Deck 7: The Price System

Question 1

What links the flower growers in Kenya with romantic American teenagers who give flowers as gifts of affection?

A) markets
B) hierarchical authority
C) central planners
D) the United States Senate

Answer 1

markets

Question 2

Wearing 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 statement 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 lower 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.

Answer 2

Knowledge of the Western Halloween festival and demand for costumes can translate into profits for Chinese producers who can produce such costumes at lower costs.

Question 3

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.

Answer 3

decreases in the supply and increases in the price of the other good.

Question 4

A decrease in the demand for a good sold in Market A:

A) will affect only Market A.
B) might affect other markets, even those halfway across the world.
C) will not affect Market A, but it will affect nearby markets.
D) might affect distant markets, but it will not affect Market A.

Question 5

Newly formed trade unions raise wages for workers in Country X, where cars are manufactured. The higher wages increase the costs for the car manufacturers, who then 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 6

It's worthwhile to grow roses in Kenya because:

A) people in Amsterdam don't cooperate with people in Kenya.
B) very few people have to be involved in the process of supplying roses grown there.
C) it's impossible to grow roses anywhere else.
D) the gains from growing roses in an ideal climate are greater than the costs of transporting roses around the world.

Question 7

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, which helps coordinate the logistics of agricultural trade flows between the United States and Kenya
C) economic markets
D) tariff laws in the United States

Question 8

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 decreased greenhouse heating costs in California, making it cheaper to grow flowers in warmer climates.
C) The Kenyan flower industry is run by the California flower growers.
D) No transportation costs exist for flowers.

Question 9

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 10

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 by bureaucrats.
D) treaties, entrepreneurs, and bureaucratic planning.

Question 11

Millions of producers working across the world cooperate to ensure that many more 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.

Question 12

The women in Kenya who pick roses:

A) have a good sense of what Valentine's Day is.
B) know that roses need to bloom a few days before February 14, but otherwise know little about Valentine's Day.
C) do nothing to prepare for Valentine's Day.
D) hold back the rose supply around Valentine's Day in order to raise prices.

Question 13

Which factor(s) contribute to the increased speed of trade across countries?
I. profit opportunities for sellers
II. better transportation networks
III. increased cooperation among countries

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

Question 14

South Africa, with large natural diamond deposits, 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 been 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 15

Which example 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 16

Ethanol and sugar are both made from sugar cane, and ethanol can be used as a fuel substitute 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

Question 17

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 18

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

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

Question 19

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 20

Workers in Peru collect cochineal bugs used to dye certain United States 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 21

If an increase in oil prices made it profitable to use corn-based ethanol for fuel and corncobs are a waste product of ethanol production, what will happen in the market for corncob pipes?

A) Supply will increase, prices will fall, and sales will increase.
B) Supply will decrease, prices will rise, and sales will decrease.
C) Demand will increase, prices will rise, and sales will increase.
D) Demand will decrease, prices will fall, and sales will decrease.

Question 22

Which of these 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 23

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 24

Sugar cane can be used to produce sugar as well as the 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 25

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 26

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 27

Land used to grow corn can also grow soybeans. As the demand for corn used in ethanol began to increase the price of corn, what happened to the price of soybeans?

A) The price of soybeans fell due to lower demand for soybeans.
B) The price of soybeans rose since farmers began planting corn instead of soybeans, thus decreasing the supply of soybeans.
C) The price of soybeans rose since they were in limited supply and demand increased.
D) The price of soybeans stayed the same, since subsidies made up for any differences in the price between corn and soybeans.

Question 28

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) The sugar crop was attacked by disease, which caused a decrease in sugar production.

Question 29

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 produce 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 Southeast 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 30

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 31

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

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

Question 32

The locovore movement encourages eating locally produced food to reduce the greenhouse gases emitted from transporting food long distances, placing upward pressure on local land prices as farmland becomes more valuable. Which statement reflects what will likely occur as a result?

A) The price of beef falls as more people eat beef.
B) Hunting animals becomes more common.
C) Local forests become less common.
D) In the short term, the price of lumber rises.

Question 33

Dairy farmers use sawdust for milk cow bedding. What happened to the price of milk because of the housing slowdown in 2007?

A) The price of milk rose as the demand for milk rose.
B) The price of milk rose as the supply of milk decreased.
C) The price of milk fell as the demand for milk decreased.
D) The price of milk fell as the supply of milk increased.

Question 34

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 35

The Kenyan flower industry provides an example of:

A) how shifts of supply and demand in one market have effects on other markets.
B) why most markets are independent of one another.
C) how prices fail to coordinate economic activity.
D) why it is difficult to link world markets.

Question 36

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 37

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 gained from 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 38

Although large parts of beef cattle become meat products, other parts become leather jackets. As the demand for beef rises, what happens in the market for leather jackets?

A) Supply decreases and price increases.
B) Demand and price increase.
C) Supply increases and price decreases.
D) Demand and price decrease.

Question 39

How are oil prices and sugar prices related?

A) Governments set the price of sugar (per ton) to equal 45% of the price of a barrel of oil.
B) Oil prices and sugar prices are not related.
C) Governments set the price of sugar (per ton) to equal 1.2 times the price of a barrel of oil.
D) As oil prices increase, producers divert sugar cane from sugar production to ethanol production.

