Question 1

Assume the demand function for scooters is given by QD = 20,000 - 10P + 0.2I, where P = price of a scooter, and I = average income of consumers. Also, assume the supply function of scooters is given by QS = 20 P. If the market for scooters is perfectly competitive, and the average income of consumers is $20,000, what are the equilibrium price and quantity in this market?

Accepted Answer

To find the equilibrium, set QD equal to QS. Substitute I = 20,000 into the demand function: QD = 20,000 - 10P + 0.2(20,000) = 24,000 - 10P. Set this equal to QS = 20P: 24,000 - 10P = 20P. Solving for P gives P = $800. Substitute P = $800 into either QD or QS to find the equilibrium quantity: QS = 20(800) = 16,000 scooters.

Question 2

If demand is represented by Qd = 50 -.5P +.005I where I=$50,000 and supply is represented by Qs = 100 +.4P - 2W where wages=W=$15.00, compute the equilibrium price and quantity. where wages=W=$15.00, compute the equilibrium price and quantity. What happens if income falls to I=$40,000?

Accepted Answer

The equilibrium price is $255.56. The equilibrium quantity is 172.22. When income falls to $40,000, the new equilibrium price is $200. The new equilibrium quantity is 150.

Question 3

Assume Pollutex Inc. produces paper in its plant located on Lake Ontario, half a mile away from CleanAir Camping. Pollutex employs an obsolete production process, dumping scum in the lake. The camp has experienced a steady decline in the number of attendees since Pollutex moved nearby. In particular, the owners forecast that CleanAir Camping will generate a profit of only $50,000 a year in the future, which is $150,000 less than the one generated before Pollutex moved nearby. A cleaner production process is available, which would not require dumping the scum in the lake. However, converting the plant would increase yearly costs by $100,000. Is the current situation Pareto efficient?

Accepted Answer

The situation is not Pareto efficient because CleanAir could pay Pollutex to convert its plant, which would increase CleanAir's profits by more than the cost of conversion, benefiting both parties.

Question 4

Faith and Hope are 30 year old identical twins. The only difference between Faith and Hope is their credit score. Faith has a proven record of repaying debt. Faith can borrow money at 4.5%. Hope has often missed debt payments. Hope can borrow at 8.5%.
They are considering enrolling in an evening MBA program. They plan on completing the program in two years. Assume the annual tuition is $16,000 for both years. They also anticipate that the non-monetary costs of obtaining an MBA will be $40,000 per year. The twins anticipate that after graduation in two years, their earnings will be $10,000 per year higher until they retire at age 62. Should Faith enroll in the evening MBA program? Should Hope enroll in the evening MBA program?

Accepted Answer

The answer of Faith and Hope are 30 year old...

Question 5

Tom and Jerry have been roommates for the past two years. During this period, they bought 11 CDs together. Now that each is taking his own apartment, they are deciding how to split their possessions. Tom suggests they take 5 CDs each and give the extra one to Arnold, their neighbor. Jerry, on the other hand, suggests they flip a coin to decide who gets the 11th CD. Assuming they neither like nor dislike being altruistic, which of the two suggestions is Pareto efficient?

Accepted Answer

Pareto efficiency refers to a situation where any change that benefits one person without harming another person is not possible. In this case, Tom's suggestion of taking 5 CDs each and giving the extra one to Arnold is not Pareto efficient because it does not give Jerry an equal chance to get the 11th CD. If Jerry disagrees with Tom's suggestion, then it harms Jerry's interests. On the other hand, Jerry's suggestion of flipping a coin is Pareto efficient because it gives each person an equal chance of getting the 11th CD. If Tom disagrees with Jerry's suggestion, it does not harm Jerry's interests because they can still divide the CDs equally. Therefore, Jerry's suggestion is Pareto efficient.

Question 6

Markets can give a buyer everything a buyer needs to know about a product even though the buyer does not have the training to understand the specific knowledge needed to build or distribute the product. Explain.

Accepted Answer

The answer of Markets can give a buyer everything a...

Question 7

A competitive equilibrium price guarantees that:

Accepted Answer

A competitive equilibrium price is determined by the intersection of the demand and supply curves in a free market. At this price, the quantity supplied equals the quantity demanded, and consumers who are willing to pay the market price can buy the product. Therefore, choice A is the correct option. Choices B and C are incorrect because they do not reflect the concept of a competitive equilibrium price. Choice D is also incorrect because it is a vague and unrelated option.

Question 8

A bunch of elementary school kids sit down at a long lunch table. For several minutes, everyone trades food, but then the table becomes quiet as they begin to eat. What happened?

Accepted Answer

The answer of A bunch of elementary school kids sit...

Question 9

Suppose Sam and Kevin can produce pens and pencils in the times that follows:

Accepted Answer

The answer of Suppose Sam and Kevin can produce pens...

