Question 1

Scientists find that eating corn three times a day will prolong life. This leads to a shift in preferences away from wheat and toward corn. As we move from one equilibrium to another, we can predict that

Accepted Answer

When preferences shift from wheat to corn, it affects all input markets because the demand for inputs related to corn production increases, while demand for inputs related to wheat production decreases. This includes labor, land, machinery, and any other inputs specific to these crops.

Question 2

A gas tax holiday would

Accepted Answer

A gas tax holiday would lower the price of gasoline, which could lead to an increase in demand for gasoline, potentially affecting the market for air travel as people may choose to drive instead of fly for short distances. Additionally, with more people opting to drive due to lower gas prices, the level of congestion on roads could increase.

Question 3

It is essential to establish specific criteria to judge the performance of any economic system. Two such criteria are

Accepted Answer

Efficiency refers to the ability of the economic system to produce goods and services with minimum waste of resources. Equity, on the other hand, focuses on the fair distribution of wealth and income among the members of society. Both criteria are important in assessing the performance of an economic system. An efficient system that benefits only a few individuals or groups is not desirable, just as an equitable system that is inefficient in producing goods and services is not sustainable. Therefore, both efficiency and equity should be considered when evaluating the effectiveness of an economic system. Choices B, C, and D are too narrow in scope and do not encompass the broader concerns around the performance of economic systems.

Question 4

Assume that an economy producing two products, skateboards and in‐line skates, is initially in equilibrium, and that skateboards and in‐line skates are substitutes. If consumer preferences shift away from skateboards and toward in‐line skates, which of the following will NOT occur?

Accepted Answer

If consumer preferences shift away from skateboards and toward in-line skates, then the demand for skateboards will decrease, causing firms producing skateboards to incur losses in the short run. Similarly, firms producing in-line skates will earn profits in the short run due to the increase in demand. In the long run, additional capital will flow into in-line skates production to meet the increased demand. However, there is no reason for additional capital to flow into skateboard production in the long run as the demand for skateboards is decreasing. Thus choice D is the correct answer.

Question 5

A technological change in the production of cars will

Accepted Answer

A technological change in the production of cars will have a significant impact on both input and output markets in the automobile industry as well as related industries. This might affect suppliers of raw materials, production workers, and ultimately consumers who may experience changes in the cost, availability, and quality of cars.

Question 6

Initially the beef and mutton markets are in equilibrium, then preferences shift away from beef and into mutton. If you are a cattle rancher, the best profit-maximizing strategy is to

Accepted Answer

When preferences shift away from beef and into mutton, demand for beef decreases, leading to a potential surplus at the current price and equilibrium quantity. For a cattle rancher, decreasing output can help align supply with the new, lower demand, helping to stabilize prices and minimize short-run losses. Increasing output or maintaining the same level of production could exacerbate the surplus, potentially leading to even lower prices and greater losses. Shifting capacity into cattle raising (option C) does not apply as they are already cattle ranchers. Shutting down (option A) is an extreme response that might not be necessary if adjustments in output can mitigate the impact of the shift in preferences.

Question 7

Refer to the information provided in Figure 12.1 below to answer the questions that follow.  Figure 12.1
-Refer to Figure 12.1. The firm is

Accepted Answer

Point B represents the minimum point on the firm's average total cost curve, indicating that it is the most efficient point for the firm to produce at. Therefore, the firm is more efficient when it produces at point B than at point A or any other point on the ATC curve.

Question 8

Refer to the information provided in Figure 12.3 below to answer the questions that follow.  Figure 12.3
-Refer to Figure 12.3. The DVD industry is a constant-cost industry. As the demand for DVD players shifts from D to $$D ^ { \prime }$$ , which of the following is LEAST likely to result?

Accepted Answer

In a perfectly competitive market, prices may increase in the short run due to increased demand, but in the long run, they will return to the equilibrium level due to the entry of new firms, making it unlikely for the price to remain at $5.00.

Question 9

A new technology is developed for producing microwave ovens that reduces production costs by 10%. Which of the following is the most likely consequence of this technological change?

Accepted Answer

The technological change that reduces production costs by 10% will give a competitive advantage to the firms that adopt it, leading to lower costs and higher efficiency compared to firms that do not adopt it. Therefore, firms will need to adopt this new technology to remain efficient and competitive in the market.

Question 10

Refer to the information provided in Figure 12.2 below to answer the questions that follow.  Figure 12.2
-Refer to Figure 12.2. A technological advance causes the supply of personal computers to increase. The graph of this situation represents a

Accepted Answer

The graph in Figure 12.2 only considers the market for personal computers, and does not take into account the effects on other industries or the economy as a whole. Therefore, it represents a partial equilibrium analysis.

