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

Question 1

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) demand for; decrease; decrease
B) supply of; increase; increase
C) supply of; decrease; increase
D) demand for; increase; increase

Answer 1

C

Question 2

It is Valentine's Day in the United States, and you give your lover one dozen roses that were freshly picked 72 hours ago from the fields of Kenya. What made this gift possible?

A) the United Nations Director of Horticultural Operations, who oversees the planting and transportation of flowers around the world
B) the Jennifer Flowers Act that helps coordinate the logistics of agricultural trade flows between the United States and Kenya
C) economic markets
D) All of the answers are correct.

Answer 2

C

Question 3

Hundreds of thousands of producers working across the world cooperate to ensure that millions of consumers can have the goods and services they desire. These producers do not know each other and are not coordinated by a central agency. Their actions are directed simply by:

A) self interest.
B) robotic technology.
C) their governments.
D) computer technology.

Answer 3

A

Question 4

Which of the following factors contribute to the increased speed of trade across countries? I. profit opportunities for sellers II. better transportation networks III. increased cooperation among countries
B) I only
C) II and III only
D) I and III only
E) I, II, and III

Question 5

When gasoline prices are high, oil refiners have an incentive to pull every last drop of gasoline out of a barrel of crude. This implies that an increase in the demand for gasoline will cause a(n) ______ quantity supplied of gasoline and ______ the supply of the remaining crude oil products.

A) increased; increase
B) increased; reduce
C) reduced; increase
D) reduced; decrease

Question 6

Markets coordinate in a way that links buyers and sellers who rely primarily on:

A) voluntary cooperation and undirected actions.
B) management direction of economic actions.
C) governmental policies to direct the economic actions.
D) the benevolence and good will of the market participants.

Question 7

Asphalt is the refined residue from crude oil. When gasoline prices are high, oil refiners pull every last drop of gasoline out of a barrel of crude. This would imply that higher gasoline prices mean a(n):

A) increased supply of asphalt, causing lower asphalt prices.
B) increased supply of asphalt, causing higher asphalt prices.
C) reduced supply of asphalt, causing lower asphalt prices.
D) reduced supply of asphalt, causing higher asphalt prices.

Question 8

Sugar cane can be used to produce sugar as well as fuel ethanol for automobiles. Falling oil prices will cause a(n) ________ in the supply of sugar resulting in ______ candy prices.

A) decrease; lower
B) decrease; higher
C) increase; lower
D) increase; higher

Question 9

Rising oil prices during the 1970s shifted flower production from California to Kenya. Which of the following answers explains this shift?

A) Markets are linked to one another.
B) Rising oil prices increased greenhouse heating costs in California making it cheaper to grow flowers in warmer climates.
C) The Kenyan flower industry is partially a result of rising oil prices.
D) All of the answers are correct.

Question 10

Which of the following is a reasonable analogy of the interconnectedness and coordination of markets?

A) a large corporation
B) the World Wide Web
C) a college dorm
D) Nothing can approximate the market.

Question 11

With large natural diamond deposits, South Africa is famous for its diamond exports. The international demand for diamonds for industrial and other purposes such as jewelry has led to the production of synthetic diamonds by other countries such as the United States. Which answer best describes the concept highlighted in this scenario?

A) International cooperation has reduced over the years.
B) Consumers prefer synthetic diamonds to natural ones.
C) Prices provide incentives for sellers.
D) Markets are no longer linked together.

Question 12

Both ethanol and sugar are made from sugar cane and ethanol can be used as a substitute for oil. As the price of oil increases, Brazilians shift sugar cane from sugar production to ethanol production, thereby:

A) increasing the price of ethanol.
B) increasing the price of sugar.
C) increasing the price of both ethanol and sugar.
D) decreasing the price of both ethanol and sugar.

Question 13

Collected by workers in Peru, cochineal bugs are used to dye certain U.S. food items red. Market activities, such as this one, can best be described as:

A) cooperative, voluntary, and undirected.
B) chaotic and primitive.
C) directed and uncooperative.
D) orderly, involuntary, and centrally directed.

Question 14

Newly formed trade unions raise wages for workers in Country X where cars are manufactured. The higher wages increase costs for the car manufacturers who relocate to Country Y where labor costs are lower. Car manufacturing begins to thrive in Country Y relative to Country X. Which answer best describes the concept highlighted by this scenario?

A) Changes in one market can affect markets and people in other regions of the world.
B) Trade unions always cause industries to collapse.
C) The links between markets are weakening over time.
D) Manufacturing industries are the only industries where markets are linked well.

