Question 1

The United States attempted to centrally plan the allocation of oil in the:

Accepted Answer

A)  1990s. 
B)  1980s. 
C)  1970s. 
D)  1960s. 
A)  1990s. 
B)  1980s. 
C)  1970s. 
D)  1960s.

Question 2

The women in Kenya who pick roses:

Accepted Answer

A)  have a good sense of what Valentine's Day is. 
B)  know that roses need to bloom a few days before February 14, but otherwise know little about Valentine's Day. 
C)  do nothing to prepare for Valentine's Day. 
D)  hold back the rose supply around Valentine's Day in order to raise prices. 
A)  have a good sense of what Valentine's Day is. 
B)  know that roses need to bloom a few days before February 14, but otherwise know little about Valentine's Day. 
C)  do nothing to prepare for Valentine's Day. 
D)  hold back the rose supply around Valentine's Day in order to raise prices.

Question 3

In which of these instances does price function as a signal in the market?

Accepted Answer

A)  Suppliers invest more in exploration when the price of oil increases. 
B)  Consumers complain of price gouging as the price of oil skyrockets. 
C)  Government imposes price controls on the skyrocketing price of oil. 
D)  Consumers increase buying when the price of oil increases. 
A)  Suppliers invest more in exploration when the price of oil increases. 
B)  Consumers complain of price gouging as the price of oil skyrockets. 
C)  Government imposes price controls on the skyrocketing price of oil. 
D)  Consumers increase buying when the price of oil increases.

Question 4

If farmers are concerned about the price of their future crop changing, they can:

Accepted Answer

A)  plant more seeds today. 
B)  sell futures contracts to lock in a future price for their crop. 
C)  plant less today so that the price will be higher in the future. 
D)  buy futures contracts to lock in a future price for their crop. 
A)  plant more seeds today. 
B)  sell futures contracts to lock in a future price for their crop. 
C)  plant less today so that the price will be higher in the future. 
D)  buy futures contracts to lock in a future price for their crop.

Question 5

When the price of pizza increases, consumers have an incentive to:

Accepted Answer

A)  decrease their demand for pizza. 
B)  purchase substitute goods, such as Chinese food. 
C)  increase their consumption of pizza since it is now more valuable. 
D)  open another pizza restaurant in order to increase supply and drive prices down. 
A)  decrease their demand for pizza. 
B)  purchase substitute goods, such as Chinese food. 
C)  increase their consumption of pizza since it is now more valuable. 
D)  open another pizza restaurant in order to increase supply and drive prices down.

Question 6

Futures markets are common in commodities, financial instruments, and:

Accepted Answer

A)  nowhere else. 
B)  some barter markets in third-world countries. 
C)  currencies. 
D)  telecommunications. 
A)  nowhere else. 
B)  some barter markets in third-world countries. 
C)  currencies. 
D)  telecommunications.

Question 7

Recall from the text that weather is a very important determinant for futures prices of orange juice. Using a supply and demand graph, explain why an expectation of bad weather in the future might cause futures prices to rise today.

Accepted Answer

A prediction of bad weather translates t

Question 8

Which of these statements is TRUE?
I. China and the Soviet Union tried to centrally plan their entire economies.
II. To many people's surprise, including economists, central planning proved successful in Eastern Europe.
III. President Nixon ordered gas stations closed on Sunday, an example of central planning.

Accepted Answer

A)  II and III only 
B)  I, II, and III 
C)  II only 
D)  I and III only 
A)  II and III only 
B)  I, II, and III 
C)  II only 
D)  I and III only

Question 9

Speculation tends to ______ market welfare.

Accepted Answer

A)  increase 
B)  decrease 
C)  maintain 
D)  be unassociated with 
A)  increase 
B)  decrease 
C)  maintain 
D)  be unassociated with

Question 10

Speculators profit by buying low and selling high, which has the benefit of smoothing price swings in the market.

Accepted Answer

A) True 
 B)False

Question 11

Many times in economic markets we see new firms drive old firms out of business with lower costs and better products. Are these "business failures" also "market failures"? Explain why or why not.

Accepted Answer

Business failures (e.g., bankruptcy, los

Question 12

After the September 11th attacks, one division of the Pentagon began to set up a Policy Analysis Market (PAM), a prediction market for political events in the Middle East. United States senators cancelled the program after discovering that it would allow futures contracts for assassinations and terrorist attacks. Had the PAM survived, how might it have helped the United States government?

