Deck 3: Markets

Question 1

An increase in the supply of oranges in a town drives down its price by 5 percent.Which of the following changes will be observed in the market?

A)The demand for oranges will decrease.
B)The demand for oranges will increase.
C)The quantity of oranges demanded will increase.
D)The quantity of oranges demanded will decrease.

Answer 1

C

Question 2

Which of the following statements about markets is true?

A)Markets reduce the opportunity costs of making exchanges.
B)Markets expand the range of buyers and sellers available as counterparties.
C)Markets increase the transaction costs of making exchanges.
D)Markets increase the costs of information.

Answer 2

B

Question 3

Which of the following markets is continuously in operation and not set in a single venue or restricted to certain dates or times?

A)The U.S natural gas industry
B)The San Francisco Wholesale Produce Market
C)The U.S.real estate market
D)An art exhibition

Answer 3

C

Question 4

An increase in the price of Kellogg's breakfast cereal is likely to shift the demand curve for cereal manufactured by Malt-O-Meal to the right.

Question 5

Suppose a consumer is willing to pay a maximum of $45 for a brand of perfume whose price increases from $37 to $41.What will be the impact of this price rise on the consumer surplus?

A)Consumer surplus will increase by $8.
B)Consumer surplus will decline by $8.
C)Consumer surplus will increase by $4.
D)Consumer surplus will decline by $4.

Question 6

Tim shifted to a new house closer to his office with his family after receiving a favorable salary review from his employer.Here, the new house can be considered as a normal good.

Question 7

At a given demand, if the supply of a commodity declines, the equilibrium price level falls.

Question 8

Sellers in a geographically centralized market have higher transaction costs compared to those in a decentralized market.

Question 9

If the demand for a commodity is perfectly elastic, a downward shift in supply will result in lower prices.

Question 10

The flatter the slope of the supply curve the lower will be the price elasticity of supply.

Question 11

A sudden rise in input prices which drives up the marginal cost of producing automobiles will shift the supply curve of automobiles upward.

Question 12

A futures contract hedges against the risks associated with the volatility of spot price.

Question 13

Assume that excessive lobbying by tea cultivators led to the announcement of a price floor higher than the equilibrium price of tea.This legislation is likely to result in a shortage of tea leaves in the market.

Question 14

Marginal valuation is:

A)the maximum a person is willing to pay for an additional unit of a good or service.
B)the maximum amount of a good or service a person is willing to consume.
C)the difference between the price an individual is willing to pay for a good or service and its actual price.
D)the difference between the amount of a good or service demanded and that which is available.

Question 15

Arbitrage in foreign exchange and gold are both common as buyers can bargain with the sellers on the market price.

Question 16

A change in the price of a commodity affects both the demand and the quantity demanded.

Question 17

It is difficult to practice arbitrage for untradable services or for goods which have a few knowledgeable traders.

Question 18

Suppose fish steak and spaghetti are the only alternatives available during lunch hours at an office cafeteria.If a nominal change in the price of fish steak brings about a prominent change in the demand for spaghetti we can conclude that the latter has a high demand elasticity.

Question 19

Before the deregulation of banks and other financial institutions in the 1980s, the Federal Reserve Board's Regulation Q regulated the interest rates on bank deposits and the interest rates charged on loans.

Question 20

Consumer surplus increases when the market price of a commodity declines.

Question 21

The supply curve of a producer, whose costs vary continuosly with output will be:

A)a straight line vertical to the output axis.
B)a straight line horizontal to the output axis.
C)the positively sloped portion of the marginal cost curve.
D)the negatively sloped portion of the marginal cost curve.

Question 22

If cheese spreads and butter are substitutes, an increase in the price of butter will:

A)shift the demand curve for cheese spreads upward.
B)shift the demand curve for cheese spreads downward.
C)shift the demand curve for butter upwards.
D)shift the demand curve for butter downward.

Question 23

A tradesman who purchases diamonds in a country where the price is low and sells them in another country where the price is high, can be said to be practicing:

A)arbitrage.
B)speculation.
C)derivatives trading.
D)forecasting.

