Question 1

The price of milk increases. Which of the following is NOT part of the likely chain of events that follows from this price change?

Accepted Answer

The price increase of milk would lead to an increase in demand for milk production, which would lead to an increase in demand for feed for dairy cows, leading to an increase in the production of feed. However, the price increase of milk would not necessarily lead to a decrease in demand for milking machines or a decrease in their production, so laying off workers who manufacture milking machines is not a likely chain of events.

Question 2

In a market system, the costs associated with exchanging goods are known as

Accepted Answer

In economics, transaction costs refer to the costs associated with any exchange of goods or services, including the costs of searching for information, negotiating prices, and enforcing contracts. These costs are inherent in any market system and are considered a fundamental part of the transaction process. Therefore, option D is the correct choice.

Question 3

Specialists who try to lower transaction costs are

Accepted Answer

Middlemen are specialists who try to lower transaction costs. They act as intermediaries between producers and consumers, and they help to reduce the search, negotiation, and monitoring costs associated with transactions. By bringing buyers and sellers together, they facilitate exchanges and help to ensure that transactions are completed efficiently and effectively.

Question 4

The price system

Accepted Answer

The price system is the voluntary exchange system used in the United States, as well as many other developed countries. It is a system where prices are determined by supply and demand, and buyers and sellers are free to make transactions based on those prices.

Question 5

The price system has

Accepted Answer

The price system involves voluntary exchange between buyers and sellers, without government interference in fixing prices or producers determining prices unilaterally. Prices are set through market forces of supply and demand, reflecting the preferences of buyers and the costs of production for sellers.

Question 6

An economic system in which relative prices change to reflect changes in supply and demand for different commodities is known as a

Accepted Answer

A market system is characterized by relative prices that change based on changes in the supply and demand of different goods and services. In a market system, prices act as signals that coordinate the actions of buyers and sellers, guiding them to allocate resources efficiently. This stands in contrast to socialist and communist systems, where prices are often set by the government and may not reflect supply and demand. Queuing systems, on the other hand, are characterized by waiting in line for goods or services rather than relying on prices to allocate them.

Question 7

In a price system, changes in prices

Accepted Answer

Changes in prices signal to everyone in the price system which goods are relatively more or less scarce. This information helps individuals and businesses make more informed decisions about how to allocate resources and produce goods and services. The price system allocates scarce resources in the most efficient way possible.

Question 8

The price system features

Accepted Answer

The price system is based on voluntary exchange in which both the consumer and producer benefit. The consumer gains satisfaction from the product or service they purchase and the producer gains revenue from the sale. This exchange is made in currency, but it is not limited to currency exchanges only. Barter exchanges can still occur, but they are not the only way that exchanges are made in the price system. D is incorrect because the price system is designed to make both the consumer and producer better off, not just one party.

Question 9

Which of the following is NOT an example of a transaction cost?

Accepted Answer

The enjoyment of owning the good is not a transaction cost. It is a benefit or utility derived from consuming the good. The other options are examples of transaction costs, which include any costs associated with completing a transaction or exchange, such as search costs or negotiating costs.

Question 10

Which of these would NOT be considered a middleman in a market?

Accepted Answer

An apple farmer is a direct producer and not a middleman, as they are not involved in the distribution or sale of the product.

Question 11

In the price system,

Accepted Answer

In the price system, prices are not set by government action, consumers alone, or producers alone. Instead, prices are determined by the interaction of supply and demand. As suppliers offer more goods or services at higher prices, the quantity demanded by consumers tends to fall. This causes prices to lower until the equilibrium price is reached, where the quantity supplied and quantity demanded are equal. Therefore, D is the best choice.

Question 12

Which of the following is NOT a device to reduce transaction costs?

Accepted Answer

Government prohibitions on advertising would ultimately increase transaction costs by limiting the flow of information about products and services. The other options - shopping centers, auto dealers located close together, and banks that direct funds from savers to borrowers - all work to reduce transaction costs by making it easier and more efficient for buyers and sellers to interact with each other.

Question 13

The signaling aspect of the market system refer to

Accepted Answer

The signaling aspect of the market system refers to how prices function as signals to both producers and consumers about the relative scarcity of goods and services. As prices rise, producers are signaled to increase production, while consumers are signaled to decrease consumption. Likewise, as prices fall, producers are signaled to decrease production, while consumers are signaled to increase consumption. This signaling mechanism helps to allocate resources efficiently in the market system.

Question 14

The signals in markets are determined

Accepted Answer

The signals in markets are determined by supply and demand. The interaction of these forces determine the price of a good or service, which serves as a signal for producers and consumers.

Question 15

In a market system, intermediaries in the exchange process are known as

Accepted Answer

Intermediaries in the exchange process refer to middlemen, who play a crucial role in connecting producers and consumers by facilitating the transfer of goods and services between them. They may include wholesalers, retailers, brokers, and distributors, among others.

Question 16

In a market system, what must take place for quantity demanded to continually be equated with quantity supplied?

Accepted Answer

In a market system, quantity demanded and quantity supplied are continually equated through the adjustment of relative prices to market clearing levels. As prices fluctuate, consumers and producers adjust their behavior accordingly, leading to an eventual equilibrium where the quantity demanded equals the quantity supplied at a given price level. Price controls, changes in tastes and preferences, and involuntary exchanges are not necessary for this equilibrium to be achieved.

Question 17

In a market system, which component conveys information about what is relatively scarce and what is relatively abundant?

Accepted Answer

Prices in a market system determine the relative scarcity or abundance of goods and services. When a good is scarce, its price will increase, signaling to producers that they should increase their output to meet consumer demand. Conversely, when a good is abundant, its price will decrease, signaling to producers that they should reduce their output to avoid excess inventory. Thus, prices act as a signal to producers and consumers about what goods and services are needed and in what quantities.

Question 18

Voluntary exchange

Accepted Answer

Voluntary exchange refers to an agreement between a buyer and a seller to trade goods or services for a mutually agreed upon price. This allows both the consumer and producer to benefit from the exchange and can lead to a more efficient allocation of resources. However, it does not eliminate scarcity, as resources are still limited, and there may still be transaction costs involved in the exchange. Option A is incorrect because voluntary exchange cannot eliminate scarcity, which is a fundamental economic problem. Option B is also incorrect because voluntary exchange is a pricing mechanism, not a rationing device, as it allows consumers to bid for goods and services based on their willingness to pay. Finally, option D is incorrect because transaction costs can arise in any exchange, regardless of whether it is voluntary or not.

Question 19

The way we know what commodities are relatively scarce or abundant is through

Accepted Answer

Prices reflect the relative scarcity or abundance of a commodity. When a commodity is scarce, its price increases because buyers are willing to pay more for it. Conversely, when a commodity is abundant, its price decreases because sellers are willing to accept less for it. Therefore, prices are the best way to determine the relative scarcity or abundance of a commodity.

Question 20

Which of the following statements about markets is correct? I. A market helps resources move to their highest-valued uses by means of prices.
II. A market encompasses the exchange arrangements of both buyers and sellers.

Accepted Answer

Statement I is correct as a market helps allocate resources by allowing prices to determine their highest-valued uses. Statement II is also correct as a market refers to the entire system of buyers, sellers, and exchanges that facilitate trade. Therefore, both statements are correct.

Quiz 4: Extensions of Demand and Supply Analysis