Question 1

Which of the following is NOT a characteristic of governmental rent controls?

Accepted Answer

Rent controls often lead to excess demand, fewer new constructions, and low vacancy rates, but they do not ensure equitable distribution of apartments.

Question 2

In the market for coffee, for many consumers:

Accepted Answer

Tea is a close substitute for coffee for many consumers, as they both fall under the category of hot beverages and provide a similar caffeine boost. Non-dairy creamer and coffee mugs are not substitutes for coffee but complementary products that are often used together. Cola beverages do not have a direct relationship with coffee and are not complementary or substitute products.

Question 3

According to the textbook, government price controls fail because:

Accepted Answer

Government price controls fail because they cannot repeal basic economic motives such as supply and demand. Price controls create shortages or surpluses, which lead to inefficiencies in the market. Additionally, price controls can lead to black markets and decreased quality of goods/services. Therefore, it is not due to enforcement, lack of market data, or firms ignoring the restrictions.

Question 4

In a free market, if the price of a good is below the equilibrium price, then;

Accepted Answer

If the price of a good is below the equilibrium price in a free market, demand for the good will exceed the supply available at that price. Therefore, demanders will be willing to offer a higher price to acquire the good, which will lead to an increase in the price until it reaches the equilibrium point where supply and demand are equal. Suppliers are unlikely to lower the price in this situation because they are already dissatisfied with growing inventories, and lowering the price further would only exacerbate the problem. Government intervention to set a higher price would disrupt the free market forces of supply and demand.

Question 5

When a market is not in equilibrium:

Accepted Answer

In a market that is not in equilibrium, there will be either excess demand or excess supply. As a result, buyers and sellers will have economic motives to change their behavior, such as lowering prices or increasing production, until the market reaches equilibrium. This process of self-correction is known as the market mechanism, and it does not require government intervention or lobbying by firms. Option A and B are incorrect because they suggest either a need for external intervention or a reliance on political influence. Option D is also incorrect because it assumes a static state of disequilibrium, whereas markets are constantly adjusting to changing conditions.

Question 6

"As the price of personal computers continues to fall, demand increases." This headline is inaccurate because:

Accepted Answer

A falling price for personal computers would lead to an increase in quantity demanded, not an increase in demand. The demand curve would remain the same, but a movement along the curve would occur as consumers purchase more at the lower price. Option A and B are incorrect as they suggest a change in the curve rather than a movement along it. Option C is incorrect as it implies causation in the wrong direction.

Question 7

You have noticed that there is a persistent shortage of teachers in an inner-city school district in your state. Based on this observation, you suspect that:

Accepted Answer

The persistent shortage of teachers in an inner-city school district suggests that either the wage offered is lower than the equilibrium wage or there are other factors, such as poor working conditions, that are discouraging teachers from applying to those schools. As a result, the demand for teachers is greater than the supply, leading to a shortage. Therefore, choice B is the best option.

Question 8

Suppose you bought a concert ticket from Ticketmaster for $50, but when you got to the concert scalpers (individuals who re-sell tickets at the event) were selling tickets in the same seating area as yours for $25. What is probably true?

Accepted Answer

The fact that scalpers are selling tickets for less than the Ticketmaster price suggests that there is an excess supply of tickets at the Ticketmaster price. This could be due to a variety of reasons, such as the event organizers overestimating demand, or people deciding not to attend at the last minute.

Question 9

Suppose one knows two facts: first, the market for prescription drugs experiences chronic shortages and second, government sets the price for prescription drugs. One can conclude that the:

Accepted Answer

The chronic shortages in the market for prescription drugs suggest that the quantity demanded exceeds the quantity supplied at the current government set price. Therefore, the government has set the price below the equilibrium price, leading to scarcity and shortages.

Question 10

In a free market, if the price of a good is above the equilibrium price, then;

Accepted Answer

If the price of a good is above the equilibrium price, then suppliers will be producing more of the good than demanders are willing to buy, causing a surplus to build up. To get rid of the surplus, suppliers will need to lower the price to entice more buyers to purchase the good. This will continue until the price reaches the equilibrium price, at which point the quantity supplied and quantity demanded will be equal. Therefore, D is the correct choice.

Question 11

Suppose you notice that more and more people are driving gas-guzzling cars. Since you drive an economy car, their increased demand for gas:

Accepted Answer

The increased demand for gas due to gas-guzzling cars will cause the price of gas to increase. This will affect everyone who drives a car, including those who drive an economy car.

Question 12

The tendency of markets to automatically gravitate toward equilibrium is an application of which core principle?

Accepted Answer

The Incentive Principle explains how individuals and firms respond to incentives, leading to adjustments in supply and demand that drive markets toward equilibrium.

Question 13

A regulated maximum price that is above the equilibrium price:

Accepted Answer

A regulated maximum price above the equilibrium price will have no effect on the market because the market will naturally operate at the equilibrium price, which is lower than the maximum price set.

Question 14

An increase in the quantity demanded of tea occurs whenever:

Accepted Answer

According to the law of demand, as the price of a good or service falls, the quantity demanded of that good or service will increase, assuming all other factors remain constant. Therefore, when the price of tea falls, the quantity demanded of tea will increase.

Question 15

A movement along a demand curve from one price-quantity combination to another is called:

Accepted Answer

A movement along a demand curve from one price-quantity combination to another is a change in quantity demanded. This means that there has been a change in the price of the good or service, and as a result, the quantity demanded by consumers has changed.

Question 16

Minimum wage laws are an example of:

Accepted Answer

Minimum wage laws set a regulated price for labor, establishing the lowest legal wage that can be paid to workers.

Question 17

If the demand for a good decreases as income decreases, it is a(n):

Accepted Answer

A normal good is one for which demand increases as income increases and decreases as income decreases.

Question 18

When the price of a good is below its equilibrium value:

Accepted Answer

When the price is below equilibrium, there is excess demand, leading consumers to bid the price up to reach equilibrium.

Question 19

Which of following is NOT true of an equilibrium price?

Accepted Answer

Equilibrium price is based on the intersection of demand and supply curves, and it represents the price at which the quantity demanded and supplied are equal. It is not always a fair and just price, as it is solely determined by market forces of supply and demand and may not account for externalities or ethical considerations.

Question 20

In a market where government has set the maximum price below the equilibrium price, one might expect:

Accepted Answer

When the government sets a maximum price below the equilibrium price, it creates a price ceiling, leading to a shortage as quantity demanded exceeds quantity supplied. This often results in a black market where goods are sold at higher prices.

Quiz 3: Supply and Demand