Question 15

Markets are linked in unpredictable and creative ways by:

A) treaties that govern trade.
B) entrepreneurs who look for methods of cutting costs.
C) careful planning of bureaucrats.
D) treaties, entrepreneurs, and bureaucratic planning.

Question 16

The wearing of costumes at Halloween is largely a Western custom. In China, the Halloween festivals are very different in that they involve more of the presentation of gifts and food to family members and others that have passed away. Which of the following is a reasonable explanation for why the Western market for Halloween costumes might be important for Chinese firms and factories?

A) The costumes that the Chinese do not use during their festivals can be exported to the West.
B) Knowledge of the Western Halloween festival and demand for costumes can translate into profits for Chinese producers who can produce such costumes at low costs.
C) The West can export costumes for the Chinese to wear during their Halloween Festivals.
D) Chinese producers can try to market Chinese festivals to American consumers.

Question 17

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

A) Middle Eastern; European
B) wealthy; poor
C) cold; warm
D) warm; cold

Question 18

If the production of two goods uses a common input, increases in production of one good will cause:

A) decreases in the supply and increases in the price of the other good.
B) decreases in the supply and price of the other good.
C) increases in the supply and price of the other good.
D) increases in the supply and decreases in the price of the other good.

Question 19

Brazil is the world's largest sugar cane producer and sugar cane can be used for producing sugar and fuel ethanol for automobiles. Which of the following sequence of events is correct?

A) Rising oil prices cause Brazilian producers to shift sugar cane production from sugar to fuel ethanol. The decrease in sugar supply raises the price of candy bars.
B) Rising oil prices cause Brazilian producers to shift sugar cane production from fuel ethanol to sugar. The increase in sugar supply decreases the price of candy bars.
C) Falling oil prices cause Brazilian producers to shift sugar cane production from sugar to fuel ethanol. The increase in sugar supply raises the price of candy bars.
D) Falling oil prices cause Brazilian producers to shift sugar cane production from fuel ethanol to sugar. The increase in sugar supply raises the price of candy bars.

Question 20

A barrel of oil can be used to produce both gasoline and asphalt. If the price of gasoline falls, the supply of asphalt ________ and asphalt prices ________.

A) increases; decrease
B) increases; increase
C) decreases; decrease
D) decreases; increase

Question 21

Central planning of resource allocation:

A) was attempted by the United States during the 1973-1974 oil crisis.
B) can only succeed if the central planners have perfect information on the best uses of resources.
C) was the dominant economic planning method in both the former Soviet Union and China.
D) All of the answers are correct.

Question 22

From the chapter discussion, why did increased ethanol production and consumption in Brazil result in higher sugar prices?

A) Sugar is the primary ingredient in ethanol production and thus when the demand for ethanol increased the demand for sugar also increased.
B) Farmers reallocated sugar cane to ethanol production, decreasing the production of sugar, and leading to higher sugar prices.
C) Brazil's demand for sugar increased.
D) A disease attacked the sugar crop and caused a decrease in sugar production.

Question 23

Markets are advantageous over central planning as methods of resource allocation because:

A) resources travel to their highest value uses.
B) resources are allocated equally across all uses.
C) resources are distributed to those goods that have a larger number of substitutes.
D) central planners have never been shown to correctly identify high value uses of products.

Question 24

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

A) increase in low-value uses.
B) fall the most in high-value uses.
C) fall the most in low-value uses.
D) fall equally across low- and high-value uses.

Question 25

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:

A) value of the stainless steel in its lowest valued use.
B) profits of selling fishing lures.
C) value of the stainless steel in its next highest valued use.
D) revenues of producing fishing lures minus the costs.

Question 26

Reference: Ref 7-1 (Figure: Demand Curve) Refer to the figure. Which point on the graph represents an unsatisfied want?

A) Point B
B) Point A and Point B
C) Point A
D) Point C

Question 27

Higher oil prices represent higher energy costs in general across the economy leading to increased use of bicycles and public transportation. Which answer best describes the idea that changes in one market can cause effects in previously unseen markets?

A) The rise in the demand for bicycles causes a rise in the price of bicycles.
B) Increased bicycle demand increases the demand for rubber to make bicycle tires. Farmers in South East Asia switch from rice to rubber production and the price of rice increases.
C) The greater demand for public transportation offsets the demand for heating oil.
D) The rise in the demand for oil causes a rise in the demand for bicycles.

Question 28

Reference: Ref 7-1 (Figure: Demand Curve) Refer to the figure. Which point on the graph represents the value of the good in its next highest valued use?

A) Point A
B) Point B
C) Point C
D) the origin

Question 29

The equilibrium price in the market represents the:

A) value of the good in its next highest valued use.
B) value of the good in all its uses.
C) price of the good in its lowest valued use.
D) average cost of producing the good.

