Deck 7: Production, Costs, and Industry Structure

Question 1

Newly formed trade unions raise wages for workers in CountryX where cars are manufactured. The higher wages increasecosts for the car manufacturers who relocate to Country Ywhere labor costs are lower. Car manufacturing begins tothrive in Country Y relative to Country X. Which answer bestdescribes 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.

Answer 1

A

Question 2

Higher oil prices represent higher energy costs in generalacross the economy leading to increased use of bicycles andpublic transportation. Which answer best describes the ideathat changes in one market can cause effects in previouslyunseen 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.(True
Answer )Correct
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.

Answer 2

B

Question 3

With large natural diamond deposits, South Africa is famousfor its diamond exports. The international demand fordiamonds for industrial and other purposes such as jewelry hasled to the production of synthetic diamonds by other countriessuch as the United States. Which answer best describes theconcept 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.

Answer 3

C

Question 4

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

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

Question 5

If the production of two goods uses a common input, increasesin 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 6

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

A)voluntary cooperation and undirected actions.(True Answer )Correct
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

It is Valentine's Day in the United States, and you give yourlover one dozen roses that were freshly picked 72 hours agofrom 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.

Question 8

Ethanol and sugar are both made from sugar cane, and ethanolcan be used as substitute fuel for oil. Increasing oil prices causethe 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

Question 9

Markets are linked in unpredictable and creative ways by:

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

Question 10

From the chapter discussion, why did increased ethanolproduction and consumption in Brazil result in higher sugarprices?

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 11

Both ethanol and sugar are made from sugar cane and ethanolcan be used as a substitute for oil. As the price of oil increases,Brazilians shift sugar cane from sugar production to ethanolproduction, 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 12

Hundreds of thousands of producers working across the worldcooperate to ensure that millions of consumers can have thegoods and services they desire. These producers do not knoweach other and are not coordinated by a central agency. Theiractions are directed simply by:

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

Question 13

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

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

Question 14

When gasoline prices are high, oil refiners have an incentive topull every last drop of gasoline out of a barrel of crude. Thisimplies that an increase in the demand for gasoline will causea(n) ______ quantity supplied of gasoline and ______ the supplyof the remaining crude oil products.

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

Question 15

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

Question 16

A barrel of oil can be used to produce both gasoline andasphalt. 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 17

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

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

Question 18

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

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

Question 19

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

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

Rising oil prices during the 1970s shifted flower productionfrom California to Kenya. Which of the following answersexplains 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 21

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 22

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

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 23

Suppose resources are directed through the actions of a centralplanner, who receives information on all the different uses ofthese resources. Why might sellers have an incentive to provideuntruthful 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.(True Answer
)Correct
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 24

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 25

In a demand-and-supply diagram, the market price representsthe 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 26

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

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

Question 27

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 28

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 29

The equilibrium price in the market represents the:

A)value of the good in its next highest valued use.(True Answer )Correct
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

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 31

(Figure: Demand Curve) Refer to the figure. Which part of thedemand curve represents the satisfied wants?

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

Question 32

The text states: ―The great economic problem is to arrange ourlimited resources to satisfy as many of our limited wants aspossible.‖ 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.(True
Answer )Correct
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 33

(Figure: Demand Curve) Refer to the figure. Which point onthe graph represents the value of the good in its next highestvalued use?

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

Question 34

The central planning approach failed to optimally allocate oilduring 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 35

Markets are advantageous over central planning as methods ofresource allocation because:

A)resources travel to their highest value uses.(True Answer )Correct
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 36

The Strike King Lure Co. ordered $100,000 worth of stainlesssteel to use in the production of fishing lures. The $100,000expenditure 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 37

Suppose that a war in the Middle East makes oil increasinglyscarce. 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 38

Suppose that war in the Middle East reduces the supply of oilforcing the country to economize on oil. How should the centralplanner 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 39

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

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

Question 40

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.(True Answer )Correct

Question 41

(Figure: Demand Curve Sections) Refer to the figure. Thesection 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 42

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 43

If the price of ice in a hurricane-devastated area suddenlyskyrockets, 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.(True Answer )Correct
D)have an incentive to direct ice to its highest valued uses.

Question 44

Markets work well because of the information delivered by:

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

Question 45

Which of the following encompasses all the relevantinformation 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 46

After a hurricane knocks out power to thousands of households,the price of electric generators increases threefold. Accordingto 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 47

When the price of pizza increases, consumers have an incentiveto:

A)decrease their demand for pizza.
B)purchase substitute goods such as Chinese food.(True Answer )Correct
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 48

How do speculators mitigate shortfalls in the equilibriumquantities 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.(True Answer
)Correct

Question 49

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

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

Question 50

When a consumer compares the price of a good to the value ofthat 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.(True Answer )Correct
D)the price of the good to the value of other substitute goods.