Question 40

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 41

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 42

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

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

Question 43

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 44

Use the following to answer questions:
Figure: Demand Curve
(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 45

Use the following to answer questions:
Figure: Demand Curve
(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 46

In a "successful" market, there will be:

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

Question 47

The great economic problem is to:

A) increase resources to satisfy as many of our limited wants as possible.
B) equally allocate resources in order 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 48

Markets have the advantage over central planning as the method 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 49

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 50

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 51

Suppose resources are directed by means of a central planner who receives information on all the different uses of these resources. Why might sellers have an incentive to not provide truthful information to the central planner?

A) Sellers 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 that 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 52

The text states: "The great economic problem is to arrange our limited resources to satisfy as many of our 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 directs 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 53

Which statement explains why many economists have often compared the functioning of worldwide markets to the functioning 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 54

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

A) shift oil out of uses for which good substitutes for oil exist
B) supply oil for uses for which good substitutes for oil exist
C) increase demand for oil in all production processes
D) decrease supply for oil in all production processes

Question 55

Central planning of resource allocation:

A) was attempted by the United States during the 2007-2009 financial crisis.
B) can succeed even if the central planners do not have perfect information on the best uses of resources.
C) was the dominant economic planning method used in both the former Soviet Union and China.
D) insures all resources are used appropriately.

Question 56

Use the following to answer questions:
Figure: Demand Curve
(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 57

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 58

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 59

Large-scale central planning has been abandoned throughout the world (except for North Korea and Cuba) because of ______ and ___ problems.

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

Question 60

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 61

In general, central planning has:

A) been the great success story of the twentieth century.
B) provided a high standard of living in many places, for example, Cuba and North Korea.
C) been a large failure.
D) caused India to become a fast-growing economy.

Question 62

Economist Friedrich Hayek pondered over what economic puzzle?

A) why so few people have good economic intuition
B) how there is production without central authority
C) the reason why diamonds, which are unnecessary for life, are so expensive, while water, which is so critical for life, is so cheap
D) how prediction markets are able to accurately estimate the future

Question 63

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 since it is now more valuable.
D) open another pizza restaurant in order to increase supply and drive prices down.

Question 64

Which statement explains why prices are so important in a market economy?

A) They convey information regarding the value of resources in alternative uses.
B) They directly correlate with producer profits.
C) They convey information regarding the value of the good to consumers.
D) They hold a negative correlation with the producers' opportunity cost.

Question 65

In a competitive free market, consumers decide not only whether their use of a good is worth more than the market price, but also whether their use of a good is worth more than:

A) all other uses of the good.
B) its inframarginal uses.
C) the good's highest-valued use.
D) its next highest-valued use.

Question 66

Suppose there was no "great economic problem." Which option would have had to occur for this to happen?

A) There are zero transportation costs.
B) Resources are no longer subject to scarcity.
C) There are zero transaction costs.
D) All humans die, except one.

Question 67

About the price system, Friedrich Hayek wrote, "I have deliberately used the word 'marvel' to shock the reader out of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design . . . this mechanism would have been acclaimed as one of the greatest triumphs of the human mind." He means that:

A) people have a hard time seeing how important the price system is because no one designed it.
B) the price system was deliberately designed by the human mind.
C) the price system is widely regarded as an important invention.
D) the mechanism does not work very well.

Question 68

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 69

Which statement describes what is NOT a difficulty of central planning?

A) Central planning distinguishes between low- and high-value uses of an item.
B) Designers must ensure that planners have the incentive to move goods from low- to high-valued uses.
C) The skills of central planners go unappreciated.
D) The planners must communicating orders to everyone involved in production.

Question 70

The great economic problem is:

A) minimizing unemployment in a changing world.
B) reducing the deficit in a two-party system.
C) satisfying infinite wants with limited resources.
D) restricting immigration to a legal process.

Question 71

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 72

Markets work well because of the information delivered by:

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

Question 73

What is the great economic problem?

A) to satisfy as many of our wants as possible with our scarce resources
B) to allocate resources so that there is no unemployment
C) to find a solution to natural resource depletion
D) to provide social justice to the exploited workers of the world

Question 74

If a central planner had the power to solve the great economic problem:

A) his incentive would be to solve the problem.
B) his incentive would be to use that power to enrich himself, not to solve the problem.
C) his incentive would be to use the price system to solve the problem.
D) he would not be very powerful.

Question 75

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) none of these on its own

Question 76

The market price of copper gives us information on:

A) the value of labor used to mine copper.
B) the value of copper in its next highest-valued use.
C) how much capital equipment was used in its production.
D) the competitiveness of the copper market.

Question 77

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 78

What do economists consider to be "the great economic problem"?

A) eliminating scarcity
B) maximizing employment while minimizing inflation
C) using limited resources to satisfy as many of our unlimited wants as possible
D) utilizing tax policies to eliminate business cycles

Question 79

One of the biggest problems with centrally planned economies is that:

A) central planners have limited information on the true value of the various ways to utilize scarce resources.
B) they fail to reach economic efficiency because their policies limit global trade.
C) workers have little incentive to work for the central planner.
D) they typically have higher levels of corruption compared with market economies.

Question 80

Is the task of effective central planning difficult?

A) It is not difficult because allocating resources is easier than ever with the microprocessing power of twenty-first-century computers.
B) It is not difficult because economic models and theory have become increasingly better at handling real-world complexities.
C) It is difficult because central planners have no way of knowing the value of a particular resource in all of its uses.
D) It is difficult, but only if the central planners are dedicated public servants and not self-interested politicians.