Question 1

According to Walras' Law, in a general competitive equilibrium with a total of ____ markets, if supply equals demand in the first _____ markets, then supply will equal demand in the _____ market as well.
A) three; two; first
B) three; three; third
C) three; two; third
D) three; three; first

Accepted Answer

Walras' Law states that if in an economy with a certain number of markets, if supply equals demand in all but one market, then supply must also equal demand in that last market. Therefore, in a scenario with three markets, if supply equals demand in the first two, it must automatically equal demand in the third market as well.

Question 2

Let the demand and supply for two linked products, say corn and soy, be the following: Q_c^d= 12 - 2p_c + p_s; Q_c^s = 4+p_c; Q_s^d = 6-4p_s + p_c; Q_s^s = 4 + p_s. The superscript refers to "demand" (d) or "supply" (s) and the subscript refers to corn (c) or soy (s). Now, suppose that the demand for corn shifts to Q_c^d = 18 - 2p_c + p_s. If the price of soy does not adjust in response to this shift, what is the new equilibrium price of corn? A) p_c = 2 B) p_c = 1 C) p_c = 3 D) p_c = 5

Accepted Answer

D

Question 3

The prices of complementary goods tend to be _______________.
A) positively correlated.
B) inversely related.
C) unrelated.
D) related to the prices of substitute goods.

Accepted Answer

Complementary goods are products that are typically used together, so if the price of one increases, the demand for the other tends to decrease, leading to a potential decrease in its price, hence they are inversely related.

Question 4

Let the demand and supply for two linked products, say corn and soy, be the following: Q_c^d= 12 - 2p_c + p_s; Q_c^s = 4+p_c; Q_s^d = 6-4p_s + p_c; Q_s^s = 4 + p_s. The superscript refers to "demand" (d) or "supply" (s) and the subscript refers to corn (c) or soy (s). What are the equilibrium prices of corn and soy? A) p_c = 2; p_s = 2 B) p_c = 1; p_s = 3 C) p_c = 3; p_s = 1 D) p_c = 1; p_s = 1

Accepted Answer

To find the equilibrium prices, set the demand equal to supply for both products: For corn: 12 - 2p_c + p_s = 4 + p_c For soy: 6 - 4p_s + p_c = 4 + p_s Solving these equations simultaneously gives p_c = 3 and p_s = 1.

Question 5

In a general equilibrium setting, the supply curves for final goods and services are determined by
A) profit maximization by firms.
B) cost minimization by firms.
C) profit maximization by consumers.
D) utility maximization by consumers.

Accepted Answer

In a general equilibrium setting, the supply curves for final goods and services are determined by profit maximization by firms. This is because firms aim to maximize their profit by producing output at a level where marginal cost equals marginal revenue. As the level of output increases, the marginal cost also increases, which means that firms have to charge a higher price to cover their costs and earn a profit. Therefore, the supply curve is upward sloping, reflecting the positive relationship between price and quantity supplied.

Question 6

Walras' Law tells us that,
A) supply will always equal demand.
B) if an economy has five markets and if supply equals demand in three of those markets, then supply will equal demand in the other two markets.
C) the prices in an N market economy can be determined for all N markets.
D) if an economy has five markets, then a general equilibrium analysis will yield the prices in four of the markets relative to the price in the fifth market.

Accepted Answer

The answer of Walras' Law tells us that,
A) supply will...

Question 7

Partial equilibrium analysis differs from general equilibrium analysis in that
A) a partial equilibrium analysis studies the determination of price and output determination, whereas general equilibrium includes a greater number of variables.
B) prices are not held constant in all other markets in partial equilibrium, but in general equilibrium they are.
C) a partial equilibrium analysis studies the determination of price and output in a single market, whereas general equilibrium looks at more than one market simultaneously.
D) a general equilibrium holds prices constant in multiple markets, whereas partial equilibrium does not.

Accepted Answer

Partial equilibrium analysis focuses on the study of the determination of price and output in a single market, while general equilibrium analysis looks at the interaction between multiple markets. In partial equilibrium, the analysis is conducted under the assumption that prices in other markets remain constant, while in general equilibrium, prices in all markets are held constant. Therefore, C is the correct choice.

