Deck 3: Markets, Organizations, and the Role of Knowledge

Question 1

Assume the demand function for scooters is given by QD = 20,000 - 10P + 0.2I, where P = price of a scooter, and I = average income of consumers. Also, assume the supply function of scooters is given by QS = 20 P. If the market for scooters is perfectly competitive, and the average income of consumers is $20,000, what are the equilibrium price and quantity in this market?

A) The equilibrium price is $16,000, and 800 scooters are traded.
B) The equilibrium price is $1,600, and 32,000 scooters are traded.
C) The equilibrium price is $800, and 16,000 scooters are traded.
D) The equilibrium price is $800, and 32,000 scooters are traded.

Answer 1

C

Question 2

If demand is represented by Qd = 50 -.5P +.005I where I=$50,000 and supply is represented by Qs = 100 +.4P - 2W where wages=W=$15.00, compute the equilibrium price and quantity. where wages=W=$15.00, compute the equilibrium price and quantity. What happens if income falls to I=$40,000?

Answer 2

The equilibrium price is $255.56. The equilibrium quantity is 172.22. When income falls to $40,000, the new equilibrium price is $200. The new equilibrium quantity is 150.

Question 3

Assume Pollutex Inc. produces paper in its plant located on Lake Ontario, half a mile away from CleanAir Camping. Pollutex employs an obsolete production process, dumping scum in the lake. The camp has experienced a steady decline in the number of attendees since Pollutex moved nearby. In particular, the owners forecast that CleanAir Camping will generate a profit of only $50,000 a year in the future, which is $150,000 less than the one generated before Pollutex moved nearby. A cleaner production process is available, which would not require dumping the scum in the lake. However, converting the plant would increase yearly costs by $100,000. Is the current situation Pareto efficient?

A) Yes, since there is no alternative that would make CleanAir better off without hurting Pollutex, and vice versa.
B) No, as Pollutex could convert its plant and make CleanAir better off by $150,000.
C) No. In fact, CleanAir owners could pay Pollutex a sum between $100,000 and $150,000 a year to convert its plant, and increase profits between $0 and $50,000.
D) No. In fact, Pollutex owners could pay CleanAir a sum between $100,000 and $150,000 a year to convert its plant, and increase profits between $0 and $50,000.

Answer 3

C

Question 4

Faith and Hope are 30 year old identical twins. The only difference between Faith and Hope is their credit score. Faith has a proven record of repaying debt. Faith can borrow money at 4.5%. Hope has often missed debt payments. Hope can borrow at 8.5%.
They are considering enrolling in an evening MBA program. They plan on completing the program in two years. Assume the annual tuition is $16,000 for both years. They also anticipate that the non-monetary costs of obtaining an MBA will be $40,000 per year. The twins anticipate that after graduation in two years, their earnings will be $10,000 per year higher until they retire at age 62. Should Faith enroll in the evening MBA program? Should Hope enroll in the evening MBA program?

Question 5

Tom and Jerry have been roommates for the past two years. During this period, they bought 11 CDs together. Now that each is taking his own apartment, they are deciding how to split their possessions. Tom suggests they take 5 CDs each and give the extra one to Arnold, their neighbor. Jerry, on the other hand, suggests they flip a coin to decide who gets the 11th CD. Assuming they neither like nor dislike being altruistic, which of the two suggestions is Pareto efficient?

A) Tom's suggestion.
B) Jerry's suggestion.
C) Both suggestions make sense
D) Both suggestions do not make sense

Question 6

Markets can give a buyer everything a buyer needs to know about a product even though the buyer does not have the training to understand the specific knowledge needed to build or distribute the product. Explain.

Question 7

A competitive equilibrium price guarantees that:

A) consumers who want to buy the product at the market price are satisfied.
B) producers can hoard the quantity they want to at the current market price.
C) gains from trade are maximized only by the produces.
D) you can get whatever you want

Question 8

A bunch of elementary school kids sit down at a long lunch table. For several minutes, everyone trades food, but then the table becomes quiet as they begin to eat. What happened?

Question 9

Suppose Sam and Kevin can produce pens and pencils in the times that follows:

Question 10

Assume the market for ceiling fans is perfectly competitive and currently in equilibrium. If the demand increases while the supply decreases, then:

A) we can be certain the equilibrium price will increase.
B) we can be certain the equilibrium quantity will increase.
C) Both price and quantity will increase
D) Both price and quantity will decrease

Question 11

Assume the demand function for basketballs is given by QD = 150 - 3P + 0.1I, where P = price of a basketball, and I = average income of consumers. Also, assume the supply of basketballs is given by QS =2P. If the market for basketballs is perfectly competitive, and the average income is equal to $1,500, what are the equilibrium price and quantity? What if a 20% income tax is introduced?

