Question 1

When oil prices increased in the 1970s, sellers began to grow roses in ________ countries and sell them in ________ countries.

Accepted Answer

A)  Middle Eastern; European 
B)  wealthy; poor 
C)  cold; warm 
D)  warm; cold 
A)  Middle Eastern; European 
B)  wealthy; poor 
C)  cold; warm 
D)  warm; cold

Question 2

Figure: Price Changes   The figure (from Global Financial Data, EIA) illustrates in percentage terms how the price of onions (in gray) and crude oil (in black) fluctuate over time. The price of onions clearly fluctuates more than oil. In 1958, the United States Congress banned future markets on onions. How does this historical fact explain the difference in deviation between oil and onions?

Accepted Answer

A)  The ban prevented analysts from buying and selling based on the price of onions' current supply and demand. 
B)  The ban encouraged speculation on the onion, causing its price to fluctuate widely as different bubbles grew and popped. 
C)  The ban destroyed any incentive for market participants to understand the onion industry. 
D)  The ban forced market participants to buy and sell based solely on current supply and demand. 
A)  The ban prevented analysts from buying and selling based on the price of onions' current supply and demand. 
B)  The ban encouraged speculation on the onion, causing its price to fluctuate widely as different bubbles grew and popped. 
C)  The ban destroyed any incentive for market participants to understand the onion industry. 
D)  The ban forced market participants to buy and sell based solely on current supply and demand.

Question 3

Futures markets largely ______ risk.

Accepted Answer

A)  do not affect 
B)  decrease 
C)  increase 
D)  maintain 
A)  do not affect 
B)  decrease 
C)  increase 
D)  maintain

Question 4

Central planning of resource allocation:

Accepted Answer

A)  was attempted by the United States during the 2007-2009 financial crisis. 
B)  can succeed even if the central planners do not have perfect information on the best uses of resources. 
C)  was the dominant economic planning method used in both the former Soviet Union and China. 
D)  insures all resources are used appropriately. 
A)  was attempted by the United States during the 2007-2009 financial crisis. 
B)  can succeed even if the central planners do not have perfect information on the best uses of resources. 
C)  was the dominant economic planning method used in both the former Soviet Union and China. 
D)  insures all resources are used appropriately.

Question 5

If an increase in oil prices made it profitable to use corn-based ethanol for fuel and corncobs are a waste product of ethanol production, what will happen in the market for corncob pipes?

Accepted Answer

A)  Supply will increase, prices will fall, and sales will increase. 
B)  Supply will decrease, prices will rise, and sales will decrease. 
C)  Demand will increase, prices will rise, and sales will increase. 
D)  Demand will decrease, prices will fall, and sales will decrease. 
A)  Supply will increase, prices will fall, and sales will increase. 
B)  Supply will decrease, prices will rise, and sales will decrease. 
C)  Demand will increase, prices will rise, and sales will increase. 
D)  Demand will decrease, prices will fall, and sales will decrease.

Question 6

Failing to understand the signaling role of prices, consumers would complain of ________ and politicians would call for ________.

Accepted Answer

A)  price binding; regulation 
B)  price gimmicks; antitrust action 
C)  a price ceiling; a price floor 
D)  price gouging; price controls 
A)  price binding; regulation 
B)  price gimmicks; antitrust action 
C)  a price ceiling; a price floor 
D)  price gouging; price controls

Question 7

Markets are linked in unpredictable and creative ways by:

Accepted Answer

A)  treaties that govern trade. 
B)  entrepreneurs who look for methods of cutting costs. 
C)  careful planning by bureaucrats. 
D)  treaties, entrepreneurs, and bureaucratic planning. 
A)  treaties that govern trade. 
B)  entrepreneurs who look for methods of cutting costs. 
C)  careful planning by bureaucrats. 
D)  treaties, entrepreneurs, and bureaucratic planning.

Question 8

Which factor(s) contribute to the increased speed of trade across countries?
I. profit opportunities for sellers
II. better transportation networks
III. increased cooperation among countries

Accepted Answer

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

Question 9

Two centrally planned economies in 2011 were:

Accepted Answer

A)  China and Russia. 
B)  China and North Korea. 
C)  North Korea and Cuba. 
D)  Russia and Cuba. 
A)  China and Russia. 
B)  China and North Korea. 
C)  North Korea and Cuba. 
D)  Russia and Cuba.

Question 10

Suppose that everyone believes war is about to break out in the Middle East, decreasing the supply of oil. One should:

Accepted Answer

A)  buy oil futures because the reduced oil supply will raise the price of oil. 
B)  sell oil futures because the reduced oil supply will decrease the price of oil. 
C)  speculate at random. 
D)  do nothing; prices already reflect that information. 
A)  buy oil futures because the reduced oil supply will raise the price of oil. 
B)  sell oil futures because the reduced oil supply will decrease the price of oil. 
C)  speculate at random. 
D)  do nothing; prices already reflect that information.

