Question 1

Imagine a free market in equilibrium. After a sudden increase in supply (but before the price can adjust), the market experiences a:

Accepted Answer

A)  shortage. 
B)  surplus. 
C)  no change. 
D)  new equilibrium. 
A)  shortage. 
B)  surplus. 
C)  no change. 
D)  new equilibrium.

Question 2

If demand decreases, ceteris paribus, the quantity exchanged will be ______ at the new market equilibrium point.

Accepted Answer

A)  larger 
B)  smaller 
C)  the same 
D)  either larger or smaller 
A)  larger 
B)  smaller 
C)  the same 
D)  either larger or smaller

Question 3

If firms produce a quantity that is greater than the equilibrium quantity, then unexploited gains from trade exist.

Accepted Answer

A) True 
 B)False

Question 4

Imagine a free market in which at a price of $10, quantity supplied is 40 units and quantity demanded is 50 units. Equilibrium price in this market:

Accepted Answer

A)  is equal to $10. 
B)  is less than $10. 
C)  is greater than $10. 
D)  differs from $10 in an indeterminate direction. 
A)  is equal to $10. 
B)  is less than $10. 
C)  is greater than $10. 
D)  differs from $10 in an indeterminate direction.

Question 5

An increase in demand causes a:

Accepted Answer

A)  temporary shortage at the old equilibrium price and a higher new equilibrium price and quantity. 
B)  permanent shortage, leaving the equilibrium price and quantity unchanged. 
C)  temporary surplus at the old equilibrium price and a lower equilibrium price and quantity. 
D)  temporary shortage at the old equilibrium price, a higher new equilibrium price, and a lower new equilibrium quantity. 
A)  temporary shortage at the old equilibrium price and a higher new equilibrium price and quantity. 
B)  permanent shortage, leaving the equilibrium price and quantity unchanged. 
C)  temporary surplus at the old equilibrium price and a lower equilibrium price and quantity. 
D)  temporary shortage at the old equilibrium price, a higher new equilibrium price, and a lower new equilibrium quantity.

Question 6

The equilibrium price and quantity are the only price and quantity that are stable in a free market.

Accepted Answer

A) True 
 B)False

Question 7

Gains from trade are maximized when:

Accepted Answer

A)  the market price is higher than the equilibrium price. 
B)  the market price is less than the equilibrium price. 
C)  the market price is equal to the equilibrium price. 
D)  there are additional potential trades available that have not been completed. 
A)  the market price is higher than the equilibrium price. 
B)  the market price is less than the equilibrium price. 
C)  the market price is equal to the equilibrium price. 
D)  there are additional potential trades available that have not been completed.

Question 8

Use the following to answer questions:
Figure: Price and Quantity 3  
-(Figure: Price and Quantity 3) At a quantity of 80 units in the figure, it cost sellers ______ to produce the last unit, but buyers value this last unit at ______.

Accepted Answer

A)  $80; $50 
B)  $50; $20 
C)  $20; $80 
D)  $80; $20 
A)  $80; $50 
B)  $50; $20 
C)  $20; $80 
D)  $80; $20

Question 9

Five new sellers enter a market (that previously had seven) and begin producing a good. Which of the following choices explains what happens to the equilibrium Q and P?

Accepted Answer

A)  The demand curve will shift to the right, and the equilibrium P and Q will both rise. 
B)  The supply curve will shift to the right, the equilibrium P will fall, and the equilibrium Q will rise. 
C)  The supply curve will shift to the left, the equilibrium P will fall, and the equilibrium Q will rise. 
D)  The supply curve will shift to the right, the equilibrium P will rise, and the equilibrium Q will fall. 
A)  The demand curve will shift to the right, and the equilibrium P and Q will both rise. 
B)  The supply curve will shift to the right, the equilibrium P will fall, and the equilibrium Q will rise. 
C)  The supply curve will shift to the left, the equilibrium P will fall, and the equilibrium Q will rise. 
D)  The supply curve will shift to the right, the equilibrium P will rise, and the equilibrium Q will fall.

Question 10

After adjusting for inflation, a comparison of the price of leg warmers reveals that the price of leg warmers was significantly higher in the 1980s than it is today. Which of the following can explain this?

