ECON 1B03 Lecture Notes - Lecture 13: Price Ceiling, Economic Equilibrium, Shortage
ECON 1B03 Full Course Notes
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1. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?
| $0.60 | ||
| $0.40 | ||
| $0.75 | ||
| $0.67 |
2. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:
| a tax of $5 in Market X and a subsidy of $10 in Market Y. | ||
| subsidizing both markets. | ||
| taxing Market Y and subsidizing Market X. | ||
| taxing both markets. |
3.Economic theory suggests that a natural monopoly should be:
| eliminated whenever it arises. | ||
| regulated to take advantage of economies of scale. | ||
| left alone to operate with excess capacity. | ||
| taken over by the government. |
4.When the size of the production is the most efficient:
| total cost is at the minimum. | ||
| average cost is at the minimum. | ||
| marginal cost is at the minimum. | ||
| fixed cost is at the minimum. |
5.A firm should exit the industry if which of the following conditions apply?
| TR > TC | ||
| P < AC | ||
| Lifetime expected profit is positive. | ||
| Prices are low now but expected to rise. |
6.Figure: Costs
Reference: Ref 11-6
(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:
| $75. | ||
| $300. | ||
| $225. | ||
| $0, because P = MC at P = $20. |
7.When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.
| too low; too high | ||
| equal to the efficient price; too low | ||
| too high; too low | ||
| equal to the efficient price; too high |
8.Which of the following statements is TRUE?
I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.
II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances.
III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.
| I only | ||
| II and III only | ||
| I, II, and III | ||
| III only |
9.Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:
| various options. | ||
| more quantity. | ||
| more discount. | ||
| higher quality. |
10.Figure: Government Price Controls
Reference: Ref 8-3
(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:
| a shortage of 15 units. | ||
| a surplus of 15 units. | ||
| a supply of 20 units. | ||
| no effect on the market. |
11.In which of these instances does price function as a signal in the market?
| Suppliers invest more in exploration when the price of oil increases. | ||
| Consumers complain of price gouging as the price of oil skyrockets. | ||
| Government imposes price controls on the skyrocketing price of oil. | ||
| All of the answers are correct. |
12.Ethanol and sugar are both made from sugar cane, and ethanol can be used as substitute fuel for oil. Increasing oil prices cause the demand for ethanol to increase. This will cause the ______ sugar to ______ and its price to ______.
| demand for; decrease; decrease | ||
| supply of; increase; increase | ||
| supply of; decrease; increase | ||
| demand for; increase; increase |
13.Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?
| Cotton growers in California don't pay payroll taxes. | ||
| The water used to grow California cotton is highly subsidized by the government. | ||
| Cotton growers in California are mostly operated as nonprofit enterprises. | ||
| The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield. |
14.Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:
| the equilibrium price will fall to $7.50. | ||
| competition among buyers will increase the current price. | ||
| the current price will fall below $7.50 as sellers compete for market share. | ||
| There is not enough information provided to answer the question. |
15.Which of the following would increase the demand for beef?
| lower pork prices | ||
| higher consumer income | ||
| higher prices of feed grains used to feed beef cattle | ||
| an increase in the price of beef |
16.A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve.
True
False
17.Table: Production in the United States and Germany
| Labor units required to produce: |
| One Clock | One Sofa |
| United States | 2 | 5 | |
| Germany | 3 | 9 |
Reference: Ref 2-8
(Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one sofa in the United States is _________, and the opportunity cost of producing one sofa in Germany is _______.
| two clocks; three clocks | ||
| 10 clocks; 27 clocks | ||
| 0.4 clocks; 0.33 clocks | ||
| 2.5 clocks; three clocks |
18.Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.
| This trade makes Ella worse off by $200. | ||
| This trade makes Mark better off by $200. | ||
| Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800. | ||
| This trade creates value by moving the guitar and drum set to people who value them more. |
1. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?
| $0.60 | ||
| $0.40 | ||
| $0.75 | ||
| $0.67 |
2. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:
| a tax of $5 in Market X and a subsidy of $10 in Market Y. | ||
| subsidizing both markets. | ||
| taxing Market Y and subsidizing Market X. | ||
| taxing both markets. |
3.Economic theory suggests that a natural monopoly should be:
| eliminated whenever it arises. | ||
| regulated to take advantage of economies of scale. | ||
| left alone to operate with excess capacity. | ||
| taken over by the government. |
4.When the size of the production is the most efficient:
| total cost is at the minimum. | ||
| average cost is at the minimum. | ||
| marginal cost is at the minimum. | ||
| fixed cost is at the minimum. |
5.A firm should exit the industry if which of the following conditions apply?
| TR > TC | ||
| P < AC | ||
| Lifetime expected profit is positive. | ||
| Prices are low now but expected to rise. |
6.Figure: Costs
Reference: Ref 11-6
(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:
| $75. | ||
| $300. | ||
| $225. | ||
| $0, because P = MC at P = $20. |
7.When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.
| too low; too high | ||
| equal to the efficient price; too low | ||
| too high; too low | ||
| equal to the efficient price; too high |
8.Which of the following statements is TRUE?
