ECO105Y1 Lecture Notes - Price Ceiling, Market Clearing, Opportunity Cost

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26 Nov 2013

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Chapter 5 - what gives when prices don"t. Smart choices of consumers and businesses are not coordinated. When the price is too low, suppliers do not supply. When the price is too high, consumers do not demand. Government can fix prices, but can"t force businesses (or consumers) to supply (or demand) at the fixed price. Rent controls fix rents below market clearing price. Most voters in big cities are renters. Government doesn"t spend money to make people happy. You are the minister of education and your government is being pressured to eliminate university tuition. It will be a stimulus to the economy (opportunity cost) Tax payers will pay more but education becomes cheaper. Less incentive to take school seriously (general level of participation is low) Competition will be increased because everybody has education. Always look for alternatives and unintended consequences of a policy. Unemployment from higher minimum wage depends on elasticity of business demand for unskilled labour.

Related Questions

MC Qu. 020 In a market economy:

In a market economy:

the government owns the means of production so that it can produce what is in society's best interest.

businesses design their plans to maximize their profit and the market is relied upon to see that individual self-interest is consistent with society's interest.

workers are directed by government planning boards to produce what is in society's best interest.

government sets prices to make necessities affordable because it is in society's best interest to make necessities affordable.

MC Qu. 022 Suppose that at the current price consumers would ...

Suppose that at the current price consumers would like to purchase 10 million large-screen televisions and 15 million are available. When the market coordinates the demand and supply for large-screen televisions, the price of large-screen televisions will:

rise.

fall.

stay the same.

be fixed by the government.

MC Qu. 036 Most economies today are:

Most economies today are:

pure market economies.

differentiated primarily by the degree to which they depend on markets.

differentiated primarily by who owns the means of production.

socialist.

MC Qu. 047 Households are on the:

Households are on the:

the supply side of factor markets and the demand side of goods markets.

the demand side of factor markets and the supply side of goods markets.

the supply side of both factor markets and goods markets.

the demand side of both factor markets and goods markets.

MC Qu. 050 Governments do all of the following except:

Governments do all of the following except:

oversee the interaction of households and businesses in the goods and factor markets.

demand labor services from households in the factor market.

demand for goods and services from businesses in the goods market.

supply labor services to businesses in the factor market.

MC Qu. 054 Businesses fail because:

Businesses fail because:

they follow the principle of consumer sovereignty too closely.

the invisible hand determines that they are not producing something socially valuable.

they earn excessive profits.

entrepreneurship is present.

MC Qu. 066 A business is most likely to be characterized as a...

A business is most likely to be characterized as a corporation if:

it has two or more owners, with each owner liable for every other owner's actions.

it has only one owner.

it is legally treated as a person and owned by stockholders who are liable for the actions of the corporate "person" regardless of their investment

each owner is liable only to the extent of his or her own investment.

MC Qu. 074 Which of the following statements is correct?

Which of the following statements is correct?

Stockholders are legally liable for all the debt of a corporation.

A corporation is a business that is legally owned by its employees.

Corporations are legal entities that, in law, are treated as persons.

Most large companies and many small companies in the United States are not corporations.

MC Qu. 095 Government regulation of working conditions is an ...

Government regulation of working conditions is an example of:

government as a referee.

government as owner.

government as an actor.

government as a dictator.

10. MC Qu. 104 Which of the following would most likely generate ...

Which of the following would most likely generate a negative externality?

education

a lighthouse

cigarette smoke

employment

magentasnail731

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.