Question 1

Large-scale central planning has been abandoned throughout the world (except for North Korea and Cuba) because of ______ and ___ problems.

Accepted Answer

A)  information; transactions cost 
B)  incentives; asymmetry 
C)  information; incentive 
D)  communication; complexity 
A)  information; transactions cost 
B)  incentives; asymmetry 
C)  information; incentive 
D)  communication; complexity

Question 2

Speculation tends to ______ volatility in quantity exchanged over time.

Accepted Answer

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

Question 3

In a free market, there are no unsatisfied wants at the equilibrium price.

Accepted Answer

A) True 
 B)False

Question 4

Use the following to answer question 154:
Figure: Speculation  
-(Figure: Speculation) The figure depicts the oil market, which is expected to experience a future supply disruption. Without speculation, the price today is ______ and the price in the future is ______.

Accepted Answer

A)  B; D 
B)  A: D 
C)  A; C 
D)  B; C 
A)  B; D 
B)  A: D 
C)  A; C 
D)  B; C

Question 5

Sugar cane can be used to produce sugar as well as the fuel ethanol for automobiles. Falling oil prices will cause a(n) ________ in the supply of sugar, resulting in ______ candy prices.

Accepted Answer

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

Question 6

Tyler buys a futures contract from Alex that gives him the right to buy 1,000 barrels of oil at $125 per barrel in 48 months. What happens in 48 months if the actual price per barrel of oil is $100?

Accepted Answer

A)  Tyler made a profit of $25 per barrel, or $25,000. 
B)  Alex must give Tyler $10,000. 
C)  Tyler must pay Alex $25,000. 
D)  The contract becomes void because the price turned out lower than expected. 
A)  Tyler made a profit of $25 per barrel, or $25,000. 
B)  Alex must give Tyler $10,000. 
C)  Tyler must pay Alex $25,000. 
D)  The contract becomes void because the price turned out lower than expected.

Question 7

Prices are incentives, prices are signals, and prices are predictions.

Accepted Answer

A) True 
 B)False

Question 8

Typically, speculation is carried out through:

Accepted Answer

A)  participation in a futures market. 
B)  participation in a spot market. 
C)  buying and storing a good over time. 
D)  predicting a price increase without actually buying anything. 
A)  participation in a futures market. 
B)  participation in a spot market. 
C)  buying and storing a good over time. 
D)  predicting a price increase without actually buying anything.

Question 9

A futures contract is:

Accepted Answer

A)  a contract to buy or sell commodities at some point in the future at a predetermined price. 
B)  a contract to rent a resource for a specified period with the option of buying it at the end of the lease. 
C)  an investment security whose value depends on the prices of several other securities. 
D)  the rate at which one currency trades for another currency. 
A)  a contract to buy or sell commodities at some point in the future at a predetermined price. 
B)  a contract to rent a resource for a specified period with the option of buying it at the end of the lease. 
C)  an investment security whose value depends on the prices of several other securities. 
D)  the rate at which one currency trades for another currency.

Question 10

With speculation, prices:

Accepted Answer

A)  become less volatile than they otherwise would be. 
B)  are highly volatile because speculators on average have poor information. 
C)  either rise in both the present and the future, or fall in both the present and the future. 
D)  are perfectly smooth because speculators always guess correctly. 
A)  become less volatile than they otherwise would be. 
B)  are highly volatile because speculators on average have poor information. 
C)  either rise in both the present and the future, or fall in both the present and the future. 
D)  are perfectly smooth because speculators always guess correctly.

Question 11

If people suddenly expect that a severe drought will reduce the supply of grain, the price of grain futures will be:

Accepted Answer

A)  high and then bid lower. 
B)  bid higher. 
C)  low and bid even lower. 
D)  bid lower. 
A)  high and then bid lower. 
B)  bid higher. 
C)  low and bid even lower. 
D)  bid lower.

Question 12

MOST markets are interdependent and rely on the outcomes of other markets.

Accepted Answer

A) True 
 B)False

Question 13

Speculation is defined as:

Accepted Answer

A)  risk taking. 
B)  the attempt to profit from future price changes. 
C)  the source of mutual interdependence in the modern world. 
D)  risk aversion. 
A)  risk taking. 
B)  the attempt to profit from future price changes. 
C)  the source of mutual interdependence in the modern world. 
D)  risk aversion.

Question 14

After a hurricane knocks out power to thousands of households, the price of electric generators increases threefold. According to economists:

Accepted Answer

A)  this is a vivid example of market and class exploitation by capitalists. 
B)  this discourages the use of electric generators in low-value uses, making them more readily available for high-value uses. 
C)  the rising price will give an incentive for firms to ship fewer electric generators to the disaster area. 
D)  the increase in demand for electric generators should technically cause the price to fall after a hurricane. 
A)  this is a vivid example of market and class exploitation by capitalists. 
B)  this discourages the use of electric generators in low-value uses, making them more readily available for high-value uses. 
C)  the rising price will give an incentive for firms to ship fewer electric generators to the disaster area. 
D)  the increase in demand for electric generators should technically cause the price to fall after a hurricane.

