Question 1

Explain why the prices of Christmas trees fall after December 25.&#10;A) Decrease in demand.&#10;B) Increase in supply.&#10;C) Both a and b.&#10;D) Neither a nor b.

Accepted Answer

After December 25, the demand for Christmas trees falls significantly because the holiday has passed, leading to a decrease in prices. The supply does not necessarily increase; instead, the demand drops sharply.

Question 2

Explain why the price of fresh tulips increases during the winter season.&#10;A) Increase in demand.&#10;B) Decrease in supply.&#10;C) Both a and b.&#10;D) Neither a nor b.

Accepted Answer

B

Question 3

Young New Yorkers search feverishly for rent-controlled apartments. Which of the following explain the market situation?&#10;A) The controlled rent is below the market equilibrium.&#10;B) Quantity demanded exceeds quantity supplied.&#10;C) The market is subject to excess demand.&#10;D) a and b.&#10;E) a, b, and c.

Accepted Answer

Rent-controlled apartments are priced below market equilibrium, leading to a situation where the quantity demanded exceeds the quantity supplied, creating excess demand. This explains why young New Yorkers are fervently searching for these apartments.

Question 4

Some governments support farmers by buying their products at fixed prices. Which of the following explain how that could result in the government accumulating large stocks of agricultural products?&#10;A) The fixed price exceeds the market equilibrium.&#10;B) Quantity supplied exceeds quantity demanded.&#10;C) The market is subject to excess demand.&#10;D) a and b.&#10;E) a, b, and c.&#10;

Accepted Answer

A) The fixed price exceeds the market equilibrium: When a government sets a fixed price for agricultural products that is above the market equilibrium price, it encourages farmers to produce more since they are guaranteed a higher price for their products than what the market would normally pay. This can lead to overproduction.
B) Quantity supplied exceeds quantity demanded: As a result of the fixed price being higher than the market equilibrium, the quantity of agricultural products supplied by farmers can exceed the quantity demanded by consumers at that price. Since the government is committed to buying the surplus at the fixed price, it ends up accumulating large stocks of the products.
C) The market is subject to excess demand: This statement is not correct in the context of the government setting a fixed price above market equilibrium. Excess demand would occur if the price were set below the market equilibrium, leading to a shortage rather than a surplus. In the scenario described, the government's intervention causes a surplus, not a shortage.
Therefore, the combination of a fixed price above market equilibrium (A) and the resulting excess supply over demand (B) explains why the government could end up accumulating large stocks of agricultural products.

Question 5

As Valentine's Day approaches, the demand for both roses and chocolate increases. Why does the price of roses increase much more sharply than the price of chocolate?&#10;A) The supply of roses is much less price elastic than the supply of chocolate.&#10;B) The price of roses exceeds the price of chocolate.&#10;C) The demand for roses is much less price elastic than the demand for chocolate.&#10;D) The market for roses is subject to excess demand.&#10;E) The market for chocolate is subject to excess supply.

Accepted Answer

The supply of roses is much less price elastic than the supply of chocolate, meaning that it is harder to quickly increase the supply of roses in response to increased demand, leading to sharper price increases. Chocolate, on the other hand, can be produced and supplied more flexibly, mitigating price spikes.

Question 6

In the late summer and autumn, as growers harvest their crops, the supply of fresh fruit increases. Considering the relevant demand curves, explain why the price of fresh fruit falls much more sharply than the price of tinned fruit.

A) The supply of tinned fruit is much more price elastic than the supply of fresh fruit.
B) The price of fresh fruit exceeds the price of tinned fruit.
C) The demand for tinned fruit is much more price elastic than the demand for fresh fruit.
D) The market for tinned fruit is subject to excess demand.
E) The market for fresh fruit is subject to excess supply.

Accepted Answer

The answer of In the late summer and autumn, as...

Question 7

Many governments levy taxes on the sale of alcohol and tobacco. Explain the difference between the buyer's price and seller's price.&#10;A) Buyer's price - seller's price = tax.&#10;B) Buyer's price = seller's price - tax.&#10;C) Buyer's price + tax = seller's price.&#10;D) Buyer's price + seller's price = tax.

Accepted Answer

The difference between the buyer's price and the seller's price is the tax amount. The buyer pays the seller's price plus the tax, making the buyer's price higher than the seller's price by the amount of the tax.