Accepted Answer

A)  Since the 1980s jeans have become preferable to leg warmers, decreasing the demand for leg warmers. 
B)  New regulation on the importing of leg warmers made abroad decreased the supply of leg warmers to the United States. 
C)  An increase in the price of cotton used to make leg warmers has led to a decrease in the price of leg warmers today. 
D)  The expected increase in the price of yarn has led to a decrease in the price of leg warmers today. 
A)  Since the 1980s jeans have become preferable to leg warmers, decreasing the demand for leg warmers. 
B)  New regulation on the importing of leg warmers made abroad decreased the supply of leg warmers to the United States. 
C)  An increase in the price of cotton used to make leg warmers has led to a decrease in the price of leg warmers today. 
D)  The expected increase in the price of yarn has led to a decrease in the price of leg warmers today.

Question 11

Draw a market demand curve and market supply curve for automobiles and label these curves D1 and S1, respectively. (Be sure to label all axes!) On the same graph, show what would happen if the auto workers union required all manufacturers of automobiles to now provide health insurance for ALL workers and their dependents. (Note: Assume that prior to this change, manufacturers of automobiles do NOT provide health insurance coverage to 100 percent of their employees and/or their dependents.) What do you expect to happen to the price of automobiles as a result of this change in union policy?

Accepted Answer

The supply curve for automobil

Question 12

An increase in the demand for organic foods will lead to:

Accepted Answer

A)  an increase in the price, and hence an increase in the supply of organic foods. 
B)  an increase in the price, and hence an increase in the quantity supplied of organic foods. 
C)  a decrease in the price, and hence a decrease in the supply of organic foods. 
D)  a decrease in the price, and hence a decrease in the quantity supplied of organic foods. 
A)  an increase in the price, and hence an increase in the supply of organic foods. 
B)  an increase in the price, and hence an increase in the quantity supplied of organic foods. 
C)  a decrease in the price, and hence a decrease in the supply of organic foods. 
D)  a decrease in the price, and hence a decrease in the quantity supplied of organic foods.

Question 13

Use the following to answer questions:
Figure: Price and Quantity 1  
-(Figure: Price and Quantity 1) In the diagram, at which price is there a surplus?

Accepted Answer

A)  $80 
B)  $50 
C)  $40 
D)  $0 
A)  $80 
B)  $50 
C)  $40 
D)  $0

Question 14

Figure: Supply Shift   In the figure, the supply curve shifted from S0 to S1. To describe this movement, we would say that:

Accepted Answer

A)  demand decreased, which caused a decrease in supply. 
B)  supply decreased, which caused a decrease in quantity demanded. 
C)  supply decreased, which caused a decrease in demand. 
D)  supply increased, which caused a decrease in quantity demanded. 
A)  demand decreased, which caused a decrease in supply. 
B)  supply decreased, which caused a decrease in quantity demanded. 
C)  supply decreased, which caused a decrease in demand. 
D)  supply increased, which caused a decrease in quantity demanded.

Question 15

In the market for a normal good, an increase in income will cause an increase in ______, an increase in quantity ______, and a(n) ______ in price.

Accepted Answer

A)  demand; supplied; increase 
B)  demand; supplied, decrease 
C)  supply; demanded; decrease 
D)  supply; demanded; increase 
A)  demand; supplied; increase 
B)  demand; supplied, decrease 
C)  supply; demanded; decrease 
D)  supply; demanded; increase

Question 16

Vernon Smith showed the market equilibrium concept to be:

Accepted Answer

A)  unrelated to experimental results. 
B)  inconsistent with experimental results. 
C)  consistent with experimental results. 
D)  not testable in experimental settings. 
A)  unrelated to experimental results. 
B)  inconsistent with experimental results. 
C)  consistent with experimental results. 
D)  not testable in experimental settings.

Question 17

For each good produced in a free market economy, demand and supply determine:

Accepted Answer

A)  the price of the good, but not the quantity. 
B)  the quantity of the good, but not the price. 
C)  both the price and the quantity of the good. 
D)  neither price nor quantity; sellers determine the price. 
A)  the price of the good, but not the quantity. 
B)  the quantity of the good, but not the price. 
C)  both the price and the quantity of the good. 
D)  neither price nor quantity; sellers determine the price.