Question 51

(Figure: Demand Curve Sections) Refer to the figure. Thesection 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 52

The market is effectively able to allocate goods to their highestvalued 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 53

The market solves the incentive problem when allocatingresources 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 54

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

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

Question 55

A U.S. manufacturer arranges to purchase parts from aGerman supplier for 500,000 euros in six months. The U.S.manufacturer is concerned that the dollar will depreciateagainst the euro, meaning the dollar cost of the 500,000 euroswill 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 56

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

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 57

If speculators expect that the future price of corn will be higher,they will cause today's price of corn to ________ and the futureprice of corn to be ________ than it would have been withoutspeculation.

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

Question 58

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

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

Question 59

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 60

Can speculators who expect prices to rise actually cause thoseprices 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.(True Answer
)Correct
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 61

Suppose Chad believes that the price of oil will be higher in thefuture and buys an oil futures contract from Joe. The contractwill give Chad the right to 1,000 barrels of oil at $50 per barrelto be delivered by Joe 30 months in the future. Which of thefollowing statements is correct?

A)Chad has to pay Joe $50,000 upon the purchase and waits for 30 months for delivery of 1,000 barrels of oil.
B)Chad will receive the cash difference from Joe if the per barrel oil price rises higher than $50 after 30 months.(True
Answer )Correct
C)Joe will receive the cash difference from Chad if the per barrel oil price rises higher than $50 after 30 months.
D)Joe will deliver the oil to Chad after 30 months and receive $50,000 from Chad.

Question 62

A future is a standardized contract to buy or sell specifiedquantities of a commodity or ________ at a specified ________.

A)financial instrument; price
B)financial instrument; level of risk
C)unspecified quantities; price
D)unspecified quantities; level of risk

Question 63

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 64

You agree to buy 40,000 pounds of frozen pork bellies fordelivery 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 65

Which of the following observations would be consistent withthe effect of oil speculation?

A)Society becomes worse off from speculation because speculators intend to drive up the price of oil.
B)Society becomes worse off as speculators decrease the value of oil by moving it to a time when its value is lower.
C)Society becomes better off as speculators increase the value of oil by moving it to a time when its value is higher.(True
Answer )Correct
D)Society is indifferent about the activities of speculators.

Question 66

Speculators who think that a war in the Middle East is likelywill ______ oil futures, pushing ______ the futures price.

A)buy; up
B)buy; down
C)sell; up
D)sell; down

Question 67

Suppose speculators expect that the supply of oil will decreasenext year and as a result, buy up oil today and put it intostorage. This should cause the value of that oil to:

A)increase.
B)decrease.
C)either increase or decrease.
D)remain unchanged.

Question 68

John and Tom enter into a futures contract where John agreesto deliver 500 crates of coffee to Tom one year from now. Tomagrees to pay a price of $200 per crate. A year from now, Johnand 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 69

Futures contracts reduce future uncertainty. Which of thefollowing statements show how this is achieved?
I) Futures contracts allow the parties involved to mitigatepossible shortages in quantities of the good
II)Futures contracts allow the parties involved to mitigateunexpected changes in price that could hurt earnings
III) Futures contracts always allow the seller to receive a pricethat 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 70

Futures markets are common in commodities, financialinstruments, and:

A)nowhere else.
B)some barter markets in third world countries.
C)currencies.
D)telecommunications.

Question 71

Recently, economic engineers have begun to design ________ toincrease the signal to noise ratio of ________.

A)prices; markets
B)markets; prices
C)incentives; behaviors
D)opportunity costs; prices

Question 72

Which of the following scenarios would cause a speculator inchicken 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 73

If people suddenly expect that a severe drought will reduce thesupply of grain, the price of grain futures will be:

A)high and then bid lower.
B)bid higher.
C)low and bid even lower.
D)bid lower.

Question 74

Futures markets in coal can signal which of the following kindsof 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 75

Your retail outlet sells bottled water. Which of the followingscenarios 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.(True Answer )Correct
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.

Question 76

Speculators ________ prices today and ________ prices in thefuture.

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

Question 77

A soybean farmer plants his crop today but he doesn't harvestit until next year when the soybean price could be quitedifferent from today's spot price. To avoid the price risk thefarmer can:

A)sell in the futures market.
B)buy in the futures market.
C)sell in the spot market.
D)buy in the spot market.

Question 78

How can selling a futures contract mitigate agricultural risk forfarmers?

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 79

The major factor determining the price of orange juice futuresis the:

A)demand for orange juice.
B)cost of fertilizer.
C)profits to orange growers.
D)weather.

Question 80

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

A)Exporters can pin down the exact exchange rate they want to trade at and ensure a certain income stream.(True Answer
)Correct
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.