Exam 7: The Price System: Signals, Speculation, and Prediction

Around 1730, Samurai (warriors) in Japan were paid in rice. There were bad harvests which, surprisingly, caused the price of rice to fall. Around this time, through the Dojima Rice Exchange in Japan, the Samurai were able to enter into futures contracts in rice. Rice and currency were both acceptable forms of payment in Japan at this time. Discuss a likely reason why the Samurai might have wanted to enter such contracts.

A prediction market is a:

Which of the following statements are TRUE? I. A high price for a good encourages consumers to economize on its use, seeking out alternatives. II. Rising prices give firms the incentive to bring more goods to the market. III. Firms that experience rising input prices will seek out substitute inputs and develop production technologies to conserve on the costly input.

Prices are incentives, prices are signals, and prices are predictions.

The market solves the information problem when allocating resources by:

The Strike King Lure Co. ordered $100,000 worth of stainless steel to use in the production of fishing lures. The $100,000 expenditure represents the:

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 ______.

A person who tries to profit by guessing changes in future prices is a:

Suppose that a war in the Middle East makes oil increasingly scarce. Oil usage should:

Which of the following statements is TRUE? I. China and the Soviet Union tried to centrally plan their entire economies. II. To many people's surprise, including economists, central planning proved successful in Eastern Europe. III. President Nixon ordered gas stations closed on Sunday, an example of central planning.

Suppose that war in the Middle East disrupts oil production, reducing the supply of oil by 20 percent. The central planner of a government decides to economize on oil. a. What should a central planner do to economize on oil? b. What information does a central planner have to collect in order to economize on oil? c. What may cause a central planner to fail to economize on oil?

An increase in the price of oil is also a signal to oil suppliers to invest more in exploration, look for alternatives, and to increase recycling.

Central planning usually fails because:

Speculators ________ prices today and ________ prices in the future.

Reference: Ref 7-4 (Table: The HP Stock Exchange) The HP Stock Exchange lets members of HP's sales team buy and sell shares that pay off when sales fall within a certain range. A typical security would pay out $1, if and only if future sales fell within the specific range of that share. Accordingly, the trading price given in the table between 30,000 15,000 and 20,000 units implies that:

Explain why price controls may actually end up making consumers worse off in areas that have experienced natural disasters such as hurricanes.

When the prices of necessities such as gas and bottled water rise as a result of a natural disaster, it is efficient for the government to impose price controls to keep suppliers from ―price gouging‖ consumers.

One advantage of prediction markets is that they create incentives for traders to relay:

When oil prices increased in the 1970s, sellers began to grow roses in ________ countries and sell them in ________ countries.

A market in which buyers and sellers trade shares of stock, where the share prices reflect the probability of some future event is called a: