Deck 11: Behavioual Analysis of Markets

Question 1

Which of the following is not true about the double auction mechanism implemented by Vernon Smith?

A) Asks must be ascending; they start low and go up.
B) Bids must be ascending; they start low and go up from there.
C) Asks must be descending; they start high and go down from there.
D) Any bid that is lower than the current lowest bid or any ask that is higher than the current highest ask is placed in a rank queue behind the current lowest bid and the current highest ask respectively.

Answer 1

Asks must be ascending; they start low and go up.

Question 2

A "call market" is one where:

A) the buyer bids and seller asks are aggregated in order to create the underlying demand and supply curves respectively; all trade takes place at the equilibrium price dictated by the underlying demand and supply curves.
B) Buyers submit bids and sellers submit asks; individual buyers and sellers are free to engage in decentralized trading in order to find profitable trades.
C) Any bid that is lower than the current lowest bid or any ask that is higher than the current highest ask is placed in a rank queue behind the current low bid and the current high ask respectively.
D) Asks must be ascending; they start low and go up; bids must be descending; they start high and go down.

Answer 2

the buyer bids and seller asks are aggregated in order to create the underlying demand and supply curves respectively; all trade takes place at the equilibrium price dictated by the underlying demand and supply curves.

Question 3

A "continuous double-auction" is one where:

A) Buyers submit bids and sellers submit asks; individual buyers and sellers are free to engage in decentralized trading in order to find profitable trades.
B) The buyer bids and seller asks are aggregated in order to create the underlying demand and supply curves respectively; all trade takes place at the equilibrium price dictated by the underlying demand and supply curves.
C) Sellers post prices and buyers are welcome to buy or not on a take-it-or-leave it basis.
D) Asks must be ascending; they start low and go up; bids must be descending; they start high and go down.

Answer 3

Buyers submit bids and sellers submit asks; individual buyers and sellers are free to engage in decentralized trading in order to find profitable trades.

Question 4

A "posted-offer" market is one where:

A) Sellers post prices and buyers are welcome to buy or not on a take-it-or-leave it basis.
B) Buyers submit bids and sellers submit asks; individual buyers and sellers are free to engage in decentralized trading in order to find profitable trades.
C) The buyer bids and seller asks are aggregated in order to create the underlying demand and supply curves respectively; all trade takes place at the equilibrium price dictated by the underlying demand and supply curves.
D) Asks must be ascending; they start low and go up; bids must be descending; they start high and go down.

Question 5

Which of the following is true about the process of price convergence to the equilibrium price in the double-auction markets implemented by Vernon Smith?

A) Prices will converge smoothly to the equilibrium price as long as the magnitudes of the consumer and producer surplus are approximately equal.
B) Prices will converge smoothly to the equilibrium price as long as the magnitude of the consumer surplus exceeds the magnitude of the producer surplus.
C) Prices will converge smoothly to the equilibrium price as long as the magnitude of the consumer surplus is smaller than the magnitude of the producer surplus.
D) Prices will tend to be higher than the market equilibrium price due to tacit collusion and signalling on the part of the sellers.

Question 6

Which of the following do Smith and his collaborators argue is generally true of posted offer markets?

A) Prices will tend to be higher than the market equilibrium price due to tacit collusion and signalling on the part of the sellers.
B) Prices will converge smoothly to the equilibrium price as long as the magnitudes of the consumer and producer surplus are approximately equal.
C) Prices will converge smoothly to the equilibrium price as long as the magnitude of the consumer surplus exceeds the magnitude of the producer surplus.
D) Prices will converge smoothly to the equilibrium price as long as the magnitude of the consumer surplus is smaller than the magnitude of the producer surplus.

Question 7

Which of the following do Smith and his collaborators argue is generally true of posted offer markets?

A) Demand withholding of buyers is greater when there are fewer buyers in the market.
B) Prices will converge smoothly to the equilibrium price as long as the magnitudes of the consumer and producer surplus are approximately equal.
C) Prices will converge smoothly to the equilibrium price as long as the magnitude of the consumer surplus exceeds the magnitude of the producer surplus.
D) Prices will converge smoothly to the equilibrium price as long as the magnitude of the consumer surplus is smaller than the magnitude of the producer surplus.