Question 8

Let the demand and supply for two linked products, say corn and soy, be the following: Q_c^d= 12 - 2p_c + p_s; Q_c^s = 4+p_c; Q_s^d = 6-4p_s + p_c; Q_s^s = 4 + p_s. The superscript refers to "demand" (d) or "supply" (s) and the subscript refers to corn (c) or soy (s). Now, suppose that the demand for corn shifts to Q_c^d = 18 - 2p_c + p_s. If we conduct a partial equilibrium analysis of the corn market, taking the price of soy as given, rather than a general equilibrium analysis, allowing the price of soy to change, we: A) underestimate the new price of corn. B) overestimate the new price of corn. C) correctly estimate the new price of corn. D) Overestimate the new price of soy.

Accepted Answer

In partial equilibrium analysis, the price of soy is held constant, ignoring the interdependence between the markets. This can lead to an underestimation of the new price of corn because the increase in corn demand could also increase the demand for soy, raising its price and further affecting the corn market.

Question 9

The general equilibrium effects of an excise tax on a commodity which would then be used to fund improvements to our national parks
A) would probably raise the price of the commodity and raise the price of labor in the national park system.
B) would probably lower the price of the commodity and raise the price of labor in the national park system.
C) would probably raise the price of the commodity and raise the price of labor in the economy as a whole.
D) would probably raise the price of the commodity and lower the price of labor in the economy as a whole.

Accepted Answer

The excise tax would increase the cost of producing and selling the commodity, leading to a higher price. This would likely lead to a decrease in demand for the commodity, which could lead to a decrease in the price of labor used to produce the commodity. However, the revenues generated from the tax would be used to fund improvements to national parks, which would likely increase the demand for labor within the national park system and potentially raise the price of labor in that sector.

Question 10

Walras' Law states that general equilibrium determines the prices of all goods and inputs
A) with absolute certainty.
B) relative to the price of another good or input.
C) only after the effects of an exogenous shock to a market are determined.
D) relative to efficient prices.

Accepted Answer

Walras' Law states that in a general equilibrium, the prices of all goods and inputs are determined relative to the prices of other goods and inputs in the economy. It does not guarantee absolute certainty or efficiency, nor does it pertain to exogenous shocks to markets.

Question 11

Suppose chicken breasts and pork steaks are substitute goods. If the supply of chicken breasts increases we would expect the price of pork steaks to go ________ and the equilibrium quantity of pork steaks to go ________
A) down, down
B) down, up
C) up, down
D) up, up

Accepted Answer

If the supply of chicken breasts increases, then the demand for pork steaks will decrease, resulting in a decrease in the price of pork steaks (down). The increase in supply of chicken breasts will also result in consumers purchasing more chicken breasts and less pork steaks, which means the equilibrium quantity of pork steaks will decrease (down).

Question 12

Suppose that black tea and green tea are substitute goods. Suppose that an excellent growing season for green tea increases the supply of green tea. What happens in the market for black tea?
A) Supply increases.
B) Supply decreases.
C) Demand increases.
D) Demand decreases.

Accepted Answer

Since black tea and green tea are substitute goods, an increase in the supply of green tea would lead consumers to switch from black tea to green tea, causing the demand for black tea to decrease. Therefore, the market for black tea would experience a decrease in demand, not an increase in supply. Since black tea and green tea are substitute goods, an increase in the supply of green tea will lead to a decrease in the demand for black tea, as consumers will switch to the substitute good. Therefore, the demand for black tea decreases.

Question 13

Let the demand and supply for two linked products, say corn and soy, be the following: Q_c^d= 12 - 2p_c + p_s; Q_c^s = 4+p_c; Q_s^d = 6-4p_s + p_c; Q_s^s = 4 + p_s. The superscript refers to "demand" (d) or "supply" (s) and the subscript refers to corn (c) or soy (s). Now, suppose that the demand for corn shifts to Q_c^d = 18 - 2p_c + p_s. If the price of soy is free to adjust in response to this shift, what are the new equilibrium prices of corn and soy? A) p_c = 5.14; p_s =1.43 B) p_c = 6.20; p_s =2.15 C) p_c = 2.50; p_s =2.50 D) p_c = 4.35; p_s =2.00

Accepted Answer

The correct answer is A because the new equilibrium prices of corn and soy are p_c = 5.14 and p_s =1.43, respectively. This can be found by solving the following system of equations:Q_c^d = 18 - 2p_c + p_sQ_c^s = 4+p_cQ_s^d = 6-4p_s + p_cQ_s^s = 4 + p_s

Question 14

The prices of substitute goods tend to be ____________.
A) positively correlated.
B) inversely related.
C) unrelated.
D) related to the prices of substitute goods.

Accepted Answer

Substitute goods are products that can be used in place of each other. When the price of one substitute good increases, consumers are likely to switch to the other substitute, increasing its demand and potentially its price. Therefore, the prices of substitute goods tend to be positively correlated.