Question 30

Central planning usually fails because:

A) of the scarcity of resources.
B) of problems of inadequate demand and supply.
C) central planners rely on market forces.
D) of information and incentive problems.

Question 31

Brazil is the largest producer and consumer of ________ in the world.

A) sugar and fuel ethanol
B) candy bars
C) oil
D) asphalt and bricks

Question 32

Which of the following can explain why many economists have often compared the functioning of worldwide markets to that of a computer?

A) Worldwide markets can allocate resources randomly just as a computer can generate random data.
B) Without the use of computers, markets cannot solve the information problem of resource use.
C) Without the use of computers, markets cannot solve the allocation problem of resource use.
D) Worldwide markets can solve very large resource-allocation problems by simply using the price signal mechanism.

Question 33

Suppose resources are directed through the actions of a central planner, who receives information on all the different uses of these resources. Why might sellers have an incentive to provide untruthful information to the central planner?

A) They want to be able to charge the minimum price for their product
B) In order to continue producing their product, sellers may overstate the importance of their product.
C) The information system is too complex to provide correct information.
D) They want resources to be able to travel to the highest value uses possible

Question 34

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.

A) II and III only
B) I, II, and III
C) II only
D) I and III only

Question 35

In a free market, the price of a good is equal to the value of the good:

A) in its next lowest valued use.
B) in its next highest valued use.
C) to the highest bidder among those who have satisfied their wants for the good.
D) given the resources used to produce the good.

Question 36

Reference: Ref 7-1 (Figure: Demand Curve) Refer to the figure. Which part of the demand curve represents the satisfied wants?

A) Point B
B) Segment AC
C) Segment AB
D) Segment BC

Question 37

The text states: ―The great economic problem is to arrange our limited resources to satisfy as many of our limited wants as possible.‖ How does a market achieve this goal?

A) It chooses central planners who are experts at identifying the best uses of resources.
B) The forces of demand and supply use prices as a signaling device that direct resources to their highest value uses.
C) It ensures that prices provide an even signal by making sure prices across all markets are equal.
D) It offers resource-based futures contracts.

Question 38

The market acts like a computer because:

A) prices are information processors.
B) people ―connect with‖ each other when they buy and sell.
C) much of the Internet is used for buying and selling.
D) computers were developed to create new markets.

Question 39

Large scale central planning has been abandoned throughout the world because of ______ problems.

A) information and transactions cost
B) incentives and asymmetry
C) information and incentives
D) communication and complexity

Question 40

The central planning approach proved ________ because ________.

A) successful; central planners use state-of the-art military computers to efficiently allocate resources
B) a failure; it was never given enough time to be successfully implemented in most countries
C) successful; central planners, unlike CEOs, are not solely interested in maximizing profits and raising prices
D) a failure; central planners lack information and incentives to allocate resources efficiently

Question 41

When the price of oil rises, consumers economize by buying ________ and by ________.

A) more oil; finding substitutes
B) less oil; recycling
C) less oil; finding substitutes
D) more oil; recycling

Question 42

Reference: Ref 7-2 (Figure: Demand Curve Sections) Refer to the figure. The section of the demand curve labeled B represents the:

A) value of the good in its next highest use.
B) satisfied wants.
C) unsatisfied wants.
D) All of the answers are correct.

Question 43

The great economic problem is to:

A) increase resources to satisfy as many of our limited wants as possible.
B) equally allocate resources to satisfy as many of our limited wants as possible.
C) create unlimited resources to satisfy as many of our infinite wants as possible.
D) arrange our limited resources to satisfy as many of our infinite wants as possible.

Question 44

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.

A) I only
B) I and II only
C) II only
D) I, II, and III

Question 45

An equilibrium price splits the uses of the good into ________ part(s).

A) one and only one
B) two
C) three
D) four or more

Question 46

The bankruptcy of firms:

A) should not occur in a well-functioning economy.
B) frees up resources to higher valued uses, a vital role in capitalism.
C) is not possible in monopoly markets.
D) is pro-cyclical with economic activity, as measured by gross domestic product.

Question 47

Reference: Ref 7-2 (Figure: Demand Curve Sections) Refer to the figure. The section of the demand curve labeled A represents the:

A) value of the good in its next highest use.
B) satisfied wants.
C) unsatisfied wants.
D) All of the answers are correct.

Question 48

When the price of pizza increases, consumers have an incentive to:

A) decrease their demand for pizza.
B) purchase substitute goods such as Chinese food.
C) increase their consumption of pizza as it is now more valuable.
D) open another pizza restaurant in order to increase supply and drive prices down.