Question 24

As observed in China's steel appliance market, the rise in the price of refrigerators resulted:

A)solely from an increase in the demand for refrigerators.
B)from an increase in the demand for steel from all appliance industries.
C)from a shortage of steel in the world markets.
D)from an increase in the price of steel that was the result of increased demand for refrigerators.

Question 25

Which of the following properties hold true for the equilibrium price-quantity combination?

A)Buyers who are willing to pay higher than the equilibrium price do not find sellers.
B)At the equilibrium price producer surplus equals consumer surplus.
C)The equilibrium output is produced at the lowest avoidable cost.
D)The equilibrium output is produced at the lowest opportunity cost.

Question 26

Bankers supported the Federal Reserve Board's Regulation Q because:

A)it allowed them to charge lower interest rates on loans.
B)it protected them from money market volatilities.
C)it increased the demand for loanable funds in the market.
D)it allowed them to borrow at a low rate of interest and lend out at a high rate of interest.

Question 27

The market-clearing price is:

A)the price at which the market is in equilibrium.
B)the price at which mutually beneficial trade take place.
C)the price at which sellers earn the maximum profit.
D)the price at which consumer surplus is zero.

Question 28

Which of the following is an effect of paper recycling on pulpwood?

A)Recycling leads to an increase in acreage devoted to pulpwood.
B)Recycling leads to a decrease in acreage devoted to pulpwood.
C)Recycling increases the demand for pulpwood.
D)Recycling increases the market price of pulpwood.

Question 29

Which of the following statements about equilibrium is true?

A)The positive and the normative attributes of equilibrium are similar.
B)The equilibrium price fails to redistribute goods in accordance to individual valuations.
C)Equilibrium refers to a state of complete happiness or fairness.
D)In equilibrium there are neither surpluses nor shortages.

Question 30

In a "pure exchange" market:

A)resources are owned only by the government.
B)resources are owned by few people.
C)people trade money for goods that are produced in the domestic economy.
D)there is no production and people trade money for goods that already exist.

Question 31

An increase in the price of an input will increase the _____ of producing the final good and shift the supply curve of the commodity _____.

A)marginal cost; upward
B)transaction cost; upward
C)marginal cost; downward
D)transaction cost; downward

Question 32

Starting from a pure exchange equilibrium, an increase in the demand for a commodity will result in:

A)a fall in the market price.
B)a rise in the market price.
C)a rise in the equilibrium output.
D)a fall in the equilibrium output.

Question 33

An increase in the cost of lumbering activities will:

A)increase the quantity of wood supplied to the furniture market.
B)decrease the quantity of wood supplied to the furniture market.
C)decrease the supply of wood to the furniture market.
D)increase the supply of wood to the furniture market.

Question 34

The area above the supply curve and below the market price represents:

A)the consumer surplus
B)the producer surplus.
C)the deadweight loss of the producer.
D)the deadweight loss of the consumer.

Question 35

Suppose the adoption of a new software reduces the marginal cost of publishing books.For a given demand curve for books, this will be represented by:

A)an upward movement along the supply curve of books.
B)a downward movement along the supply curve of books.
C)an upward shift in the supply curve of books.
D)a downward shift in the supply curve of books.

Question 36

The law that prohibits price from reaching its equilibrium point, by enforcing a maximum that is below equilibrium is called a _____ and results in a _____.

A)price ceiling; shortage
B)price ceiling; surplus
C)price floor; shortage
D)price floor; surplus

Question 37

A surplus can exist in the market only if there is:

A)a non binding price floor.
B)a binding price floor.
C)a binding price ceiling.
D)a non binding price ceiling.

Question 38

When the demand curve is vertical and the supply curve is upward sloping,:

A)a rise in the input price that increases marginal cost by $1, decreases the firm's profit by $1.
B)a drop in the input price that lowers the marginal cost by $1, doubles the firm's profit.
C)a drop in the input price that lowers the marginal cost by $1, decreases the output price by $1.
D)a rise in the input price that increases the marginal cost by $1, doubles the output price.

Question 39

An increase in the price of sodium carbonate, a chemical compound used in detergents, will:

A)increase the quantity of detergents demanded.
B)decrease the quantity of detergents demanded.
C)decrease the demand for detergents.
D)increase the demand for detergents.