Question 15

Suppose coffee and cream are complementary goods. If the supply of cream falls we would expect the price of coffee to go ________ and the equilibrium quantity of coffee to go ________.
A) down, down
B) down, up
C) up, down
D) up, up

Accepted Answer

The answer of Suppose coffee and cream are complementary goods....

Question 16

Suppose chicken breasts and barbeque sauce are known to be complements, a change in tastes toward a greater demand for chicken will likely cause
A) an increase in the price of chicken and a drop in the price of barbeque sauce.
B) an increase in the price of chicken and an increase in the price of barbeque sauce.
C) a drop in the price of chicken and a drop in the price of barbeque sauce.
D) a drop in chicken prices and an increase in the price of barbeque sauce.

Accepted Answer

Since chicken and barbeque sauce are complements, an increase in the demand for chicken will also increase the demand for barbeque sauce. This increase in demand for both products will result in an increase in their respective prices. Therefore, both the price of chicken and barbeque sauce will increase.

Question 17

Your textbook discussed a model of a simple economy with four markets: labor, capital, energy, and food. Which of the following statements is inconsistent with a general equilibrium for this simple economy?
A) The household demand for energy equals the industry supply of energy.
B) The household demand for food equals the industry supply of food.
C) The household demand for labor equals the industry supply of labor.
D) The household supply of capital equals the industry demand for capital.

Accepted Answer

In a general equilibrium model for an economy, households supply labor rather than demand it. The demand for labor comes from industries or firms, not households. Therefore, statement C is inconsistent with the general equilibrium model where it's expected that the industry's demand for labor equals the household's supply of labor.

Question 18

If we consider two spices, cumin and paprika, to be substitutes, a drop in the supply of paprika, will probably cause an increase in the price of
A) both
B) neither
C) cumin
D) paprika

Accepted Answer

When two goods are substitutes, a decrease in the supply of one (paprika) will increase its price and also increase demand (and price) for the substitute (cumin), as consumers switch to the alternative.

Question 19

Which of the following statements is incorrect?
A) A partial equilibrium analysis studies the determination of price and output in a single market.
B) A general equilibrium analysis studies the determination of price and output in more than one market simultaneously.
C) A partial equilibrium analysis ignores either consumers or producers in the analysis and looks only at one-half of the market.
D) A general equilibrium analysis would be useful to study two goods that are linked in some way, such as complementary or substitutable goods.

Accepted Answer

A partial equilibrium analysis looks at both consumers and producers in a single market, and doesn't ignore one-half of the market. Therefore, statement C is incorrect.

Question 20

In a general equilibrium setting, the demand curves for production inputs are determined by
A) utility maximization by firms.
B) profit maximization by firms.
C) cost minimization by firms.
D) utility maximization by consumers.

Accepted Answer

The answer of In a general equilibrium setting, the demand...

Quiz 16: General Equilibrium Theory

According to Walras' Law, in a general competitive equilibrium with a total of __ markets, if supply equals demand in the first _ markets, then supply will equal demand in the ___ market as well.

The prices of complementary goods tend to be _______________.

In a general equilibrium setting, the supply curves for final goods and services are determined by

Walras' Law tells us that,

Partial equilibrium analysis differs from general equilibrium analysis in that

The general equilibrium effects of an excise tax on a commodity which would then be used to fund improvements to our national parks

Walras' Law states that general equilibrium determines the prices of all goods and inputs

Suppose chicken breasts and pork steaks are substitute goods. If the supply of chicken breasts increases we would expect the price of pork steaks to go and the equilibrium quantity of pork steaks to go

Suppose that black tea and green tea are substitute goods. Suppose that an excellent growing season for green tea increases the supply of green tea. What happens in the market for black tea?

The prices of substitute goods tend to be ____________.

Suppose coffee and cream are complementary goods. If the supply of cream falls we would expect the price of coffee to go and the equilibrium quantity of coffee to go .

Suppose chicken breasts and barbeque sauce are known to be complements, a change in tastes toward a greater demand for chicken will likely cause

Your textbook discussed a model of a simple economy with four markets: labor, capital, energy, and food. Which of the following statements is inconsistent with a general equilibrium for this simple economy?

If we consider two spices, cumin and paprika, to be substitutes, a drop in the supply of paprika, will probably cause an increase in the price of

Which of the following statements is incorrect?

In a general equilibrium setting, the demand curves for production inputs are determined by