Question 1

"If gasoline were taxed, the price of gasoline would rise. Consequently, the demand for gasoline would fall, causing the price to fall to the original level." This statement is

Accepted Answer

The statement is incorrect as it confuses demand with quantity demanded. The price increase would reduce the quantity demanded, not the demand. Once the price of gasoline goes up due to taxation, the quantity demanded would decrease, leading to a lower equilibrium quantity and a higher equilibrium price than before the tax was imposed.

Question 2

All things constant, a decrease in bus, train, and airplane fares will

Accepted Answer

A decrease in the cost of using public transportation modes such as buses, trains, and airplanes will make more people opt for these modes instead of using cars. This means that the demand for cars will go down and their demand curve will shift to the left. Therefore, option A is the correct answer.

Question 3

John advertises his used car for $3,000 in the newspaper. He would be willing to sell his used car for as low as $2,000. He is offered $2,600 for it from a buyer and accepts it. In this trade, John receives

Accepted Answer

Producer surplus is the difference between the selling price and the lowest price the seller is willing to accept. In this case, John's producer surplus is $600 which is calculated by subtracting his selling price ($2,600) from his lowest acceptable price ($2,000). Consumer surplus is the difference between the highest price the buyer is willing to pay and the actual price paid. However, we do not have enough information to calculate the consumer surplus in this scenario.

Question 4

If the market price is above the equilibrium price, there will be a tendency for price to decrease, causing

Accepted Answer

The answer of If the market price is above the...

Question 5

A decrease in the supply of a good will

Accepted Answer

A decrease in the supply of a good will lead to a decrease in the quantity of the good bought and sold, and a shortage in the market. As a result, firms will bid up the price of the good in order to obtain the limited supply, leading to an increase in the price of the good.

Question 6

A hurricane damaged much of the housing in Miami. Shortly thereafter, the price of plywood rose significantly. The events suggest that

Accepted Answer

The answer of A hurricane damaged much of the housing...

Question 7

According to the law of supply, as the price of a good decreases

Accepted Answer

The answer of According to the law of supply, as...

Question 8

When Adam Smith said economic activity was directed by an "invisible hand," he was referring to the fact that

Accepted Answer

Adam Smith's concept of the "invisible hand" refers to the idea that when individuals in a competitive market act in their own self-interest, the resulting economic activity will ultimately serve the public interest. This is because the competitive forces of the market dictate that businesses will only succeed if they provide goods or services that consumers want or need, and at a price that they are willing to pay. As a result, in a free market economy, the actions of self-interested individuals are guided by an invisible hand that ultimately leads to the efficient allocation of resources and the well-being of society as a whole.

Question 9

Figure 3-24

In Figure 3-24, which of the following is true?

Accepted Answer

The answer of Figure 3-24

In Figure 3-24, which of the...

Question 10

A decrease in the price of flour will shift the supply curve for donuts

Accepted Answer

A decrease in the price of flour, a key ingredient in donuts, will lower the cost of production for donut suppliers, causing an increase in the supply of donuts. This will shift the supply curve rightward, causing the equilibrium price to decrease and the equilibrium quantity to increase.

Question 11

"Falling consumer income from the recent recession has hurt automakers in more ways than one. Not only have sales of new cars fallen, but car prices have fallen as well. As a result, the major automakers have announced cutbacks in production and layoffs of workers." Which of the following places these statements in the proper economic terminology within the context of the supply and demand model? [Note: It may help to graph this first.]

Accepted Answer

The statement describes a decrease in both demand (from falling consumer income) and quantity supplied (due to cutbacks in production and layoffs). This is represented by a leftward shift of both the demand and supply curves, resulting in a decrease in equilibrium quantity and a possible decrease in equilibrium price. Therefore, B is the correct answer as it describes a decrease in demand and a decrease in quantity supplied.

Question 12

Economic efficiency requires that

Accepted Answer

Economic efficiency requires that resources be allocated in a way that generates the greatest overall benefit for individuals in the economy. This means that all economic activity generating more benefits than costs should be undertaken, as it increases overall welfare. Choices A, B, and C do not necessarily contribute to economic efficiency.

Question 13

If the demand for beer increased, what would be the effect on the equilibrium price and quantity of beer?

Accepted Answer

An increase in demand for beer will lead to a shift in the demand curve to the right. This will result in a new equilibrium price and quantity at a higher price and quantity. Therefore, price will increase and quantity will increase.

Question 14

(I) The height of the demand curve for a commodity indicates the maximum amount the consumer would be willing to pay for each unit of the good. (II) The height of the supply curve for a commodity indicates the minimum price the seller would accept for each unit of the good.

Accepted Answer

This statement is a basic explanation of the demand and supply curves. The height of the demand curve indicates the maximum amount a consumer is willing to pay for a commodity, while the height of the supply curve indicates the minimum amount a seller will accept for each unit of the commodity. Therefore, both statements are true.

Question 15

When competition is present and property rights protected and enforced, market prices will

Accepted Answer

When competition is present and property rights protected and enforced, market prices serve as signals to entrepreneurs about what goods or services are in demand and what prices customers are willing to pay. Entrepreneurs then allocate resources to produce goods and services that they believe will generate profits, and they are incentivized to do so efficiently in order to maximize profits. As a result, competition encourages self-interested individuals to develop skills that are valuable in the marketplace, ultimately leading to higher quality products and services.

Question 16

If coffee and cream are complements, a decrease in the price of coffee will cause

Accepted Answer

Coffee and cream are complements, which means they are consumed together. A decrease in the price of coffee would make it more affordable for consumers to purchase, and therefore they would likely increase their purchase of coffee. This increase in demand for coffee would then lead to an increase in demand for cream, as consumers would want more cream to go with their increased coffee consumption.

Question 17

If the demand for a good increases, which of the following will generally occur in a market setting?

Accepted Answer

An increase in demand will lead to an increase in the quantity demanded (assuming no change in price). In order to meet this increased demand, suppliers will need to increase the quantity supplied. This increase in supply will not necessarily lead to a decrease in price, as the equilibrium price and quantity will depend on the magnitude of the shift in demand and supply. Producer profits may increase or decrease depending on the relative increase in demand and supply, but this cannot be determined without further information.

Question 18

Over the past 20 years both the quantity of health care provided and health care prices have been rising rapidly. Economic theory would suggest that the observed data could best be explained as

Accepted Answer

Economic theory suggests that when both quantity and prices of a good or service increase, it's likely the result of an increase in demand while supply remains relatively constant. This could be due to a growing population or an increase in the number of individuals seeking healthcare services.

Question 19

Which of the following would most likely decrease the price of beef?

Accepted Answer

Lower prices of grains used to produce cattle feed would decrease the cost of raising cattle, which would lower the overall cost of beef production and thus decrease the price of beef.

Question 20

A freeze in Florida devastates the orange crop at the same time a new study is released showing the health benefits of vitamin C (leading consumers to want to buy more orange juice). How will the equilibrium price and quantity of orange juice change in response to the combination of these two events?

Accepted Answer

The freeze in Florida will decrease the supply of oranges, causing a leftward shift in the supply curve for orange juice. At the same time, the release of a study showing the health benefits of vitamin C will increase demand for orange juice, causing a rightward shift in the demand curve. The combination of these two events will result in a higher equilibrium price, but the effect on equilibrium quantity is ambiguous since it depends on the relative magnitudes of the shifts in the supply and demand curves.

Quiz 3: Demand, Supply, and the Market Process