Sunday, May 3, 2009


#1 Describe the role of prices in market economies

Prices serve as signals that guide economic decisions and allocate scarce resources

#2 Even though all markets are not perfectly competitive, the study of perfect competition is worthwhile because:

Some degree of competition is present in most markets, not just in perfectly competitive markets.

#3 Answer the following:

a) a shift from D to D1 is called? A decrease in demand

b)A shift from D1 to D is called? An increase in demand

c) What would cause a shift in the demand curve? Changes in income, prices of related goods, tastes, expectations, the number of buyers - something other than the price of the good in question.

#4 (click to enlarge image)

a)Equilibrium price and quantity are: P = ? Q = ?

ans: 10 , 4

b) At a price of $14, here would be a ? of ? units.

ans: surplus , (6-2 )= 4

c)At a price of $6 there would be a ? of ? units.

ans: shortage , (6-2)=4

Note, in ‘b’ we have an example like with the minimum wage, where we get a surplus of labor and unemployment. In part ‘c’ we have an example of a price ceiling, like price controls that result in a shortage.

#5 Using a graph, demonstrate the difference between a change in ‘demand’ and a change in ‘quantity demanded’.


The movement from A to B along the demand curve is a change in quantity demanded. ( actually an inrease) A behavioral response to a change in the price of the good in question. A shift from D to D2 is a change in ‘demand’, ( actually an increase) a behavioral response to something other than the price of good in question.

#6 Using graphs, illustrate the difference between a change in ‘supply’ and ‘quantity supplied’

The shift from S1 to S2 is a change in ‘supply.’ A behavioral response to something other than price. The movement along the supply curve from point A to point B is a change in ‘quantity’ supplied, which is a behavioral response to price.

#7 What event would be consistent with the following graph ( movement from point A to B)?

a) An increase in gas taxes will reduce dependence on foreign oil
b) Gasoline and diesel are complements, and the price of gas decreased
c) A gas tax was imposed, resulting in higher price paid for gas and a reduction in consumption ( quantity demanded)
d) A gas tax was imposed, resulting in a higher price paid for gas and an increase in consumption ( quantity demanded)

ans: c


1) Production Possibilities Frontier

a) Draw a production possibilities frontier for a society that produces corn and cars.

b) Show an efficient point of production –label it A

c) Show an inefficient point of production – label it B

d) Show an infeasible point of production – label it C

( Click for Larger Image to see the proper graph, and points a,b,c)

e) In a separate graph, show how the frontier changes with improved economic growth.

f) In a separate graph, show how the frontier changes with decreased economic growth.

2) What 3 concepts are illustrated by the production possibilities frontier?

a) efficiency , equity, tradeoffs
b) efficiency, equity, opportunity costs
c) equity, tradeoffs, opportunity costs
d) efficiency, tradeoffs, opportunity costs


3) Circular flow diagram:

a) What does the inner loop represent?

ANS: flow of inputs and outputs

b) What does the outer loop represent?

ANS: flow of dollars

4) In what way do economists take a scientific approach to studying the economy?

they develop theories; they collect and analyze data to evaluate theories

5) Which of the following statements ( there may be more than 1 ) are propositions about which most economists agree? Hint: compare these statements with the ones in your text on page 35 (5th edition)or notes from lecture.

a) A minimum wage helps reduce poverty among young and unskilled workers

b) Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings

c) Corporations should be taxed if profits become excessive

d) The government should pass regulations to limit pollution and protect the environment

e) A minimum wage increases unemployment among young and unskilled workers

ans: b,e


1) What tradeoffs would be involved if society or government requires that firms reduce pollution?

-some firms may have to close
-reduced profits and incomes to the firms owners and employees
-the cost of reducing pollution may fall on some firms more than others, giving some firms a competitive advantage


-reduced pollution may lead to cleaner air and better health
-reduced pollution may reduce effects on the climate
-reduced pollution may improve water quality, biodiversity

2) Prices balance the marginal benefit of consuming a good with the marginal cost of supplying a good. Therefore a person’s willingness to pay for a good represents:

a) availability
b) corporate greed
c) profit
d) the marginal benefit that an extra unit of the good would provide for that person
Ans: D

3) Which statement best describes making rational decisions at the margin:

a) Making decisions that are associated with no marginal cost
b) Making only decisions that can easily be reversed
c) Making decisions only after comparing the marginal benefits and marginal costs
d) Only making decisions if the choices are certain
Ans: C

4) Define: see definitions in the text margins or the glossary in the back of the book

Market failure
Property Rights
Opportunity Cost
Market Economy
Marginal Changes

5) Explain two main causes of market failure and give an example of each.

1)Market Power: ability of a single person or small group to influence market prices. Ex: town with only 1 cable company.

2) Externality: the impact of one persons actions on the well being of a bystander. Ex: pollution

6) What are two method s of correcting an externality that we spoke about in class?

In the case of a negative externality, such as pollution, two methods of correction include pollution taxes, or assigning property rights such as in the form of tradable pollution permits.