A) Before the tax, the equilibrium price is $60, and 120 basketballs are traded. The introduction of an income tax would have no effect on the equilibrium price net of the tax and quantity.
B) Before the tax, the equilibrium price is $60, and 120 basketballs are traded. Once the income tax is introduced, the price would decrease by $6, and only 108 basketballs would be traded.
C) Before the tax, the equilibrium price is $60, and 120 basketballs are traded. Once the income tax is introduced, the price would decrease by $6, which would cause the quantity of basketballs traded to increase.
D) Before the tax, the equilibrium price is $60, and 108 basketballs are traded. Once the income tax is introduced, the price would decrease by $6, and only 120 basketballs would be traded.

Question 12

Many products come with a warning about how to use the product without harming other people. Why?

Question 13

Currently XYZ's compensation system is such that only top managers receive compensation based on the company's performance, while everybody else in the company receives a fixed salary. Moreover, top managers have full discretion over the launch of new products. Due to the failure of the last three products launched by XYZ, top managers are contemplating modifying the allocation of decision rights concerning new products. What changes would make more economic sense?

A) Delegating decision rights down the ladder to those employees who are likely to have more specific knowledge, and leaving their current compensation scheme unchanged.
B) Delegating decision rights down the ladder to those employees who are likely to have more specific knowledge, and changing their compensation by awarding them bonuses based on their performance.
C) Leaving the allocation of decision rights unchanged, but changing the compensation of all the employees by awarding them bonuses based on their performance.
D) Give themselves good bonuses and reduce benefits for all employees.

Question 14

A business manager has to decide whether to buy supplies in the marketplace or whether to build them inside the company. What do "information" and "contracting" have to do with this decision?

Question 15

Externalities exist when the actions of one agent:

A) benefit or hurt another agent who is not part of the exchange relationship.
B) hurts the agent committing the action
C) benefits the agent committing the action
D) benefit or hurt another agent who is a part of the exchange relationship

Question 16

Draw supply and demand curves. Show the impact of an increase in demand. What happens to the price and quantity exchanged in the market? Show the impact of a decrease in demand. What happens to the price and quantity exchanged in the market?

Question 17

According to Ronald Coase, allocation of resources in a free-market economy will be efficient as long as:

A) property rights are clearly assigned but not enforced.
B) contracting costs are sufficiently high
C) property rights are clearly assigned, enforced with low contracting costs
D) property rights are assigned to the rich

Question 18

What are externalities and why is Ronald Coase an important figure in economics?

Question 19

Assume the government introduces a $0.50 per gallon tax on gasoline. Which of the following is true?

A) The quantity of subway and bus tickets sold is likely to increase.
B) The quantity of cars sold is likely to increase.
C) The quantity of gasoline sold is likely to increase.
D) The quantity supplied by producers will decrease

Question 20

Assume the current market price of candles is such that there is a surplus (i.e. excess supply). Which of the following best describes the adjustment process in a competitive market?

A) As the price increases, the quantity demanded increases while the quantity supplied decreases.
B) As the price increases, the quantity demanded decreases while the quantity supplied increases.
C) As the price decreases, the quantity demanded increases while the quantity supplied decreases.
D) As the price decreases, the quantity demanded decreases while the quantity supplied increases.

Question 21

If the price of movie tickets doubles, then:

A) the demand for DVDs is likely to increase.
B) the price of DVDs is likely to decrease.
C) the quantity of movie tickets sold is likely to increase.
D) More popcorn will be sold

Question 22

Assume the market for hammers is perfectly competitive, and the current price is $15. If, at this price, the quantity of hammers demanded is 15,000, while the quantity supplied is 25,000, then:

A) the market for hammers is in equilibrium.
B) the price of hammers is likely to increase.
C) the price of hammers is likely to decrease.
D) there would be no change in price

Question 23

Let D₀ be the initial demand curve for gasoline. Which one of the following does not shift this curve?

A) an increase in the amount of alternative fuels
B) an increase in gas tax
C) an increase in the price of gasoline
D) an increase in oil imports from the Gulf

Question 24

Based on the following diagram if there were a $1.50 price ceiling:

A) the quantity demanded would be 65.
B) the quantity demanded would be 80.
C) there would be a shortage of 30.
D) there would be a surplus of 30.

Question 25

Assume the market for pencils is competitive, and originally in equilibrium. As a result of increases in the price of graphite, the supply of pencils decreases. What is true in the new equilibrium?

A) The price is higher, while the quantity exchanged decreases.
B) The price is higher, and the quantity exchanged increases.
C) The price is lower, while the quantity exchanged decreases.
D) The price is lower, and the quantity exchanged increases.

Question 26

Let D₀ and S₀ be the initial demand and supply curves for gasoline. Let P₀^* and Q₀^* be the initial equilibrium in this market. There is an OPEC cartel that reduces the production of world oil by several million barrels a day. Which ONE of the following correctly captures the effect of this change on the market for gasoline?