Question 15

Explain why price controls may actually end up making consumers worse off in areas that have experienced natural disasters such as hurricanes.

Accepted Answer

High prices act as a signal to suppliers

Question 16

In a successful economy, firms should be:

Accepted Answer

A)  only making profits. 
B)  only breaking even. 
C)  only going bankrupt. 
D)  either making profits, breaking even, or going bankrupt. 
A)  only making profits. 
B)  only breaking even. 
C)  only going bankrupt. 
D)  either making profits, breaking even, or going bankrupt.

Question 17

Suppose that speculators expect that a war in the Middle East is likely next year, which could cause a significant decrease in the supply of oil.
a. What could the speculators do to profit from their expectation?
b. What would be the possible impact of the war on the oil market without speculation?
c. What would be the possible impact of the war on the oil market with the action taken by the speculators described in part a?
d. How would the action taken by the speculators impact society?

Accepted Answer

a. Speculators will buy oil today at a l

Question 18

If the futures price is much higher than the spot or current price, that is a sign that smart people with their own money on the line think that:

Accepted Answer

A)  there will be an excess supply in the near future. 
B)  supply disruptions may soon occur. 
C)  demand will decrease rapidly in the future. 
D)  supply will be stable in the near future. 
A)  there will be an excess supply in the near future. 
B)  supply disruptions may soon occur. 
C)  demand will decrease rapidly in the future. 
D)  supply will be stable in the near future.

Question 19

If the CEO of a company needs accurate predictions of future sales figures, a sales manager gives one estimate, one salesman reports his sales, and an internal prediction market provides a third data point. Which of these pieces of information embodies the BEST incentives for accuracy?

Accepted Answer

A)  that from the prediction market 
B)  that from the sales manager 
C)  that from the individual salesman 
D)  all provide the same information, therefore they have equal incentives 
A)  that from the prediction market 
B)  that from the sales manager 
C)  that from the individual salesman 
D)  all provide the same information, therefore they have equal incentives

Question 20

Explain how speculation tends to smooth prices over time and increase welfare. Use the model of demand and supply to illustrate your explanation.

Accepted Answer

The two panels in the following figure a

Exam 7: The Price System

Large-scale central planning has been abandoned throughout the world (except for North Korea and Cuba) because of ______ and ___ problems.

Speculation tends to ______ volatility in quantity exchanged over time.

In a free market, there are no unsatisfied wants at the equilibrium price.

Use the following to answer question 154: Figure: Speculation -(Figure: Speculation) The figure depicts the oil market, which is expected to experience a future supply disruption. Without speculation, the price today is ______ and the price in the future is ______.

Sugar cane can be used to produce sugar as well as the fuel ethanol for automobiles. Falling oil prices will cause a(n) ________ in the supply of sugar, resulting in ______ candy prices.

Tyler buys a futures contract from Alex that gives him the right to buy 1,000 barrels of oil at $125 per barrel in 48 months. What happens in 48 months if the actual price per barrel of oil is $100?

Prices are incentives, prices are signals, and prices are predictions.

Typically, speculation is carried out through:

A futures contract is:

With speculation, prices:

If people suddenly expect that a severe drought will reduce the supply of grain, the price of grain futures will be:

MOST markets are interdependent and rely on the outcomes of other markets.

Speculation is defined as:

After a hurricane knocks out power to thousands of households, the price of electric generators increases threefold. According to economists:

Explain why price controls may actually end up making consumers worse off in areas that have experienced natural disasters such as hurricanes.

In a successful economy, firms should be:

If the futures price is much higher than the spot or current price, that is a sign that smart people with their own money on the line think that:

If the CEO of a company needs accurate predictions of future sales figures, a sales manager gives one estimate, one salesman reports his sales, and an internal prediction market provides a third data point. Which of these pieces of information embodies the BEST incentives for accuracy?

Explain how speculation tends to smooth prices over time and increase welfare. Use the model of demand and supply to illustrate your explanation.

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

Large-scale central planning has been abandoned throughout the world (except for North Korea and Cuba) because of ____ and _ problems.

Use the following to answer question 154: Figure: Speculation -(Figure: Speculation) The figure depicts the oil market, which is expected to experience a future supply disruption. Without speculation, the price today is and the price in the future is .

Sugar cane can be used to produce sugar as well as the fuel ethanol for automobiles. Falling oil prices will cause a(n) __ in the supply of sugar, resulting in candy prices.