Question 40

Suppose a commodity market is initially in equilibrium.An increase in the nation's skilled labor force then lowers the marginal cost of producing each unit of output.Which of the following changes will be observed?

A)The demand curve will shift upward
B)The supply curve will shift downward
C)The demand curve will shift downward
D)The supply curve will shift upward

Question 41

Figure 3-1
In the figure given below the government imposes a price ceiling on wheat at $6 per bushel which is below the market-clearing price of $8.D₁ and D₂ are the demand curves for wheat of Jane and Jolly respectively and DM is the market demand curve for wheat.A total of 40 bushels of wheat is available in the market and each of the consumers have been issued a tradable coupon for 20 bushels of wheat.
Refer to Figure 3-1.What will be the equilibrium price of a coupon in this market?

A)$4
B)$2
C)$1
D)$6

Question 42

If two commodities are complements then:

A)the cross-price elasticity will be zero.
B)the cross-price elasticity will be one.
C)the cross-price elasticity will be negative.
D)the cross-price elasticity will be positive.

Question 43

The own-price elasticity of demand is defined as:

A)the ratio of a change in quantity demanded and the change in price.
B)the ratio of the percentage change in quantity demanded to the percentage change in price.
C)the ratio of the percentage change in quantity demanded to the percentage change in input prices.
D)the ratio of a change in output and the change in input usage.

Question 44

Which of the following commodities can be considered as an inferior good?

A)Dwelling in a small apartment located in a suburb
B)Washing clothes in a washer at home
C)Eating out at an upscale restaurant
D)Spending vacations at exotic locations

Question 45

If the cross-elasticity of demand for bacon with respect to price of beefsteak is positive, then:

A)an increase in the price of beefsteak will shift the demand curve for bacon outward.
B)a decrease in the price of beefsteak will shift the demand curve for beefsteak outward.
C)an increase in the price of bacon will shift the demand curve for beefsteak inward.
D)a decrease in the price of bacon will shift the demand curve for beefsteak outward.

Question 46

A perfectly elastic demand curve will:

A)be a vertical straight line.
B)be a downward sloping straight line.
C)be a horizontal straight line.
D)be an upward sloping straight line.

Question 47

Figure 3-1
In the figure given below the government imposes a price ceiling on wheat at $6 per bushel which is below the market-clearing price of $8.D₁ and D₂ are the demand curves for wheat of Jane and Jolly respectively and DM is the market demand curve for wheat.A total of 40 bushels of wheat is available in the market and each of the consumers have been issued a tradable coupon for 20 bushels of wheat.
Refer to Figure 3-1.Which of the following situations would arise if the coupon is traded below its equilibrium price?

A)The price ceiling on wheat would be removed.
B)The market price of wheat would decrease.
C)There would be a surplus of wheat.
D)There would be a shortage of wheat.

Question 48

Figure 3-1
In the figure given below the government imposes a price ceiling on wheat at $6 per bushel which is below the market-clearing price of $8.D₁ and D₂ are the demand curves for wheat of Jane and Jolly respectively and DM is the market demand curve for wheat.A total of 40 bushels of wheat is available in the market and each of the consumers have been issued a tradable coupon for 20 bushels of wheat.
Refer to Figure 3-1.Which of the following situations would arise if the price of the coupon is above its equilibrium price?

A)The price ceiling on wheat would be removed.
B)The market price of wheat would increase.
C)There would be a surplus of wheat.
D)There would be a shortage of wheat.

Question 49

Which of the following statements about elasticity of supply is true?

A)Elasticity of supply is always unity.
B)Elasticity of supply is always zero.
C)Elasticity of supply is always negative.
D)Elasticity of supply is always positive.

Question 50

A demand curve is said to be inelastic if:

A)ED = 1
B)ED = 0
C)ED > 1
D)ED < 1

Question 51

For an inferior good:

A)the income elasticity is positive.
B)the income elasticity if negative.
C)the income elasticity is zero.
D)the income elasticity is unity.

Question 52

Which of the following will result from an epizootic affecting sheep reared for wool?