Question 49

Which economist described the market as being driven by ―an invisible hand‖?

A) Milton Friedman
B) John Locke
C) Friedrich Hayek
D) Adam Smith

Question 50

Markets work well because of the information delivered by:

A) the government.
B) the supply curve.
C) the demand curve.
D) prices.

Question 51

The central planning approach failed to optimally allocate oil during the 1973-1974 oil crisis because of problems of:

A) demand and supply.
B) markets and prices.
C) resources and budgets.
D) information and incentives.

Question 52

Which of the following encompasses all the relevant information about the uses of a particular good?

A) the cost of producing the good
B) the price of the good
C) the value of the good to consumers
D) There is no way for just one number to encompass all the relevant information about the uses of a good.

Question 53

When a consumer compares the price of a good to the value of that good, he or she is really comparing:

A) the price of other substitute goods.
B) the value of the good to the costs associated with producing the good.
C) the value of the good to its opportunity cost.
D) the price of the good to the value of other substitute goods.

Question 54

The market solves the incentive problem when allocating resources because the:

A) consumers will pay for the good only if its price is greater than the value of use.
B) consumers will pay for the good only if its value of use is greater than the price.
C) suppliers will produce the good only if its cost is less than the value of use.
D) suppliers will produce the good only if its value of use is less than the cost.

Question 55

The market is effectively able to allocate goods to their highest valued uses because:

A) consumers will only purchase the good if its value is greater than its price.
B) government intervention keeps prices consistent with their market value.
C) suppliers will only produce goods for which the cost of production is less than the price.
D) consumers have a great incentive to conserve goods for future use.

Question 56

In a demand-and-supply diagram, the market price represents the value of the:

A) first satisfied want.
B) last unsatisfied want.
C) good in its next lowest use.
D) good in its next highest use.

Question 57

In a successful economy, some firms should always be:

A) making profits.
B) breaking even.
C) going bankrupt.
D) All of the answers are correct.

Question 58

The market solves the information problem when allocating resources by:

A) collapsing all the relevant information about uses of the good into its price.
B) collapsing all the relevant information about inputs of the good into the level of output.
C) aggregating all the relevant information about the output of the good into the supply curve.
D) aggregating all the relevant information about the output of the good into the demand curve.

Question 59

In a ―successful‖ market, there will be:

A) many successful firms.
B) less bankruptcy.
C) many unsuccessful firms.
D) both many successful and many unsuccessful firms.

Question 60

Suppose that war in the Middle East reduces the supply of oil forcing the country to economize on oil. How should the central planner optimize the economic problem under this situation?

A) shift oil out of uses where good substitutes for oil exist
B) supply oil for uses where few substitutes for oil exist
C) Both of the answers are correct.
D) Neither of the answers is correct.

Question 61

Failing to understand the signaling role of prices, consumers would complain of ________ and politicians would call for ________.

A) price binding; regulation
B) price gimmicks; antitrust action
C) a price ceiling; a price floor
D) price gouging; price controls

Question 62

Speculators ________ prices today and ________ prices in the future.

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; do not change

Question 63

Speculators:

A) serve no important economic function, except buying low and selling high.
B) move resources from periods of low-value use to periods of high-value use.
C) move resources from poor countries to rich counties.
D) are a key source of inflation.

Question 64

Futures markets in coal can signal which of the following kinds of information?

A) when the coal seams may run out
B) changes in the industrial demand for coal
C) the effect of the projected arrival of coal substitutes
D) All of the answers are correct.

Question 65

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

A) profiteer.
B) marketer.
C) speculator.
D) price raider.

Question 66

How can a futures contract mitigate exchange rate risk for an exporting firm?

A) Exporters can pin down the exact exchange rate they want to trade at and ensure a certain income stream.
B) Exporters can avoid international trade and enter into contracts for domestic items only.
C) The contract does so by allowing exporters to avoid political risks associated with exchange rate volatility.
D) The contract does so by allowing exporters to trade in alternate stable currencies.

Question 67

Which of the following scenarios would cause a speculator in chicken and beef futures to use a ―buy low and sell high‖ strategy for chicken?

A) A report emerges from the Surgeon General that eating red meat in moderate amounts allows for increased brain power.
B) Cows are found to be infected with ―Mad Cow Disease‖ and must be destroyed.
C) Households begin eating more meals at restaurants.
D) Chickens are found to spread the Avian Flu disease among humans.

Question 68

Which of the following scenarios would cause a speculator to ―buy low and sell high‖?