Accepted Answer

A)  by lowering the signal-to-noise ratio in the market 
B)  by tipping off terrorists that they were about to be captured 
C)  by showing the world that we did not know very much about events in foreign countries 
D)  by aggregating dispersed information about political events into a single, readable signal 
A)  by lowering the signal-to-noise ratio in the market 
B)  by tipping off terrorists that they were about to be captured 
C)  by showing the world that we did not know very much about events in foreign countries 
D)  by aggregating dispersed information about political events into a single, readable signal

Question 13

Prices provide little information about where resources should best be allocated in an economy.

Accepted Answer

A) True 
 B)False

Question 14

Higher oil prices made growing flowers too expensive in colder climates, which helped give rise to the Kenyan flower industry.

Accepted Answer

A) True 
 B)False

Question 15

Perhaps the biggest sign of the accuracy of the HSX market is the sale of its data to Hollywood studios eager to improve their predictions about future blockbusters.

Accepted Answer

A) True 
 B)False

Question 16

The major factor determining the price of orange juice futures is the:

Accepted Answer

A)  demand for orange juice. 
B)  cost of fertilizer. 
C)  profits to orange growers. 
D)  weather. 
A)  demand for orange juice. 
B)  cost of fertilizer. 
C)  profits to orange growers. 
D)  weather.

Question 17

The BEST known prediction market is the:

Accepted Answer

A)  Hewlett Packard Market Index. 
B)  Berkshire Hathaway Fund. 
C)  Dow Jones Industrial Average. 
D)  Iowa Electronic Markets. 
A)  Hewlett Packard Market Index. 
B)  Berkshire Hathaway Fund. 
C)  Dow Jones Industrial Average. 
D)  Iowa Electronic Markets.

Question 18

If the value of a heap of asphalt to be used on one's driveway is greater than the opportunity cost of using the heap elsewhere, then the asphalt will:

Accepted Answer

A)  be used elsewhere. 
B)  be used on the driveway. 
C)  not be used. 
D)  be used only sparingly. 
A)  be used elsewhere. 
B)  be used on the driveway. 
C)  not be used. 
D)  be used only sparingly.

Question 19

Suppose speculators expect that the supply of oil will decrease next year and as a result, buy up oil today and put it into storage. This should cause the value of that oil to:

Accepted Answer

A)  increase. 
B)  decrease. 
C)  either increase or decrease. 
D)  remain unchanged. 
A)  increase. 
B)  decrease. 
C)  either increase or decrease. 
D)  remain unchanged.

Question 20

Speculation tends to ______ volatility in prices over time.

Accepted Answer

A)  increase 
B)  decrease 
C)  not affect 
D)  eliminate 
A)  increase 
B)  decrease 
C)  not affect 
D)  eliminate

Exam 7: The Price System

The United States attempted to centrally plan the allocation of oil in the:

The women in Kenya who pick roses:

In which of these instances does price function as a signal in the market?

If farmers are concerned about the price of their future crop changing, they can:

When the price of pizza increases, consumers have an incentive to:

Futures markets are common in commodities, financial instruments, and:

Recall from the text that weather is a very important determinant for futures prices of orange juice. Using a supply and demand graph, explain why an expectation of bad weather in the future might cause futures prices to rise today.

Speculation tends to ______ market welfare.

Speculators profit by buying low and selling high, which has the benefit of smoothing price swings in the market.

Many times in economic markets we see new firms drive old firms out of business with lower costs and better products. Are these "business failures" also "market failures"? Explain why or why not.

Prices provide little information about where resources should best be allocated in an economy.

Higher oil prices made growing flowers too expensive in colder climates, which helped give rise to the Kenyan flower industry.

Perhaps the biggest sign of the accuracy of the HSX market is the sale of its data to Hollywood studios eager to improve their predictions about future blockbusters.

The major factor determining the price of orange juice futures is the:

The BEST known prediction market is the:

If the value of a heap of asphalt to be used on one's driveway is greater than the opportunity cost of using the heap elsewhere, then the asphalt will:

Suppose speculators expect that the supply of oil will decrease next year and as a result, buy up oil today and put it into storage. This should cause the value of that oil to:

Speculation tends to ______ volatility in prices over time.

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