Question 18

Use the following to answer questions:
Figure: Basic Supply and Demand  
-(Figure: Basic Supply and Demand) In the diagram, which of the following statements is TRUE?

Accepted Answer

A)  The equilibrium price is $3, and the equilibrium quantity is 60 units. 
B)  The equilibrium price is $4, and the equilibrium quantity is 60 units. 
C)  The equilibrium price is $2, and the equilibrium quantity is 40 units. 
D)  The equilibrium price is $3, and the equilibrium quantity is 50 units. 
A)  The equilibrium price is $3, and the equilibrium quantity is 60 units. 
B)  The equilibrium price is $4, and the equilibrium quantity is 60 units. 
C)  The equilibrium price is $2, and the equilibrium quantity is 40 units. 
D)  The equilibrium price is $3, and the equilibrium quantity is 50 units.

Question 19

Gains from trade will be maximized at the free market equilibrium price and quantity because the supply of goods is:

Accepted Answer

A)  bought by the buyers who have the highest willingness to pay. 
B)  bought by the buyers who have the lowest willingness to pay. 
C)  sold by the sellers with the highest opportunity cost. 
D)  sold by the sellers that minimize producer surplus. 
A)  bought by the buyers who have the highest willingness to pay. 
B)  bought by the buyers who have the lowest willingness to pay. 
C)  sold by the sellers with the highest opportunity cost. 
D)  sold by the sellers that minimize producer surplus.

Question 20

If market transactions equal the equilibrium quantity, there may still be unexploited gains from trade.

Accepted Answer

A) True 
 B)False

Exam 4: Equilibrium

Imagine a free market in equilibrium. After a sudden increase in supply (but before the price can adjust), the market experiences a:

If demand decreases, ceteris paribus, the quantity exchanged will be ______ at the new market equilibrium point.

If firms produce a quantity that is greater than the equilibrium quantity, then unexploited gains from trade exist.

Imagine a free market in which at a price of $10, quantity supplied is 40 units and quantity demanded is 50 units. Equilibrium price in this market:

An increase in demand causes a:

The equilibrium price and quantity are the only price and quantity that are stable in a free market.

Gains from trade are maximized when:

Use the following to answer questions: Figure: Price and Quantity 3 -(Figure: Price and Quantity 3) At a quantity of 80 units in the figure, it cost sellers ______ to produce the last unit, but buyers value this last unit at ______.

Five new sellers enter a market (that previously had seven) and begin producing a good. Which of the following choices explains what happens to the equilibrium Q and P?

After adjusting for inflation, a comparison of the price of leg warmers reveals that the price of leg warmers was significantly higher in the 1980s than it is today. Which of the following can explain this?

An increase in the demand for organic foods will lead to:

Use the following to answer questions: Figure: Price and Quantity 1 -(Figure: Price and Quantity 1) In the diagram, at which price is there a surplus?

Figure: Supply Shift In the figure, the supply curve shifted from S0 to S1. To describe this movement, we would say that:

In the market for a normal good, an increase in income will cause an increase in ______, an increase in quantity ______, and a(n) ______ in price.

Vernon Smith showed the market equilibrium concept to be:

For each good produced in a free market economy, demand and supply determine:

Use the following to answer questions: Figure: Basic Supply and Demand -(Figure: Basic Supply and Demand) In the diagram, which of the following statements is TRUE?

Gains from trade will be maximized at the free market equilibrium price and quantity because the supply of goods is:

If market transactions equal the equilibrium quantity, there may still be unexploited gains from trade.

The Big Ideas

The Power of Trade and Comparative

Supply and Demand

Elasticity and Its Applications

Taxes and Subsidies

The Price System

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

Use the following to answer questions: Figure: Price and Quantity 3 -(Figure: Price and Quantity 3) At a quantity of 80 units in the figure, it cost sellers to produce the last unit, but buyers value this last unit at .

Figure: Supply Shift In the figure, the supply curve shifted from S₀ to S₁. To describe this movement, we would say that:

In the market for a normal good, an increase in income will cause an increase in , an increase in quantity , and a(n) __ in price.