Question 8

Some governments support farmers by subsidizing the cost of inputs including energy and fertilizer. Who do such subsidies benefit?&#10;A) Farmers.&#10;B) Manufacturers of fertilizer.&#10;C) Energy producers.&#10;D) All of the above.&#10;E) None of the above.

Accepted Answer

Subsidies for inputs like energy and fertilizer lower the costs for farmers, which can lead to increased demand for these inputs. This benefits farmers directly by reducing their expenses, manufacturers of fertilizer through increased sales, and energy producers by potentially increasing their market and sales as well.

Question 9

When the Covid-19 pandemic broke out, the price of face masks increased sharply. Suppose that the government had imposed price controls on face masks. How would that affect economic efficiency?&#10;A) There would be excess supply.&#10;B) At the market equilibrium, marginal benefit < marginal cost.&#10;C) At the market equilibrium, marginal cost would be lower.&#10;D) All of the above.&#10;E) None of the above.

Accepted Answer

Price controls, such as a price ceiling on face masks during a pandemic, typically lead to a shortage, not excess supply, because the controlled price is often set below the market-clearing price. This results in the quantity demanded exceeding the quantity supplied. At the market equilibrium under a price control, it's not that marginal benefit is less than marginal cost; rather, the price control prevents the market from reaching its natural equilibrium where marginal benefit equals marginal cost. Therefore, none of the provided options accurately describe the effect of price controls on economic efficiency in this context.

Question 10

The Hong Kong Hospital Authority subsidizes healthcare. Comment on the economic efficiency of such subsidies.&#10;A) There would be excess demand.&#10;B) At the market equilibrium, marginal benefit < marginal cost.&#10;C) At the market equilibrium, marginal cost would be higher.&#10;D) All of the above.&#10;E) None of the above.

Accepted Answer

Subsidies lower the price of healthcare for consumers, leading to an increase in demand. This can result in excess demand as more people seek healthcare at the lower price. At the market equilibrium with subsidies, the marginal benefit to consumers is greater than the marginal cost of providing the service, as the true cost is not fully borne by the consumer. This can lead to a situation where the marginal cost to the economy (including the subsidy) is higher than it would be without subsidies, reflecting inefficiency.

Question 11

Explain why the prices of Christmas trees fall after December 25.

Accepted Answer

The answer of Explain why the prices of Christmas trees...

Question 12

Explain why the price of fresh tulips increases during the winter season.

Accepted Answer

The answer of Explain why the price of fresh tulips...

Question 13

Young New Yorkers search feverishly for rent-controlled apartments. Explain the relation among rent control and the demand and supply of apartments.

Accepted Answer

The answer of Young New Yorkers search feverishly for rent-controlled...

Question 14

Some governments support farmers by buying their products at fixed prices. Explain how that could result in the government accumulating large stocks of agricultural products.

Accepted Answer

The answer of Some governments support farmers by buying their...

Question 15

As Valentine's Day approaches, the demand for both roses and chocolate increases. Considering the relevant supply curves, explain why the price of roses increases much more sharply than the price of chocolate.

Accepted Answer

The answer of As Valentine's Day approaches, the demand for...

Question 16

In the late summer and autumn, as growers harvest their crops, the supply of fresh fruit increases. Considering the relevant demand curves, explain why the price of fresh fruit falls much more sharply than the price of tinned fruit.

Accepted Answer

The answer of In the late summer and autumn, as...

Question 17

Many governments levy taxes on the sale of alcohol and tobacco. Explain the difference between the buyer's price and seller's price.

Accepted Answer

The answer of Many governments levy taxes on the sale...

Question 18

Some governments support farmers by subsidizing the cost of inputs including energy and fertilizer. Who do such subsidies benefit and to what extent?

Accepted Answer

The answer of Some governments support farmers by subsidizing the...

Question 19

When the Covid-19 pandemic broke out, the price of face masks increased sharply. Suppose that the government had imposed price controls on face masks. How would that affect economic efficiency?

Accepted Answer

The answer of When the Covid-19 pandemic broke out, the...

Question 20

The Hong Kong Hospital Authority subsidizes healthcare. Comment on the economic efficiency of such subsidies.

Accepted Answer

The answer of The Hong Kong Hospital Authority subsidizes healthcare....

Deck 5: Market Equilibrium Part II: Market Power