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ECON1020 Lecture Notes - Lecture 4: Herding, Rationality, Adverse Selection

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15 Sep 2018

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Dr. Ananta Neelim

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Document Summary

Week 4 market failure: information failures and. In the competitive market, the equilibrium occurs at the price where qd = qs. Comparative statics: changes in demand and supply. Identify how various events lead to changes in demand and supply. Market failure refers to a situation in which the market on its own fails to allocate resources efficiently. A number of types of market failure exist which correspond to violations of the assumptions of the model of the market. When markets fail, sometimes they correct themselves (private solutions); sometimes, government needs to intervene (public policy solutions) Ratio(cid:374)ality is the assu(cid:373)ptio(cid:374) that people are (cid:862)ho(cid:373)o e(cid:272)o(cid:374)o(cid:373)i(cid:272)us". Gather info and carefully weigh costs and benefits to choose the optimal course of action. Information failure arises when people fail to be rational due to . Do not have the capability to rational, limited cognition.

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Related Questions

1 an imperfect market, individual firms

A.are always able to set the price of their product.

B.are able to influence the price of their product.

C.have no influence over the price of their product.

D.take the market price as given.

1 Which of the following is NOT characteristic of a market economy?

Significant government intervention

Little or no government intervention

Buyers and sellers motivated by self-interest

Prices determined by demand and supply

2 In a competitive market, the price of the product is

independently set by each competing seller.

set by the market leader and then copied by other sellers.

jointly set after a meeting of all sellers in the market.

set by market supply and demand.

3 Which of the following firms participates in a competitive market?

A new car manufacturer, such as Ford, Honda, Toyota, or GMC

A software producer, such as Microsoft

A local electric utility company

4 In an imperfect market, individual firms

are always able to set the price of their product.

are able to influence the price of their product.

have no influence over the price of their product.

take the market price as given.

5 Which of the following firms operates as a monopoly?

A car manufacturer

A local water utility

A fish vendor at a neighborhood market

6 According to the law of demand, what is the relationship between price and quantity demanded?

No relationship

7 Refer to the following graph. The demand curve slopes downward because
Click to view graphic. (Links to an external site.)

prices and quantity demanded move in opposite directions.

prices and quantity demanded move in the same direction.

prices and quantity demanded have no relationship.

prices and quantity demanded remain unchanged.

8 A change in which of the following will cause a change in the quantity demanded of coffee?

Consumer income

The price of green tea, a substitute for coffee

The number of coffee consumers

The price of coffee

9 Suppose that burgers and fries are complements in consumption. If the price of fries increases

overall demand for burgers will increase.

overall demand for burgers will decrease.

quantity demanded for burgers will increase.

quantity demanded for burgers will decrease.

10 Suppose that Coca Cola and Pepsi are substitutes in consumption. If the price of Coca Cola decreases, then

both the equilibrium price and the quantity of Pepsi demanded will decrease.

both the equilibrium price and the quantity of Pepsi demanded will increase.

the equilibrium price of Pepsi will increase and the quantity demanded of Pepsi will decrease.

the equilibrium price of Pepsi will decrease and the quantity demanded of Pepsi will increase.

11 According to the law of supply, what is the relationship between price and quantity supplied?

No relationship

It depends on the change in price

12 Refer to the graph below. The supply curve is _______________ driven by the law of supply.
Click to view graphic. (Links to an external site.)

Downward sloping

Perfectly vertical

Perfectly horizontal

13 A change in which of the following will cause a change in the quantity supplied of coffee?

The technology or the production process of making coffee

Anticipation of a change in the price of coffee

The wages of coffee bean pickers

The price of coffee

14 Which of the following will cause a rightward shift in the supply curve for tobacco?

A fall in the number of tobacco farmers in the market

An increase in taxes on tobacco

Removal of government subsidies to tobacco farmers

An improvement in the technology used in the production of tobacco

15 Flour is a factor of production of cupcakes. How will an increase in the price of flour affect the market for cupcakes?

Overall supply will increase

Overall supply will decrease

Quantity supplied will increase

Quantity supplied will decrease

16 Refer to the following image. When a market is in equilibrium, which of the following is true?
Click to view graphic. (Links to an external site.)

Quantity supplied exceeds quantity demanded

Quantity supplied is less than quantity demanded

Quantity supplied is equal to quantity demanded

There is no relationship between quantity supplied and quantity demanded

17 Refer to the following figure. At a price of $15, this market is experiencing a(n)
Click to view graphic. (Links to an external site.)

none of the above are true.

18 Refer to the following figure. At a price of $5, this market is experiencing
Click to view graphic. (Links to an external site.)

None of the above are true.

19 Suppose pasta salad is a normal good. If the price of pasta (a major ingredient in pasta salad) increases and income also increases, the

equilibrium quantity and equilibrium price of pasta salad will increase.

equilibrium quantity of pasta salad will decrease and the equilibrium price of pasta salad may either increase or decrease.

equilibrium quantity of pasta salad may either increase or decrease and the equilibrium price of pasta salad will increase.

equilibrium quantity and equilibrium price of pasta salad will both decrease.