Question 8

Which of the following do Smith and his collaborators argue is generally true of posted offer markets?

A) Price signalling and tacit collusion is easier when there are fewer, as opposed to more, sellers buyers in the market.
B) Demand withholding of buyers is greater when there are more as opposed to fewer buyers in the market.
C) Prices will converge smoothly to the equilibrium price as long as the magnitudes of the consumer and producer surplus are approximately equal.
D) Prices will tend to remain below the predicted equilibrium price.

Question 9

When it comes to posted offer markets, which of the following statements is not likely to be true?

A) Price signalling and tacit collusion is easier when there are fewer as opposed to more sellers in the market.
B) Demand withholding of buyers is greater when there are fewer as opposed to more buyers in the market.
C) Prices will converge smoothly to the equilibrium price as long as the magnitudes of the consumer and producer surplus are approximately equal.
D) Prices will tend to be higher than the market equilibrium price due to tacit collusion and signalling on the part of the sellers.

Question 10

Which of the following is generally true about the double auction market mechanisms implemented by Vernon Smith?

A) Prices will tend to stay above the equilibrium price or at best converge to the equilibrium from above as long as the magnitude of the consumer surplus exceeds the magnitude of the producer surplus.
B) Prices will stay tend to stay above the equilibrium price or at best converge to the equilibrium from above as long as the magnitude of the consumer surplus is smaller than the magnitude of the producer surplus.
C) Prices will converge smoothly to the equilibrium price as long as the magnitude of the consumer surplus is smaller than the magnitude of the producer surplus.
D) Prices will tend to be higher than the market equilibrium price due to tacit collusion and signalling on the part of the sellers.

Question 11

Which of the following is generally true about the double auction market mechanisms implemented by Vernon Smith?

A) Prices will tend to stay below the equilibrium price or at best converge to the equilibrium from below as long as the magnitude of the consumer surplus is smaller than the magnitude of the producer surplus.
B) Prices will stay tend to stay above the equilibrium price or at best converge to the equilibrium from above as long as the magnitude of the consumer surplus is smaller than the magnitude of the producer surplus.
C) Prices will converge smoothly to the equilibrium price as long as the magnitude of the consumer surplus is smaller than the magnitude of the producer surplus.
D) Prices will tend to be higher than the market equilibrium price due to tacit collusion and signalling on the part of the sellers.

Question 12

Neo-classical economic theory suggests which of the following to be true about a price-ceiling?

A) A price-ceiling imposed below the equilibrium price will lead to a shortage.
B) A price-ceiling imposed above the equilibrium price will lead to a shortage.
C) A price-ceiling imposed below the equilibrium price will lead to a surplus.
D) A price-ceiling imposed below the equilibrium price will be non-binding.

Question 13

Neo-classical economic theory suggests which of the following to be true about a price-ceiling?

A) A price-ceiling imposed above the equilibrium price will be non-binding.
B) A price-ceiling imposed above the equilibrium price will lead to a shortage.
C) A price-ceiling imposed below the equilibrium price will lead to a surplus.
D) A price-ceiling imposed above the equilibrium price will be binding.

Question 14

Neo-classical economic theory suggests which of the following to be true about a price-floor?

A) A price-floor imposed below the equilibrium price will be non-binding.
B) A price-floor imposed above the equilibrium price will lead to a shortage.
C) A price-floor imposed below the equilibrium price will lead to a surplus.
D) A price-floor imposed below the equilibrium price will be binding.

Question 15

Neo-classical economic theory suggests which of the following to be true about a price-floor?

A) A price-floor imposed above the equilibrium price will lead to a surplus.
B) A price-floor imposed below the equilibrium price will lead to a surplus.
C) A price-floor imposed above the equilibrium price will lead to a shortage.
D) A price-floor imposed above the equilibrium price will be non-binding.

Question 16

Suppose the demand curve has the usual downward slope while the supply curve is horizontal. This would imply that:

A) Market prices would tend to stay above the predicted equilibrium price since the magnitude of consumer surplus is larger than that of producer surplus.
B) Market prices would tend to stay above the predicted equilibrium price since the magnitude of consumer surplus is smaller than that of producer surplus.
C) Market prices would tend to stay below the predicted equilibrium price since the magnitude of consumer surplus is larger than that of producer surplus.
D) Market prices would converge smoothly to the predicted equilibrium price since the magnitude of consumer surplus is approximately equal to that of producer surplus.