I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.
II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances.
III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.
| I only | ||
| II and III only | ||
| I, II, and III | ||
| III only |
9.Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:
| various options. | ||
| more quantity. | ||
| more discount. | ||
| higher quality. |
10.Figure: Government Price Controls
Reference: Ref 8-3
(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:
| a shortage of 15 units. | ||
| a surplus of 15 units. | ||
| a supply of 20 units. | ||
| no effect on the market. |
11.In which of these instances does price function as a signal in the market?
| Suppliers invest more in exploration when the price of oil increases. | ||
| Consumers complain of price gouging as the price of oil skyrockets. | ||
| Government imposes price controls on the skyrocketing price of oil. | ||
| All of the answers are correct. |
12.Ethanol and sugar are both made from sugar cane, and ethanol can be used as substitute fuel for oil. Increasing oil prices cause the demand for ethanol to increase. This will cause the ______ sugar to ______ and its price to ______.
| demand for; decrease; decrease | ||
| supply of; increase; increase | ||
| supply of; decrease; increase | ||
| demand for; increase; increase |
13.Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?
| Cotton growers in California don't pay payroll taxes. | ||
| The water used to grow California cotton is highly subsidized by the government. | ||
| Cotton growers in California are mostly operated as nonprofit enterprises. | ||
| The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield. |
14.Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:
| the equilibrium price will fall to $7.50. | ||
| competition among buyers will increase the current price. | ||
| the current price will fall below $7.50 as sellers compete for market share. | ||
| There is not enough information provided to answer the question. |
15.Which of the following would increase the demand for beef?
| lower pork prices | ||
| higher consumer income | ||
| higher prices of feed grains used to feed beef cattle | ||
| an increase in the price of beef |
16.A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve.
True
False
17.Table: Production in the United States and Germany
| Labor units required to produce: |
| One Clock | One Sofa |
| United States | 2 | 5 | |
| Germany | 3 | 9 |
Reference: Ref 2-8
(Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one sofa in the United States is _________, and the opportunity cost of producing one sofa in Germany is _______.
| two clocks; three clocks | ||
| 10 clocks; 27 clocks | ||
| 0.4 clocks; 0.33 clocks | ||
| 2.5 clocks; three clocks |
18.Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.
| This trade makes Ella worse off by $200. | ||
| This trade makes Mark better off by $200. | ||
| Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800. | ||
| This trade creates value by moving the guitar and drum set to people who value them more. |
Question 26 pts
Which of the following is not a reason why specialization and trade are beneficial to society?
| Specialization fosters learning by doing, thus lowering the unit-costs of products | |
| Firms and workers become less dependent on others for producing goods and services |
| The total output of economic goods may be increased even without any increase in resources | |
| Scarce resources are utilized more efficiently by exploiting differences among them |
Question 27 pts
Laissez-faire capitalism limits the government's economic functions to the following, except:
| Protecting private property rights | |
| Establishing a legal environment to enforce contracts among individuals |
| Setting prices of individual goods and services | |
| Preventing individuals and firms from coercing others |
Question 28 pts
A production system where various workers concentrate on different specialized tasks to contribute towards a whole product is referred to as:
| Roundabout production | |
| A coincidence of wants |
| Freedom of enterprise | |
| Division of labor |
Question 29 pts
The market system is said to be characterized by "consumer sovereignty." This is because:
| A sovereign government determines which consumer goods will be produced | |
| Firms must match their production decisions to the consumers' choices |
| The prices of consumer goods are regulated by a sovereign government | |
| Consumer goods are considered to be more important than capital goods |
Question 30 pts
Consumers express self-interest when they:
| Seek the lowest price for a product | |
| Reduce business losses |
| Exclude others in their thinking | |
| Collect economic profits |
Question 311 pts
Refer to the above graph with three demand curves. An "increase in quantity demanded" would be illustrated by a change from:
| Point 5 to point 1 | |
| Point 4 to point 1 |
| Point 2 to point 5 | |
| Point 4 to point 6 |
Question 32 pts
The table below shows the weekly demand for hamburger in a market where there are just three buyers.