A) Both equilibrium quantity and price will increase
B) Both equilibrium quantity and price will decrease
C) Equilibrium quantity will increase, but equilibrium price will decrease
D) Equilibrium quantity will decrease, but equilibrium price will increase

Question 27

Let Qd = 10 - 2 P and Qs = 3 P be the demand and supply curves for Beer. Then the equilibrium combination in the market is:

A) P^* = 2; Q^* = 5
B) P^* = 5; Q^* = 0
C) P^* = 2; Q^* = 6
D) P^* = 6; Q^* = 2

Question 28

Let D₀ and S₀ be the initial demand and supply curves for gasoline. Let P₀^* and Q₀^* be the initial equilibrium in this market. There is an increase in incomes due to a tech boom. Which ONE of the following correctly captures the effect of this change on the market for gasoline?

A) Both equilibrium quantity and price will increase
B) Both equilibrium quantity and price will decrease
C) Equilibrium quantity will increase, but equilibrium price will decrease
D) Equilibrium quantity will decrease, but equilibrium price will increase

Question 29

Which of the following constitute examples of positive externalities:

A) Your neighbor's garden is always well taken care of.
B) Your neighbor's barbecue smoke coming through your window.
C) Your neighbor always listening to music at an unbearable volume.
D) You allow weeds to grow in your yard

Question 30

A price ceiling will usually:

A) shift both demand and supply to the right
B) shift both demand and supply to the left
C) shift demand to the left and supply to the right
D) shift neither demand nor supply

Question 31

Based on the following diagram if there were a $3.50 price floor:

A) the quantity demanded would be 65
B) the quantity demanded would be 60.
C) there would be a shortage of 60.
D) there would be a surplus of 60.

Question 32

Let D₀ and S₀ be the initial demand and supply curves for gasoline. Let P₀^* and Q₀^* be the initial equilibrium in this market. The war in Iraq comes to an end. Iran and Afghanistan lay pipes to generate more oil. US and Venezuela enter an era of friendship. Which ONE of the following correctly captures the effect of this change on the market for gasoline?

A) Both equilibrium quantity and price will increase
B) Both equilibrium quantity and price will decrease
C) Equilibrium quantity will increase, but equilibrium price will decrease
D) Equilibrium quantity will decrease, but equilibrium price will increase

Question 33

Let D₀ and S₀ be the initial demand and supply curves for gasoline. Let P₀^* and Q₀^* be the initial equilibrium in this market. There is an increase in alternative fuels available through research and development. Which ONE of the following correctly captures the effect of this change on the market for gasoline?

A) Both equilibrium quantity and price will increase
B) Both equilibrium quantity and price will decrease
C) Equilibrium quantity will increase, but equilibrium price will decrease
D) Equilibrium quantity will decrease, but equilibrium price will increase

Question 34

According to Ronald Coase, for a free-market economy to work efficiently, there needs to be:

A) allocation of private property rights with low transactions cost
B) allocation of private property rights with high transactions cost
C) a well developed tax code.
D) low cost of malpractice insurance

Question 35

Consumer surplus is:

A) the result of a shortage.
B) the result of a surplus.
C) a measure of the quantity traded by consumers.
D) a measure of the gains from trade to consumers.

Question 36

The minimum wage is a:

A) wage ceiling.
B) positive externality.
C) price floor.
D) price ceiling.

Question 37

Price controls on gasoline:

A) increase consumer surplus for all consumers.
B) create a shortage of gasoline.
C) create a surplus of gasoline.
D) increase producer surplus for all producers.

Question 38

Based on the following diagram if there were a $3.00 price floor:

A) the quantity demanded would be 65.
B) the quantity demanded would be 30.
C) there would be a shortage of 30.
D) there would be a surplus of 30.

Question 39

MACROSOFT's top management is contemplating the development and marketing of three new software products (a word processor, a spreadsheet application, and a web browser). However, it needs to decide whether to launch them separately or as a package. The CEO proposes to delegate the decision to a team formed with representatives from each department. Why does his proposal make economic sense?

A) Ultimately, they are the ones who have to implement whatever decision is made, so one might as well ask their opinion.
B) They are likely to make a more informed decision.
C) So that their in-fighting will be advantage to the management
D) So if the project fails, they can blame each other

Question 40

The minimum wage:

A) increases economic efficiency.
B) creates a shortage of labor.
C) creates a surplus of labor.
D) increases producer surplus.

Question 41

The demand and supply curves in the market for gasoline are illustrated in the graph. Starting at the equilibrium point, if the government then imposes a price ceiling of $10, consumer surplus will then be given by the area:

A) A
B) A + B
C) A + D
D) C

Question 42

The demand and supply curves in the market for gasoline are illustrated in the graph below. Starting at the equilibrium point, if the government then imposes a price ceiling of $10, the deadweight loss will be the area:

A) D + E
B) F + G
C) D
D) E

Question 43

The demand and supply curves in the market for gasoline are illustrated in the graph below. Starting at the equilibrium point, if the government then imposes a price ceiling of $10, producer surplus will fall by an amount given by the area:

A) A
B) B + C
C) B + E
D) C