Question 17

Suppose the supply curve has the usual upward slope while the demand curve is horizontal. This would imply that:

A) Market prices would tend to stay below the predicted equilibrium price since the magnitude of consumer surplus is smaller than that of producer surplus.
B) Market prices would tend to stay above the predicted equilibrium price since the magnitude of consumer surplus is smaller than that of producer surplus.
C) Market prices would tend to stay below the predicted equilibrium price since the magnitude of consumer surplus is larger than that of producer surplus.
D) Market prices would converge smoothly to the predicted equilibrium price since the magnitude of consumer surplus is approximately equal to that of producer surplus.

Question 18

Suppose the magnitude of consumer surplus is roughly equal to the magnitude of producer surplus. Which of the following would be true?

A) Market prices would converge smoothly to the predicted equilibrium price.
B) Market price would tend to either remain below the predicted equilibrium price or converge to equilibrium from below.
C) Market price would tend to either remain above the predicted equilibrium price or converge to equilibrium from above.
D) Market prices would tend to remain above the predicted equilibrium price due to tacit collusion and price signalling by the sellers.

Question 19

Suppose the magnitude of consumer surplus is smaller than the magnitude of producer surplus. Which of the following would be true?

A) Market price would tend to either remain below the predicted equilibrium price or converge to equilibrium from below.
B) Market price would tend to either remain above the predicted equilibrium price or converge to equilibrium from above.
C) Market prices would tend to remain above the predicted equilibrium price due to tacit collusion and price signalling by the sellers.
D) Market prices would converge smoothly to the predicted equilibrium price.

Question 20

Suppose the magnitude of consumer surplus is larger than the magnitude of producer surplus. Which of the following would be true?

A) Market price would tend to either remain below the predicted equilibrium price or converge to equilibrium from below.
B) Market price would tend to either remain above the predicted equilibrium price or converge to equilibrium from above.
C) Market prices would tend to remain above the predicted equilibrium price due to tacit collusion and price signalling by the sellers.
D) Market prices would converge smoothly to the predicted equilibrium price.

Question 21

Walras believed that the speed of convergence of market prices to the predicted equilibrium price would depend on the relative magnitude of excess demand or excess supply at prices slightly higher or slightly lower than the predicted equilibrium respectively. This would imply that prices convergence to the predicted equilibrium will be faster if:

A) The demand and supply curves are relatively flat.
B) The demand and supply curves are relatively steep.
C) The bids are descending and the asks are ascending.
D) The auctioneer raises the prices when there is a surplus and lowers that price when there is a shortage.

Question 22

Which of the following is true in laboratory implementations of double auction market mechanisms?

A) The speed of convergence of market prices to the predicted equilibrium price depends more on the relative magnitudes of the consumer and producer surplus at the predicted equilibrium price than on the magnitude of the excess demand or excess supply at prices slightly higher or slightly lower than the predicted equilibrium price.
B) The speed of convergence of market prices to the predicted equilibrium price depends more on the magnitude of the excess demand or excess supply at prices slightly higher or slightly lower than the predicted equilibrium price than on the relative magnitudes of the consumer and producer surplus at the predicted equilibrium price.
C) The speed of convergence of market prices to the predicted equilibrium price depends more on the relative slopes of the demand and supply curves rather than on the magnitudes of the consumer and producer surplus at the predicted equilibrium price.
D) The speed of convergence of market prices to the predicted equilibrium price depends more on ability of sellers to engage in tacit collusion or not rather than the relative magnitudes of the consumer and producer surplus at the predicted equilibrium price.

Question 23

Consumer surplus is measured by:

A) The area of the triangle below the demand curve and above the equilibrium price.
B) The area of the triangle above the supply curve and below the equilibrium price.
C) The area of the triangle between the demand and supply curves to the left of the market equilibrium that correspond to the zone where buyers and sellers can engage in profitable traders.
D) The area of the triangle between the demand and supply curves to the right of the market equilibrium that correspond to the zone where buyers and sellers can engage in profitable traders.

