Question 1

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 price a producer is willing to sell their good for and the actual price they receive for it. In this case, John was willing to sell his car for $2,000 but received $2,600, resulting in a producer surplus of $600. Choices A and B are incorrect because John did not receive the full advertised price of $3,000, and choice D is incorrect because consumer surplus refers to the difference between the maximum amount a consumer is willing to pay for a good and the actual price they paid, which is not relevant in this scenario.

Question 2

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 making donuts) will reduce the cost of producing donuts for producers. This will lead to an increase in the supply of donuts, shifting the supply curve rightward. As a result, the equilibrium price will decrease, and the equilibrium quantity will increase.

Question 3

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 4

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

Accepted Answer

Adam Smith's "invisible hand" theory suggests that when individuals, driven by self-interest, compete in a free market, they unintentionally promote the public interest by producing goods and providing services that consumers want at a price they are willing to pay. The competition between individuals in the market is guided by an invisible hand, which directs their actions toward socially optimal outcomes, without the need for central planning or coordination. Thus, option B is the correct answer as it best reflects the essence of Smith's concept of the invisible hand.

Question 5

Economic efficiency requires that

Accepted Answer

Economic efficiency requires that all economic activity generating more benefits than costs to individuals in the economy be undertaken. This means that resources should be allocated in a way that maximizes overall benefits, considering both producers and consumers. It does not require equal distribution of income or production of only long-lasting, high-quality products. It simply requires that resources be used in the most effective way possible to create the greatest overall benefit.

Question 6

If the supply of a good increased, what would be the effect on the equilibrium price and quantity?

Accepted Answer

When the supply of a good increases, the equilibrium price and quantity will both decrease. This is because there are now more units of the good available for purchase, which will drive down the price. As the price decreases, consumers will be willing to purchase more of the good, leading to an increase in quantity demanded. The intersection of the new, higher quantity demanded and the increased supply will create a new equilibrium point.

Question 7

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 leads to a shift in the demand curve to the right. This creates a new equilibrium point where the price and quantity increase. Therefore, choice C is the correct answer.

Question 8

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

Accepted Answer

If the demand for a good increases, the quantity demanded exceeds the quantity supplied which leads to a shortage. To eliminate the shortage, the producers increase the quantity supplied by producing more of the good.

Question 9

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

Accepted Answer

The law of supply states that as the price of a good falls, sellers will produce less of the good. This is because at lower prices, the seller may not be able to cover their production costs or make a profit, so it is not worth it for them to produce as much of the good. Conversely, as the price of a good rises, sellers will produce more of the good in order to take advantage of the higher profit margins. The law of supply is based on the assumption of ceteris paribus, or all other things remaining constant, so this relationship between price and quantity supplied holds true only when all other factors affecting supply remain the same.

Question 10

A decrease in the supply of a good will

Accepted Answer

A decrease in supply means that there is less of the good available, but demand remains constant. This creates a situation where there are more buyers than there are goods available, increasing competition among buyers and causing the price to rise. Therefore, a decrease in supply will lead to an increase in the price of the good.

Question 11

The efficiency of market organization is dependent on which of the following?

Accepted Answer

Competitive markets and well-defined and enforced private property rights are crucial for the efficiency of market organization. The availability of low-cost resources and high tariffs on foreign imports (B) can potentially distort markets and hinder competition, while government establishment of the invisible hand principle and the inelasticity of certain goods (D) goes against the fundamental principles of a free-market system. Well-regulated supply and demand (A) can contribute to market efficiency, but it is not the only factor or the most important one.

Question 12

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...

Question 13

"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 14

"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 confuses demand with quantity demanded. The price increase due to taxation would not cause the demand for gasoline to fall. It would only reduce the quantity demanded at the initial price level. Therefore, the price would not fall to the original level but partly lower than that.

Question 15

A movement along a demand curve

Accepted Answer

A movement along a demand curve is caused by a change in the price of the good. This is illustrated by the law of demand, which states that as the price of a good increases, the quantity demanded decreases, and as the price of a good decreases, the quantity demanded increases.

Question 16

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

According to economic theory, when both the quantity of healthcare provided and healthcare prices are rising rapidly, it indicates an increase in demand while supply remains relatively constant. This can be due to factors such as an aging population, advances in medical technology, and an increase in the prevalence of chronic diseases that require ongoing care. As demand increases, prices also rise as providers are able to charge more for their services.

Question 17

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

Accepted Answer

If the prices of grains used to produce cattle feed decrease, it becomes cheaper for farmers to produce beef, which increases the supply of beef and drives down the price.

Question 18

The Invisible Hand Principle suggests that

Accepted Answer

The Invisible Hand Principle, coined by Adam Smith, suggests that self-interested individuals in a free market are guided by market forces to engage in economic activities that promote the general betterment of society as a whole. This is because individuals in the market seek to maximize their own profits, and in doing so, they are incentivized to produce goods and services that are in demand by consumers. As a result, market prices direct individuals to produce more goods and services that benefit society, leading to a more efficient allocation of resources and economic growth.

Question 19

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 provide signals to entrepreneurs about the goods and services that consumers demand. Entrepreneurs will seek to produce goods and services that are valued by consumers at prices that cover the costs of production. This creates an incentive for individuals to develop valuable skills and make efficient use of resources, which benefits both consumers and producers. Therefore, option C is the correct choice as it correctly identifies the incentive that competition and property rights create for individuals to develop valuable skills. Option A is incorrect because market prices encourage profit-seeking firms to produce efficiently, not discourage them. Option B is incorrect because market prices encourage the production of goods and services that are of high quality, not inferior quality. Option D is incorrect because market prices can increase or decrease depending on changes in supply and demand.

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 causes a decrease in the supply of oranges, leading to a shift in the supply curve to the left. This causes the equilibrium price to increase. However, the new study on vitamin C leads to an increase in the demand for orange juice, causing a shift in the demand curve to the right. This causes the equilibrium quantity to increase. Therefore, the combination of these two events will result in an increase in the equilibrium price and an ambiguous effect on the equilibrium quantity.

Quiz 3: B: Supply, Demand, and the Market Process