Question 1

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

Accepted Answer

The true cost of a good includes both its money price and its opportunity cost, which is the value of the best alternative forgone. Therefore, the statement is false.

Question 2

The central planning approach fails to achieve an optimal resource allocation because of information and incentives problems.

Accepted Answer

Central planning approach involves the government controlling and allocating resources, which often results in misallocation of resources due to a lack of accurate information and incentives for efficient allocation.

Question 3

Futures markets are used for speculation and rarely for reducing risk.

Accepted Answer

Futures markets can be used for both speculation and risk reduction. While some participants use futures to try and profit from price movement, others use them to hedge against potential losses in their underlying assets.

Question 4

Ethanol is the active ingredient in alcoholic beverages, but it's also a good fuel that can be made from a variety of crops like corn or sugar cane. Show how each of the following events would affect the market demand and/or supply of ethanol, as well as the resulting effect on the price of ethanol. a. The price of oil skyrockets with sudden eruption of war in the Middle East. b. More parents are concerned about cavities in their children's teeth, resulting from eating candy bars. c. Alcoholic beverage consumption is declining over time due to increased health warnings.

Accepted Answer

The answer of Ethanol is the active ingredient in alcoholic...

Question 5

Speculators reduce price swings for goods, increasing society's welfare.

Accepted Answer

Speculators, who buy and sell goods hoping to make a profit, can reduce price swings by buying when prices are low and selling when prices are high. This can help to stabilize prices and prevent drastic fluctuations, which can benefit both producers and consumers. It can also increase overall welfare by ensuring a more stable market for goods.

Question 6

A futures contract can make a future price certain.

Accepted Answer

A futures contract allows parties to agree on a price for a particular commodity or financial instrument at a future date, making the future price certain.

Question 7

Explain what Adam Smith meant when he said that the market operates as if ―an invisible hand‖ is guiding the process.

Accepted Answer

The answer of Explain what Adam Smith meant when he...

Question 8

War is expected to break out in the Middle East. Use two separate supply and demand diagrams to illustrate (1) the current price of oil and (2) the future price of oil. Using the same two supply and demand diagrams, show how speculators affect the current price of oil and future price of oil.

Accepted Answer

The answer of War is expected to break out in...

Question 9

Many times in economic markets we see new firms drive old firms out of business with lower costs and better products. Are these ―business failures‖ also ―market failures‖? Explain why or why not.

Accepted Answer

The answer of Many times in economic markets we see...

Question 10

Explain why price controls may actually end up making consumers worse off in areas that have experienced natural disasters such as hurricanes.

Accepted Answer

The answer of Explain why price controls may actually end...

Question 11

During the 1973-1974 oil crisis, the U.S. government implemented price controls and other regulations in order to try and keep prices low. Were these policies were the best way to lower prices for consumers? What would have happened in the absence of these price controls?

Accepted Answer

The answer of During the 1973-1974 oil crisis, the U.S....

Question 12

Perhaps the biggest sign of the accuracy of the HSX market is the sale of its data to Hollywood studios eager to improve their predictions about future blockbusters.

Accepted Answer

The article states that Hollywood studios purchase data from HSX in order to improve their predictions about future blockbusters, which is a sign of the accuracy of the HSX market.

Question 13

A ―buy low, sell high‖ strategy allows the speculator to make a profit from differences in market prices.

Accepted Answer

A "buy low, sell high" strategy involves buying an asset at a low price and selling it at a higher price to make a profit. This is based on differences in market prices, which allows the speculator to earn a profit from the transaction.

Question 14

The great economic problem is to increase our limited resources to satisfy as many of our infinite wants as possible.

Accepted Answer

The answer of The great economic problem is to increase...

Question 15

Sales teams have little incentive to report low sales projections to their CEOs-predictions markets help to overcome this problem.

Accepted Answer

Predictions markets allow for anonymous and decentralized forecasting, making it more difficult for sales teams to provide inaccurate or overly optimistic projections. This leads to more accurate and reliable forecasting for company leaders.

Question 16

When the prices of necessities such as gas and bottled water rise as a result of a natural disaster, it is efficient for the government to impose price controls to keep suppliers from ―price gouging‖ consumers.

Accepted Answer

While it may seem like a good idea to prevent suppliers from taking advantage of consumers during a crisis, price controls can actually have negative consequences. By capping prices, the government may unintentionally cause shortages or reduce incentives for suppliers to provide goods, leading to further problems for consumers. Additionally, price controls can make it difficult for suppliers to cover their costs and may discourage investment in the affected area in the long term. It may be more effective for the government to provide relief or subsidies directly to consumers, rather than interfering with market prices.

Question 17

Suppose that war in the Middle East disrupts oil production, reducing the supply of oil by 20 percent. The central planner of a government decides to economize on oil. a. What should a central planner do to economize on oil? b. What information does a central planner have to collect in order to economize on oil? c. What may cause a central planner to fail to economize on oil?

Accepted Answer

The answer of Suppose that war in the Middle East...

Question 18

Prices provide little information about where resources should best be allocated in an economy.

Accepted Answer

Prices signal the scarcity of resources and the demand for goods and services, which in turn affects decision-making on production and consumption. Price changes can allocate resources to where they are needed most efficiently.

Question 19

What happens to the use of steel if there is a sudden decrease in its supply? In particular, explain how the new price of steel helps to ration its use.

Accepted Answer

The answer of What happens to the use of steel...

Question 20

An increase in the price of oil is also a signal to oil suppliers to invest more in exploration, look for alternatives, and to increase recycling.

Accepted Answer

An increase in the price of oil makes exploration and alternative sources more economically feasible, leading to increased investment in these areas. Additionally, it may also incentivize suppliers to focus on more efficient and sustainable production methods, such as recycling.

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