Question 24

Producer surplus is measured by:

A) The area of the triangle above the supply curve and below the equilibrium price.
B) The area of the triangle below the demand curve and above the equilibrium price.
C) The area of the triangle between the demand and supply curves to the left of the market equilibrium that correspond to the zone where buyers and sellers can engage in profitable traders.
D) The area of the triangle between the demand and supply curves to the right of the market equilibrium that correspond to the zone where buyers and sellers can engage in profitable traders.

Question 25

Suppose starting from an initial equilibrium, there is an increase in demand and an increase in supply. This would imply that:

A) The new equilibrium quantity is certainly higher but the effect on the new equilibrium price is ambiguous; it can be higher than, lower than or the same as the price in the initial equilibrium.
B) The new equilibrium price is certainly higher but the effect on the new equilibrium quantity is ambiguous; it can be higher than, lower than or the same as the quantity in the initial equilibrium.
C) In the new equilibrium price is higher and the quantity bought and sold is lower.
D) In the new equilibrium price is lower and the quantity bought and sold is higher.

Question 26

Suppose starting from an initial equilibrium, there is an increase in demand and a decrease in supply. This would imply that:

A) The new equilibrium price is certainly higher but the effect on the new equilibrium quantity is ambiguous; it can be higher than, lower than or the same as the quantity in the initial equilibrium.
B) The new equilibrium quantity is certainly higher but the effect on the new equilibrium price is ambiguous; it can be higher than, lower than or the same as the price in the initial equilibrium.
C) In the new equilibrium price is higher and the quantity bought and sold is lower.
D) In the new equilibrium price is lower and the quantity bought and sold is higher.

Question 27

A price-ceiling is binding if and only if it imposed _____ the equilibrium price while a price floor is binding if and only if it is imposed ______ the equilibrium price.

A) above, above.
B) below; below.
C) above; below.
D) below; above.

Question 28

Even if a price ceiling is imposed above the equilibrium price and is therefore, non-binding, it will:

A) Lead to the creation of a shortage.
B) Lead to the creation of a surplus.
C) Tend to lower prices on average and transfer surplus from the sellers to the buyers.
D) Tend to raise prices on average and transfer surplus from the buyers to the sellers.

Question 29

Even if a price floor is imposed below the equilibrium price and is therefore, non-binding, it will:

A) Lead to the creation of s surplus.
B) Lead to the creation of a shortage.
C) will tend to lower prices on average and transfer surplus from the sellers to the buyers.
D) will tend to raise prices on average and transfer surplus from the buyers to the sellers.

Question 30

The degree to which market prices converge to the predicted equilibrium depends on:

A) the relative magnitudes of the consumer and producer surplus, which serve as proxies for the degree of market power for buyers and sellers respectively.
B) the shape of the demand and supply curves; whether they are relatively flat or relatively steep.
C) whether buyers and sellers can each buy and sell only one unit respectively or whether they can transact multiple units each.
D) whether the price formation process follows centralized trading as in a call-market or de-centralized trading as in Smith's continuous double auction.

Question 31

Only one of the following will have a significant impact on the degree to which market prices converge to the predicted equilibrium. Which one is it?

A) The magnitude of consumer is much larger than the magnitude of the producer surplus.
B) The shape of the demand and supply curves; whether they are relatively flat or relatively steep.
C) Whether buyers and sellers can each buy and sell only one unit respectively or whether they can transact multiple units each.
D) Whether the price formation process follows centralized trading as in a call-market or de-centralized trading as in Smith's continuous double auction.

Question 32

In the context of a posted offer market, tacit collusion refers to a situation:

A) sellers can talk to one another about what prices they wish to charge.
B) a high-cost seller posts a high price and other low-cost sellers follow suit by positing that same high price.
C) buyer can talk to one another about demand withholding.
D) bids that are lower than the current high lowest bid and asks that are higher than the current highest ask are placed in a rank queue behind standing bid and ask respectively.

Question 33

Which of the following will most likely result in higher prices on average compared to the predicted equilibrium price?

