Question 1

When the price of pizza increases, consumers have an incentive to:

Accepted Answer

A)  decrease their demand for pizza. 
B)  purchase substitute goods such as Chinese food. 
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 2

Reference: Ref 7-2 (Figure: Demand Curve Sections) Refer to the figure. The section of the demand curve labeled A represents the:

Accepted Answer

A)  value of the good in its next highest use. 
B)  satisfied wants. 
C)  unsatisfied wants. 
D)  All of the answers are correct.

Question 3

Your retail outlet sells bottled water. Which of the following scenarios would cause you to use a ―buy low and sell high‖ strategy with bottled water?

Accepted Answer

A)  A hurricane is expected to arrive within one week. 
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 4

In a demand-and-supply diagram, the market price represents the value of the:

Accepted Answer

A)  first satisfied want. 
B)  last unsatisfied want. 
C)  good in its next lowest use. 
D)  good in its next highest use.

Question 5

The true cost of a good is its money price rather than its opportunity cost.

Accepted Answer

A) True 
 B)False

Question 6

Central planning of resource allocation:

Accepted Answer

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 7

John and Tom enter into a futures contract where John agrees to deliver 500 crates of coffee to Tom one year from now. Tom agrees to pay a price of $200 per crate. A year from now, John and Tom find that the market price of coffee is $210 per crate. How might they make a cash settlement on the contract?

Accepted Answer

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 8

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

Accepted Answer

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

Question 9

The advantages of prediction markets include:

Accepted Answer

A)  the ability of predicted outcomes to always beat actual outcomes in markets. 
B)  the fact that such markets encourage sales teams and traders at firms to divulge the true information on expected outcomes. 
C)  the fact that such markets are only useful at forecasting political outcomes. 
D)  the ability for strong prediction markets to swing actual market outcomes towards the predicted outcome.

Question 10

Hundreds of thousands of producers working across the world cooperate to ensure that 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:

Accepted Answer

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

Question 11

Futures contracts reduce future uncertainty. Which of the following statements show how this is achieved? I. Futures contracts allow the parties involved to mitigate possible shortages in quantities of the good. II. Futures contracts allow the parties involved to mitigate unexpected changes in price that could hurt earnings. III. Futures contracts always allow the seller to receive a price that is higher than the market price for the product.

Accepted Answer

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

Question 12

Sugar cane can be used to produce sugar as well as fuel ethanol for automobiles. Falling oil prices will cause a(n) ________ in the supply of sugar resulting in ______ candy prices.

Accepted Answer

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

Question 13

The central planning approach failed to optimally allocate oil during the 1973-1974 oil crisis because of problems of:

Accepted Answer

A)  demand and supply. 
B)  markets and prices. 
C)  resources and budgets. 
D)  information and incentives.

Question 14

Suppose that speculators expect that a war in the Middle East is likely next year, which could cause a significant decrease in the supply of oil. a. What could the speculators do to profit from their expectation? b. What would be the possible impact of the war on the oil market without speculation? c. What would be the possible impact of the war on the oil market with the action taken by the speculators described in part a? d. How would the action taken by the speculators impact the society?

Accepted Answer

The answer of Suppose that speculators expect that a war...

Question 15

When the price of oil rises, consumers economize by buying ________ and by ________.

Accepted Answer

A)  more oil; finding substitutes 
B)  less oil; recycling 
C)  less oil; finding substitutes 
D)  more oil; recycling

Question 16

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

Accepted Answer

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 17

A market might have a small quantity traded at a high price in one year, and a larger quantity traded at a low price in another year. If one has data on the quantities traded each year in a market, one can compute the average quantity traded over time. Using appropriate demand and supply graphs, explain how speculators act as a sort of ―averaging‖ effect on markets.

Accepted Answer

The answer of A market might have a small quantity...

Question 18

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

Accepted Answer

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

Question 19

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

Accepted Answer

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

Question 20

The bankruptcy of firms:

Accepted Answer

A)  should not occur in a well-functioning economy. 
B)  frees up resources to higher valued uses, a vital role in capitalism. 
C)  is not possible in monopoly markets. 
D)  is pro-cyclical with economic activity, as measured by gross domestic product.

Exam 7: The Price System: Signals, Speculation, and Prediction