Question 10

Assume the market for ceiling fans is perfectly competitive and currently in equilibrium. If the demand increases while the supply decreases, then:

Accepted Answer

An increase in demand and decrease in supply will cause a shortage in the market, leading to an increase in equilibrium price. The decrease in supply will also lead to a decrease in equilibrium quantity, so B and C are incorrect. D is also incorrect, as the changes in demand and supply will not cause both price and quantity to decrease.

Question 11

Assume the demand function for basketballs is given by QD = 150 - 3P + 0.1I, where P = price of a basketball, and I = average income of consumers. Also, assume the supply of basketballs is given by QS =2P. If the market for basketballs is perfectly competitive, and the average income is equal to $1,500, what are the equilibrium price and quantity? What if a 20% income tax is introduced?

Accepted Answer

To find the equilibrium price and quantity, we need to set the demand equal to the supply:

150 - 3P + 0.1(1500) = 2P

Simplifying this equation, we get:

P = $60

Substituting P back into either the demand or supply function, we get:

Q = 2P = 2($60) = 120

Therefore, before the tax, the equilibrium price is $60, and 120 basketballs are traded.

Now, let's consider the effect of a 20% income tax. The demand function becomes:

QD = 150 - 3P + 0.1(0.8*1500) = 150 - 3P + 120 = 270 - 3P

Setting this equal to the supply, we get:

270 - 3P = 2P

Simplifying, we get:

P = $54

Substituting P back into either the demand or supply function, we get:

Q = 2P = 2($54) = 108

Therefore, with the income tax, the equilibrium price would decrease by $6, and only 108 basketballs would be traded.

Thus, the correct choice is B.

Question 12

Many products come with a warning about how to use the product without harming other people. Why?

Accepted Answer

The answer of Many products come with a warning about...

Question 13

Currently XYZ's compensation system is such that only top managers receive compensation based on the company's performance, while everybody else in the company receives a fixed salary. Moreover, top managers have full discretion over the launch of new products. Due to the failure of the last three products launched by XYZ, top managers are contemplating modifying the allocation of decision rights concerning new products. What changes would make more economic sense?

Accepted Answer

Delegating decision rights to employees with more specific knowledge can lead to better decision making and more successful product launches. However, to incentivize employees to perform well, their compensation scheme should be changed to include bonuses based on their performance. This will motivate them to work harder and contribute to the success of the company. Option A is not enough to motivate employees to perform well, while option C may not necessarily improve the quality of decision making. Option D is not a viable solution as reducing benefits can demotivate employees and potentially harm company culture.

Question 14

A business manager has to decide whether to buy supplies in the marketplace or whether to build them inside the company. What do "information" and "contracting" have to do with this decision?

Accepted Answer

The answer of A business manager has to decide whether...

Question 15

Externalities exist when the actions of one agent:

Accepted Answer

Externalities occur when the actions of one agent affect the well-being of another agent who is not involved in the transaction or exchange. These effects can be positive (benefits) or negative (hurts) and are often not reflected in market prices, leading to market inefficiencies.

Question 16

Draw supply and demand curves. Show the impact of an increase in demand. What happens to the price and quantity exchanged in the market? Show the impact of a decrease in demand. What happens to the price and quantity exchanged in the market?

Accepted Answer

The answer of Draw supply and demand curves. Show the...

Question 17

According to Ronald Coase, allocation of resources in a free-market economy will be efficient as long as:

Accepted Answer

According to Ronald Coase, allocation of resources in a free-market economy will be efficient only if property rights are clearly assigned and enforced with low contracting costs. Without clear and well-enforced property rights, transactions costs can make it difficult for individuals to fully realize the value of their resources or engage in mutually beneficial exchanges, which can lead to market inefficiencies. Additionally, Coase recognized that in certain circumstances, such as situations involving externalities, some form of government intervention may be necessary to achieve efficient outcomes.

Question 18

What are externalities and why is Ronald Coase an important figure in economics?

Accepted Answer

The answer of What are externalities and why is Ronald...

Question 19

Assume the government introduces a $0.50 per gallon tax on gasoline. Which of the following is true?

Accepted Answer

A tax on gasoline increases its price, leading consumers to seek alternatives like public transportation, thus increasing the quantity of subway and bus tickets sold.

Question 20

Assume the current market price of candles is such that there is a surplus (i.e. excess supply). Which of the following best describes the adjustment process in a competitive market?

Accepted Answer

In a competitive market, a surplus indicates that the price is above the equilibrium. To eliminate the surplus, the price will decrease, leading to an increase in quantity demanded and a decrease in quantity supplied until equilibrium is reached.

Quiz 3: Markets, Organizations, and the Role of Knowledge