20. What must happen to the market price in order for a shortage to be eliminated?

Price must fall.

Price must rise.

Price must stay the same.

Price may rise or fall depending on the size of the shortage.

The primary difference between a change in supply and a change in the quantity supplied is:
Choose one answer.
a. a change in quantity supplied is a shift in the supply curve, and a change in supply is a movement along the supply curve.
b. both a change in quantity supplied and a change in supply are movements along the supply curve, only in different directions.
c. a change in quantity supplied is a movement along the supply curve, and a change in supply is a shift of the supply curve.
d. a change in supply is a movement to the left along the supply curve and a change in quantity supplied is a movement to the right along the supply curve.

Question 2
What is the difference between a shortage and scarcity?
Choose one answer.
a. Scarcity will always exist because choices must be made, but a shortage will only exist if the price is kept below the equilibrium level.
b. Scarcity is a result of two or more alternative uses and will always exist, and quantities of supply and demand adjusting to flexible prices will create shortages.
c. A surplus will exist when a good is scarce; a shortage merely implies that there isn't as much of something as people would like, which is nearly always the case.
d. There is no distinction between the two. They are the same thing.

Question 3
A decrease in supply means:
Choose one answer.
a. a shift to the left of the entire supply curve.
b. moving downward (to the left) along the supply curve with lower prices.
c. less will be demanded at every price.
d. more will be supplied at every price.

Question 4
A decrease in demand, with no change in supply, will lead to ________ in equilibrium quantity and ________ in equilibrium price.
Choose one answer.
a. an increase; an increase
b. an increase; a decrease
c. a decrease; an increase
d. a decrease; a decrease

Question 5
After graduation from college you will receive a substantial increase in your income from a new job. If you decide that you will purchase more T-bone steak and less hamburger, then for you hamburger would be considered a( n ):
Choose one answer.
a. normal good.
b. substitute good.
c. complementary good.
d. inferior good.

Question 6
There is equilibrium in the market when:
Choose one answer.
a. there is no shortage.
b. there is no surplus.
c. price is established where the supply curve and the demand curve intersect.
d. all of the above are true.

Question 7
Which would not cause the supply curve to shift?
Choose one answer.
a. a change in technology
b. a change in factor costs
c. a change in the price of the good
d. a change in the prices of related goods

Question 8
Given that meat and potatoes are complementary goods, if the price of meat decreases substantially, there would be:
Choose one answer.
a. an increase in the demand for potatoes.
b. an increase in the quantity of potatoes demanded.
c. a decrease in the demand for potatoes.
d. no change in the demand for potatoes.

Question 9
Given that milk and cookies are complements, suppose the price of flour (an ingredient in cookies) rises. What happens in the market for milk?
Choose one answer.
a. The equilibrium price and quantity rise.
b. The equilibrium price rises and the equilibrium quantity falls.
c. The equilibrium price and quantity fall.
d. The equilibrium price falls and the equilibrium quantity rises.

Question 10

A temporary price of $2 in this market would result in:
Choose one answer.
a. a surplus of 8,000 bushels.
b. a shortage of 8,000 bushels.
c. a shortage of 10,000 bushels.
d. a surplus of 10,000 bushels.

Question 11
The price of oranges rises. What happens in the market for apples, which are a substitute for oranges?
Choose one answer.
a. The equilibrium price falls, and the equilibrium quantity rises.
b. The equilibrium price rises, and the equilibrium quantity falls.
c. The equilibrium price and quantity rise.
d. The equilibrium price and quantity fall.

Question 12
A market surplus occurs if the:
Choose one answer.
a. price is below the equilibrium price.
b. price is equal to the equilibrium price.
c. equilibrium price is above the actual price.
d. equilibrium price is below the actual price.

1. Presented below are demand and supply schedules for bread in East Yeastville, Colorado.

| price | quantity demanded | quantity supplied |

| ($/loaf) | (loaves / week) | (loaves / week) |

| 5.00 | 1000 | 6000 |

| 4.50 | 1300 | 4500 |

| 4.00 | 1600 | 4000 |

| 3.50 | 2000 | 3500 |

| 3.00 | 3000 | 3000 |

| 2.50 | 3200 | 2700 |

| 2.00 | 4000 | 2200 |

| 1.50 | 4500 | 1800 |

| 1.00 | 5400 | 1400 |

| .50 | 7000 | 1200 |

a. Is the Law of demand satisfied? Yes/no. How do you know?

b. What is the equilibrium price? _______ And the equilibrium quantity? ________

c. At a price of $4.00, is there a shortage or surplus? __________. How big is it? ______

d. At a price of $1.00, how much would be bought and sold? _________

e. Suppose that supply increases by 1800 units at each price. At the original equilibrium price is there

a shortage or a surplus? When the market adjusts to its new equilibrium, what

will the new price be? And the new equilibrium quantity?