Refer to the above table. At a price of $6, the weekly market quantity demanded for hamburger is:
| 17 | |
| 23 |
| 24 | |
| 18 |
Question 33pts
If farmers withhold some of their current corn harvest from the market because they anticipate a higher price of corn in the near future, then this would cause a(n):
| Movement up along the current supply curve of corn | |
| Movement down along the current supply curve of corn |
| Leftward shift in the current supply of corn | |
| Rightward shift in the current supply of corn |
Question 34 pts
Which of the following will not cause the supply curve to shift?
| A technological change in the production of the good | |
| A change in the prices of other goods that producers could be producing |
| A change in the costs of resources needed to produce the good | |
| A change in the price of the good |
Question 35 pts
All of the following would affect the position of the supply curve for cranberries, except the:
| Price of agricultural land for cranberries | |
| Cost of fertilizers for cranberry production |
| Popularity of cranberry drinks | |
| Development of a new pest control for cranberries |
Question 36 pts
When high-school and college graduates apply for jobs in the labor markets,
| Job applicants and employers are both "buyers". | |
| Job applicants are the "sellers" while employers are the "buyers". |
| Job applicants and employers are both "sellers". | |
| Job applicants are the "buyers" while employers are the "sellers". |
Question 37 pts
Refer to the figure above, which shows three supply curves for corn. Which of the following would cause the supply of corn to shift from S1 to S2?
| A decrease in consumer incomes, assuming corn is a normal good | |
| The development of a more effective insecticide against corn rootworm |
| An increase in the price of fertilizer | |
| A change in consumer tastes away from cornbread |
Question 38 pts
Which is of the following statements is correct?
| If demand increases, then price will decrease | |
| If demand decreases, then price will decrease |
| If price decreases, then demand will decrease | |
| If price increases, then demand will decrease |
Question 39 pts
Which would be a likely cause of an increase in the demand for pizza?
| A decrease in the price of hamburger sandwiches | |
| A health report showing eating pizza reduces stress |
| A reduced desire for take-out and fast-food dining | |
| A decrease in the prices of cheese, pepperoni, and mushrooms |
Question 40 pts
A market for a product reaches equilibrium when:
| Price falls further after there is a shortage | |
| The price rises further after there is a surplus |
| Buyers intend to buy a quantity equal to the quantity that sellers intend to sell | |
| The actual quantity bought by buyers equals actual quantity sold by sellers |
Question 41 pts
A higher price reduces the quantity demanded for a product because:
| Individuals can afford less of the product and will switch to substitutes | |
| The financial assets of individuals increase |
| Individuals will buy more of the product and less of its substitutes | |
| The purchasing power of individuals increases |
Question 42 pts
The idea of the Law of Demand, as applied to electric cars, assumes which of the following to be constant?
| Price of electric cars | |
| How much sellers are charging customers for electric cars |
| Price of gasoline cars | |
| Quantity of electric cars demanded by buyers |
Question 43 pts
Use the following graph of the demand for coffee:
Refer to the above diagram of three demand curves for coffee. An increase in the price of coffee, other factors constant, would cause a:
| Movement from point a to point b | |
| Movement from point b to point a |
| Shift from D1 to D2 | |
| Shift from D1 to D3 |
Question 44 pts
Which of the following factors will decrease the current demand for a product?
| A decrease in the current price of a complementary product | |
| A decrease in the current price of a substitute product |
| An increase in the current price of a substitute product | |
| An expected increase in the future price of the product |
Question 45pts
In competitive markets, a surplus or shortage will:
| Cause shifts in the demand and supply curves that tend to eliminate the surplus or shortage | |
| Cause changes in the quantities demanded and supplied that tend to intensify the surplus or shortage |
| Cause changes in the quantities demanded and supplied that tend to eliminate the surplus or shortage | |
| Never exist because the markets are always at equilibrium |
Question 46 pts
Which of the following would cause a leftward shift in the supply curve for car washes?
| A decrease in taxes on car washes | |
| An increase in the price of car washing equipment |
| A decrease in the price of water | |
| An increase in the number of cars in the city |
Question 47pts
The market system automatically corrects a surplus condition in a competitive market by:
| Raising the price of the commodity in question while decreasing the quantity demanded | |
| Raising the price of the commodity in question while increasing the quantity demanded |
| Reducing the price of the commodity in question while increasing the quantity demanded | |
| Reducing the price of the commodity in question while decreasing the quantity demanded |
Question 48 pts
A leftward shift of the supply curve for oil in the United States is most likely to result from:
| A decrease in the world price of oil | |
| An increase in the costs of exploration and drilling for oil |
| An increase in the subsidy for oil exploration and drilling | |
| A decrease in the fees that oil companies must pay for drilling licenses |
Question 49 pts
A fall in the price of milk, used in the production of ice cream, will:
| Decrease the supply of ice cream | |
| Have no effect on the supply of ice cream |
| Increase the supply of ice cream | |
| Cause a movement along the supply curve of ice cream |
Question 50 pts
Refer to the above graph, which shows the market for beef where demand shifted from D1 and D2. The change in equilibrium from E1 to E2 is most likely to result from:
| An increase in the cost of cattle feed | |
| A decrease in consumer incomes |
| A decrease in the tax on beef products | |
| An increase in the price of pork |