A)The epizootic would lower people's preference for woolen clothes.
B)The price of new woolen clothes would rise.
C)The epizootic would lower people's preference for synthetic coats.
D)The production of new woolen clothes would rise.

Question 53

The demand for a commodity is said to perfectly inelastic when:

A)a prominent change in the price level leaves the quantity demanded totally unchanged.
B)a small change in the price level affects the quantity demanded to a large extent.
C)a change in the price level has an equal impact on the quantity demanded.
D)a change in the price level has a negative impact on the quantity demanded.

Question 54

Which of the following was an effect of the affordable housing law in the cities Palo Alto, Laguna Beach, and Irvine?

A)It imposed a per-unit tax on builders of mid-range houses.
B)The law had a significant impact on the mid-range houses.
C)It imposed a per-unit tax on builders of expensive new houses.
D)The law had a significant impact on the supply of mid-range houses.

Question 55

Substitution of one commodity for another depends on all of the following factors, EXCEPT:

A)prices of the goods available to the consumers.
B)tastes and preferences of the buyers.
C)the information buyers possess.
D)market protocols.

Question 56

A Commodity X will be considered as a normal good if:

A)the quantity of the good consumed decreases with an increase in income.
B)the quantity of the good consumed increases with an increase in income.
C)the quantity of the good consumed increases in the same proportion as the increase in income.
D)the quantity of the good consumed reflects no change with a change in income.

Question 57

Suppose Betty spends her monthly allowance on buying computer games, watching movies, and parasailing.If an increase in her monthly allowance increases her expenditure on parasailing activities we can say that:

A)parasailing is an inferior good.
B)computer games are inferior goods.
C)parasailing is a normal good.
D)computer games are normal goods.

Question 58

An affordable housing law will affect a city's housing prices only if:

A)the demand for houses in the city is downward sloping.
B)the demand for houses in the city is almost horizontal.
C)the demand for houses in the city is almost vertical.
D)the demand for houses in the city is backward bending.

Question 59

Assume that the demand curve for a commodity is represented by the equation Q = 25 - 1.3P.Calculate the change in total spending for this commodity when price falls from $4.50 to $4.20.

A)Total spending rises by $4.11.
B)Total spending declines by $4.11.
C)Total spending declines by $8.20.
D)Total spending rises by $8.20.

Question 60

Figure 3-2
The figure given below depicts the income consumption curves of an individual for four goods P, Q, R, and S.
Refer to Figure 3-2.Which of the following goods has a negative income elasticity?

A)Good P
B)Good Q
C)Good R
D)Good S

Question 61

The contact points where the terms of forward contracts are set are known as:

A)the underlying markets.
B)the derivative markets.
C)the over-the-counter markets.
D)the futures exchange.

Question 62

Which of the following is a property of a forward contract?

A)In a forward contract cash is traded for immediate delivery.
B)The buyer of a forward contract is "short" while the seller of the contract is "long".
C)In a forward contract, the seller must own the commodity which is being traded.
D)The value of future delivery depends on the market price of the commodity.

Question 63

What is a price floor?

Question 64

In the market for potatoes, where price level reaches its low in October and its peak in June, speculators help to:

A)keep the equilibrium price uniform over the year.
B)lower the level of consumption in June.
C)lower the level of consumption in October.
D)keep the equilibrium price level low over the year.

Question 65

What is the income elasticity of demand for an inferior good?

Question 66

What is the Law of One Price?

Question 67

Why is a forward contract also known as a derivative asset?

Question 68

What is the impact of an interest ceiling on bank deposits but not on loans?

Question 69

Why does the elasticity of demand for a commodity change over time?

Question 70

Illustrate the concept of price elasticity of demand?

Question 71

Why is a futures contract considered valuable by both producers and consumers?

Question 72

What is the difference between the cross-elasticity of demand for two goods which are substitutes and two goods which are complements?

Question 73

Explain the concept of consumer surplus with an example.

Question 74

What are derivatives and derivative markets? Explain with an example.

Question 75

How do speculators provide a more rational guide to production and consumption decisions compared to markets?

Question 76

If the supply of a commodity is inelastic, what will be the effect of a fall in demand?