Question 11

Refer to the information provided in Figure 12.1 below to answer the questions that follow.  Figure 12.1
-Refer to Figure 12.1. This firm is currently at Point A on the ATC curve. If this firm moves toward Point B, this will make the

Accepted Answer

Moving from Point A to Point B means the firm is reducing its average total costs, which suggests an increase in efficiency. Therefore, the correct answer is C - moving toward Point B makes the economy more efficient.

Question 12

Firms stop producing tapes and start producing compact discs because people prefer compact discs to tapes. This will

Accepted Answer

Transitioning to producing compact discs, which are in greater demand, will allow firms to allocate their resources more efficiently and use their resources to meet consumer preferences. This can lead to cost savings and an increase in productivity, improving efficiency overall.

Question 13

To conduct a general equilibrium analysis of a change in consumer preferences away from beef and toward chicken, you must consider

Accepted Answer

To conduct a general equilibrium analysis of a change in consumer preferences away from beef and toward chicken, you must consider changes in the equilibrium prices and quantities of beef and chicken (A), changes in the amount of resources allocated to the production of beef and chicken (B), and changes in the price of resources allocated to the production of beef and chicken (C). All of these factors interact and affect each other in a general equilibrium analysis.

Question 14

Resources are allocated efficiently when

Accepted Answer

Efficient allocation of resources occurs when the market produces goods and services that people want, creating a situation where supply meets demand. In this scenario, resources are being allocated in the most efficient way because producers are incentivized to use resources in the most cost-effective manner in order to maximize profits. This tends to result in a balance between supply and demand, leading to efficient use of resources.

Question 15

Preferences have just shifted away from beef and into mutton. If you are a sheep rancher, the best profit-maximizing strategy is to

Accepted Answer

Given the shift in preferences towards mutton, as a sheep rancher, producing as much as possible to meet the increased demand is the best strategy to maximize profits in the short run. This takes advantage of the higher prices and demand for mutton.

Question 16

Which of the following questions is NOT answered by general equilibrium analysis?

Accepted Answer

General equilibrium analysis does not involve value judgments about what is desirable for society as a whole. It is a positive analysis that only seeks to describe and explain the workings of a complex economy without making normative assumptions.

Question 17

Examining the equilibrium conditions of individual markets and for households and firms separately is referred to as

Accepted Answer

Partial equilibrium analysis examines the equilibrium conditions of individual markets and for households and firms separately. It focuses on the interaction of supply and demand in a specific market without taking into account the effects of changes in other markets or the broader economy. B is incorrect because general equilibrium analysis considers the interactions between all markets in the economy, not just individual markets. C is incorrect because comparative statics is a method of analyzing the effects of changes in exogenous variables on equilibrium outcomes. D is incorrect because efficiency analysis analyzes the allocation of resources and whether it is Pareto efficient, rather than examining equilibrium conditions.

Question 18

Suppose there is a permanent shift of consumer preferences away from pretzels and toward potato chips. The most likely result would be

Accepted Answer

When consumer preferences shift toward a product, in this case, potato chips, demand for that product increases. This increased demand, especially if unexpected or sudden, can lead to higher prices and short-run profits for producers as they adjust to the new market conditions. The other options do not logically follow from a shift in consumer preferences toward potato chips.

Question 19

Efficiency occurs when

Accepted Answer

Efficiency occurs when the economy is producing what people want at the least possible cost. This means that resources are being allocated in the most productive way, maximizing output while minimizing input. It also implies that there is no waste or inefficiency in the production process, resulting in lower costs and higher profits for producers, as well as lower prices for consumers. B, C, and D are all important goals for an economy, but they do not necessarily lead to efficiency. For example, a fair and just distribution of income may require redistributive policies that increase costs and reduce efficiency, while all markets being in equilibrium may require prices to be too high or too low, leading to inefficiencies in production and consumption. Similarly, low unemployment and stable prices may be desirable, but they do not necessarily reflect an efficient allocation of resources.

Question 20

Suppose that a town has two major hospitals. One of these hospitals is unionized and the union has just negotiated a 10% wage increase each year for the next three years. Which of the following is most likely to occur?

Accepted Answer

As the unionized hospital increases the wages by 10%, it puts pressure on the nonunionized hospital to match the wages, or risk losing employees to the unionized hospital. Therefore, the price of labor is likely to change in both hospitals. Additionally, both hospitals may potentially cut back on other inputs or employment of labor to manage the increased labor cost.

Quiz 12: General Equilibrium and the Efficiency of Perfect Competition