A) the demand curve is downward sloping; the supply curve is horizontal.
B) the supply curve is upward sloping, the demand curve is horizontal.
C) the demand and supply curves are relatively steep; the magnitudes of shortage or surplus at prices slightly below or slightly higher than the equilibrium price respectively are relatively small.
D) the demand and supply curves are relatively flat; the magnitudes of shortage or surplus at prices slightly below or slightly higher than the equilibrium price respectively are relatively large.

Question 34

Which of the following will most likely result in lower prices on average compared to the predicted equilibrium price?

A) the demand curve is downward sloping; the supply curve is horizontal.
B) the supply curve is upward sloping, the demand curve is horizontal.
C) the demand and supply curves are relatively steep; the magnitudes of shortage or surplus at prices slightly below or slightly higher than the equilibrium price respectively are relatively small.
D) the demand and supply curves are relatively flat; the magnitudes of shortage or surplus at prices slightly below or slightly higher than the equilibrium price respectively are relatively large.

Question 35

Explain the "continuous double auction" trading institution as implemented by Vernon Smith with particular reference to what is meant by an ascending bid and descending process via a rank queue.

Question 36

In the context of posted offer markets, what is meant by "tacit collusion"?

Question 37

Consider a market characterised by a downward sloping demand curve and a horizontal supply curve. Draw the demand and supply curves to indicate the predicted equilibrium price. If this market is implemented as a continuous double action as implemented by Vernon Smith, what do you think would be true of the transaction prices on average. Would they converge to the predicted equilibrium?

Question 38

Consider a market characterised by an upward sloping supply curve and a horizontal demand curve. Draw the demand and supply curves to indicate the predicted equilibrium price. If this market is implemented as a continuous double action as implemented by Vernon Smith, what do you think would be true of the transaction prices on average. Would they converge to the predicted equilibrium?

Question 39

Consider two markets: One with demand and supply curves that are relatively steep and the second with demand and supply curves that are relatively flat but each with the same predicted equilibrium price. Draw two diagrams with the first market above on the left and the second on the right. What would Walras predict about the speed of convergence of transaction prices to the predicted equilibrium price in each of these two markets? Do the findings reported by Vernon Smith bear out the Walrasian conjecture? What does Smith identify as the major prediction about the degree and speed of convergence of transaction prices to the predicted market equilibrium price?

Question 40

What is a "call market"? How does this differ from a "double auction"?

Question 41

Draw a free-hand diagram of a market with a downward sloping demand curve and an upward sloping supply curve. On your diagram indicate (i) the equilibrium price; (ii) the consumer surplus and (iii) the producer surplus. Discuss what you would expect to see in terms of the process of price convergence to the equilibrium price if (iv) consumer surplus is larger than producer surplus; (v) consumer surplus is smaller than produce surplus and (vi) consumer surplus is equal to producer surplus.

Question 42

What must be true about the relative magnitudes of consumer and producer surplus if (i) market prices tend to converge to the equilibrium price from above or stay tend to stay above the equilibrium; (ii) market prices tend to converge to the equilibrium price from below or tend to stay below the equilibrium and (iii) market prices converge to the equilibrium smoothly. Draw a free-hand diagram showing a market with the appropriate demand and supply curves for each of these three cases. Just to make sure, you answer should include three diagrams, one for each question asked above.

Question 43

(i) What can say about the degree of market power on the buyer and seller side respectively if the demand curve is downward sloping but the supply curve is horizontal? (ii) What do you expect to see in terms of price convergence to equilibrium in this case? (iii) What can say about the degree of market power on the buyer and seller side respectively if the demand curve is horizontal but the supply curve is upward sloping? What do you expect to see in terms of price convergence to equilibrium in this case?

Question 44

Bradley Ruffle agues that in posted offer markets with market power on the seller side, one can expect to see some amount of demand withholding if the magnitude of the consumer surplus is smaller than the magnitude of the producer surplus. However, Robert Franciosi et al. argue that such demand withholding may depend on perceptions of fairness and may dissipate in the long-run. Clearly explain the difference between these two alternative views with specific reference to the concept of one or more sellers running out of stock. Your answer should be accompanied by a free-hand diagram to back up your arguments.