and the farmer would be unable to afford the boat. How can the farmer hedge his risk against a drop in wheat prices?

How is speculation like international trade?

The central planning approach failed to optimally allocate oil during the 1973-1974 oil crisis because of problems of:

Around 1730, Samurai (warriors) in Japan were paid in rice. There were sometimes bad harvests, which, surprisingly, caused the price of rice to fall. Around this time, through the Dojima Rice Exchange in Japan, the Samurai were able to enter into futures contracts in rice. Rice and currency were both acceptable forms of payment in Japan at this time. Discuss a likely reason why the Samurai might have wanted to enter such contracts.

Use the following to answer questions Table: The HP Stock Exchange -(Table: The HP Stock Exchange) The HP Stock Exchange lets members of HP's sales team buy and sell shares that pay off when sales fall within a certain range. A typical security would pay out $1, if and only if future sales fell within the specific range of that share. Accordingly, the trading price given in the table between 15,000 and 20,000 units implies that:

Hewlett-Packard uses an internal prediction market to predict future hardware sales.

Speculators who think that a war in the Middle East is likely will ______ oil futures, pushing ______ the futures price.

The Kenyan flower industry sprang up primarily because of increases in the price of oil.

Dairy farmers use sawdust for milk cow bedding. What happened to the price of milk because of the housing slowdown in 2007?

When the price of a good rises:

When speculators are right, they make society better off.

Markets coordinate in a way that links buyers and sellers who rely primarily on:

In a competitive market, what does it mean when a company goes out of business?

Speculators who think that a war in the Middle East is likely will:

The great economic problem is:

A soybean farmer plants his crop today but he doesn't harvest it until next year when the soybean price could be quite different from today's spot price. To avoid the price risk, the farmer can:

An increase in the price of oil is also a signal to oil suppliers to invest more in exploration, to search for alternatives, and to increase recycling.

In prediction markets, the probability of an event is given as 1 minus the price.

Use the following to answer questions: Figure: Demand Curve Sections -(Figure: Demand Curve Sections) Refer to the figure. The section of the demand curve labeled B represents:

It is in consumers' self-interest to pay attention to prices.