A) Farmers expect to have a bumper harvest of corn next year.
B) Imports of corn begin to flood the country.
C) The government is expected to pass legislation making it mandatory for all vehicles to use corn-based fuels within one year.
D) The government is expected to subsidize corn production for farmers.

Question 69

John and Tom enter into a futures contract where John agrees to deliver 500 crates of coffee to Tom one year from now. Tom agrees to pay a price of $200 per crate. A year from now, John and Tom find that the market price of coffee is $210 per crate. How might they make a cash settlement on the contract?

A) John will offer $5,000 to Tom and deliver the 500 crates of coffee.
B) Tom will offer $5,000 to Tom and deliver the 500 crates of coffee.
C) John will offer $5,000 to Tom and not deliver any crates of coffee.
D) Tom will offer $5,000 to John and not deliver any crates of coffee.

Question 70

You agree to buy 40,000 pounds of frozen pork bellies for delivery one year from now; upon delivery you will pay $32,400. This transaction is called a:

A) prediction settlement.
B) timing indenture.
C) futures contract.
D) hog agreement.

Question 71

In which of these instances does price function as a signal in the market?

A) Suppliers invest more in exploration when the price of oil increases.
B) Consumers complain of price gouging as the price of oil skyrockets.
C) Government imposes price controls on the skyrocketing price of oil.
D) All of the answers are correct.

Question 72

Can speculators who expect prices to rise actually cause those prices to rise in the short run?

A) Yes, if they buy up enough of the good, they will increase demand and thus raise the price of the product.
B) Yes, if they expect the price to rise, sellers will automatically raise prices for their products.
C) No, because speculators do not have enough power to cause an increase in demand.
D) No, because speculators' actions cannot influence a market equilibrium.

Question 73

If the price of ice in a hurricane-devastated area suddenly skyrockets, then ice suppliers will:

A) enjoy high profits at the expense of consumers.
B) limit the supply of ice in the area to sustain the skyrocketing price.
C) ship more ice to the area and the price will fall.
D) have an incentive to direct ice to its highest valued uses.

Question 74

How can selling a futures contract mitigate agricultural risk for farmers?

A) Farmers can grow crops that are not subject to weather inclemency.
B) Farmers can pin down a price for their produce even if there is volatility in market prices.
C) Futures contracts allow farmers to store their grains in silos until the market prices rise.
D) Futures contracts allow farmers to trade in crops whose prices will fall in the future.

Question 75

How do speculators mitigate shortfalls in the equilibrium quantities traded in markets?

A) by buying up unsold inventories and then selling them when there is a shortage in the market
B) by causing market quantities to rise and fall
C) by buying up items when the prices have risen
D) by buying up items in advance of rising prices, and then selling them in the market when prices increase.

Question 76

Futures contracts reduce future uncertainty. Which of the following statements show how this is achieved? I. Futures contracts allow the parties involved to mitigate possible shortages in quantities of the good. II. Futures contracts allow the parties involved to mitigate unexpected changes in price that could hurt earnings. III. Futures contracts always allow the seller to receive a price that is higher than the market price for the product.

A) I and II only
B) I only
C) I and III only
D) I, II, and III

Question 77

If speculators expect that the future price of corn will be higher, they will cause today's price of corn to ________ and the future price of corn to be ________ than it would have been without speculation.

A) decrease; higher
B) increase; lower
C) decrease; lower
D) increase; higher

Question 78

A U.S. manufacturer arranges to purchase parts from a German supplier for 500,000 euros in six months. The U.S. manufacturer is concerned that the dollar will depreciate against the euro, meaning the dollar cost of the 500,000 euros will rise. What should the U.S. manufacturer do?

A) lobby the Fed to lower interest rates on six-month T- bills
B) buy a futures contract that fixes the dollar cost of 500,000 euros in six months
C) buy an exchange rate contract that pegs the interest rate to the discount rate on interbank loans
D) sell a naked option to cover the output spread

Question 79

After a hurricane knocks out power to thousands of households, the price of electric generators increases threefold. According to economists:

A) this is a vivid example of market and class exploitation by capitalists.
B) this discourages the use of electric generators in low-value uses, making them more readily available for high-value uses.
C) the rising price will give an incentive for firms to ship fewer electric generators to the disaster area.
D) the increase in demand for electric generators should technically cause the price to fall after a hurricane.

Question 80

Your retail outlet sells bottled water. Which of the following scenarios would cause you to use a ―buy low and sell high‖ strategy with bottled water?

A) A hurricane is expected to arrive within one week.
B) A new producer for bottled water is expected to enter the market within the next three months.
C) Consumers are moving away from bottled water consumption to filtered tap water consumption.
D) Imports of bottled water begin to arrive in town.