Question 11

Use the following to answer questions:
Figure: Supply and Demand  
-(Figure: Supply and Demand) At the equilibrium price in the figure, the unsatisfied demanders are represented by the section of the demand curve between:

Accepted Answer

A)  $5 and $10. 
B)  $0 and $5. 
C)  $3 and $7. 
D)  $0 and $10. 
A)  $5 and $10. 
B)  $0 and $5. 
C)  $3 and $7. 
D)  $0 and $10.

Question 12

In a free market, the price of a good is equal to the value of the good:

Accepted Answer

A)  in its next lowest-valued use. 
B)  in its next highest-valued use. 
C)  to the highest bidder among those who have satisfied their wants for the good. 
D)  given the resources used to produce the good. 
A)  in its next lowest-valued use. 
B)  in its next highest-valued use. 
C)  to the highest bidder among those who have satisfied their wants for the good. 
D)  given the resources used to produce the good.

Question 13

On average, the gain in value from speculation is less than the loss in value.

Accepted Answer

A) True 
 B)False

Question 14

If more sugar cane is demanded for ethanol production, ceteris paribus, the price of sugar is expected to increase.

Accepted Answer

A) True 
 B)False

Question 15

The United States is the world's largest producer of ethanol.

Accepted Answer

A) True 
 B)False

Question 16

Which scenario would cause a speculator to "buy low and sell high"?

Accepted Answer

A)  Farmers expect to have a bumper harvest of corn next year. 
B)  Imports of corn begin to flood the country. 
C)  The government is expected to pass legislation making it mandatory for all vehicles to use corn-based fuels within one year. 
D)  The government is expected to subsidize corn production for farmers. 
A)  Farmers expect to have a bumper harvest of corn next year. 
B)  Imports of corn begin to flood the country. 
C)  The government is expected to pass legislation making it mandatory for all vehicles to use corn-based fuels within one year. 
D)  The government is expected to subsidize corn production for farmers.

Question 17

Imagine the existence of prediction markets for political claims about the future. How might politics change?

Accepted Answer

A)  Politicians would have more difficulty scaring citizens about fake threats. 
B)  It would be harder to make good policy. 
C)  Not much would change because speculators make prediction markets unreliable. 
D)  Politicians would be able to cite the prediction markets for support when deliberately making false claims. 
A)  Politicians would have more difficulty scaring citizens about fake threats. 
B)  It would be harder to make good policy. 
C)  Not much would change because speculators make prediction markets unreliable. 
D)  Politicians would be able to cite the prediction markets for support when deliberately making false claims.

Question 18

How are oil prices and sugar prices related?

Accepted Answer

A)  Governments set the price of sugar (per ton) to equal 45% of the price of a barrel of oil. 
B)  Oil prices and sugar prices are not related. 
C)  Governments set the price of sugar (per ton) to equal 1.2 times the price of a barrel of oil. 
D)  As oil prices increase, producers divert sugar cane from sugar production to ethanol production. 
A)  Governments set the price of sugar (per ton) to equal 45% of the price of a barrel of oil. 
B)  Oil prices and sugar prices are not related. 
C)  Governments set the price of sugar (per ton) to equal 1.2 times the price of a barrel of oil. 
D)  As oil prices increase, producers divert sugar cane from sugar production to ethanol production.

Question 19

Prices are important in a market economy because they allocate goods into their highest-valued uses.

Accepted Answer

A) True 
 B)False

Question 20

Goods with uses valued higher than the market price represent satisfied wants.

Accepted Answer

A) True 
 B)False

Exam 7: The Price System

When oil prices increased in the 1970s, sellers began to grow roses in ________ countries and sell them in ________ countries.

Futures markets largely ______ risk.

Central planning of resource allocation:

If an increase in oil prices made it profitable to use corn-based ethanol for fuel and corncobs are a waste product of ethanol production, what will happen in the market for corncob pipes?

Failing to understand the signaling role of prices, consumers would complain of ________ and politicians would call for ________.

Markets are linked in unpredictable and creative ways by:

Which factor(s) contribute to the increased speed of trade across countries? I. profit opportunities for sellers II. better transportation networks III. increased cooperation among countries

Two centrally planned economies in 2011 were:

Suppose that everyone believes war is about to break out in the Middle East, decreasing the supply of oil. One should:

Use the following to answer questions: Figure: Supply and Demand -(Figure: Supply and Demand) At the equilibrium price in the figure, the unsatisfied demanders are represented by the section of the demand curve between:

In a free market, the price of a good is equal to the value of the good:

On average, the gain in value from speculation is less than the loss in value.

If more sugar cane is demanded for ethanol production, ceteris paribus, the price of sugar is expected to increase.

The United States is the world's largest producer of ethanol.

Which scenario would cause a speculator to "buy low and sell high"?

Imagine the existence of prediction markets for political claims about the future. How might politics change?

How are oil prices and sugar prices related?

Prices are important in a market economy because they allocate goods into their highest-valued uses.

Goods with uses valued higher than the market price represent satisfied wants.

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

When oil prices increased in the 1970s, sellers began to grow roses in countries and sell them in countries.

Failing to understand the signaling role of prices, consumers would complain of and politicians would call for .