ECON 1B03 Lecture Notes - Lecture 4: Market Power, Perfect Competition, Peanut Butter
ECON 1B03 Full Course Notes
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The market demand curve
a. slopes upward.
b. is found by vertically adding the individual demand curves.
c. represents the sum of the quantities demanded by all the buyers at each price of the good.
d. represents the sum of the prices that all the buyers are willing to pay for a given quantity of the good.
When we move along a given demand curve,
| a. | all nonprice determinants of demand are held constant. | |||||||||||||
| b. | only price is held constant. | |||||||||||||
| c. | all determinants of quantity demanded are held constant. | |||||||||||||
| d. income and price are held constant. When the price of a good or service changes,
|
1
The following table shows the market demand schedule and supply schedule for notebooks.
|
Price ($/unit) |
Quantity Demanded (units) |
Quantity Supplied (units) |
|
1 |
20 |
4 |
|
2 |
16 |
6 |
|
3 |
14 |
10 |
|
4 |
12 |
12 |
|
5 |
10 |
14 |
|
6 |
7 |
17 |
|
7 |
4 |
20 |
|
8 |
2 |
22 |
|
9 |
1 |
25 |
Refer to the table above. Assume that the market for notebooks is in equilibrium.
1. Which of the following is likely to happen if there is an increase in the school enrollment rate, everything else remaining unchanged?
A. Both the equilibrium price and quantity of notebooks decrease.
B. The equilibrium price and quantity remain unchanged.
C. Both the equilibrium price and quantity of notebooks increase.
D. The equilibrium price increases, but the equilibrium quantity of notebooks decreases.
2. A shortage occurs in a market when:
A.price is lower than the equilibrium price.
B. price is higher than the equilibrium price.
C. supply exceeds demand.
D. the marginal utility of consumption is negligible.
3. A change in the quantity demanded of a good is:
A. the outcome of a change in income.
B. the outcome of a change in tastes and preferences.
C. represented by a shift to a new demand curve.
D. represented by a movement along the demand curve.
4. The following table shows the demand schedules of three consumers of wine. Assume that these three buyers constitute the entire market.
|
PRICE ($/Bottle) |
Sandra's Demand (Bottles) |
David's Demand (Bottles) |
Mary's Demand (Bottles) |
|
â$8 |
2 |
10 |
|
|
â$6 |
14 |
15 |
18 |
|
â$4 |
23 |
24 |
|
|
â$2 |
24 |
27 |
28 |
Refer to the table above. If the market price of wine is $8/bottle, and the market demand for wine is 19 bottles, David's consumption of wine is:
A. 12 bottles.
B. 9 bottles.
C. 4 bottles.
D. 7 bottles.
5. Which of the following factors will NOT cause a shift in the demand for a good?
A. A change in the number of consumers
B. A change in the market price of the good
C. A change in tastes and preferences
D. A change in consumer incomes
6. Are all markets perfectly competitive?
A. No, there are other market types where firms have considerable power to control the price.
B. Yes, any economic system with a market structure is by definition perfectly competitive.
C. No, there are also command and control markets that are run by a central government.
D. No, in other types of markets, sellers offer identical goods and simply accept the market price.
7. Assume that a seller in a perfectly competitive market charges more than the equilibrium price. It is likely that this seller will:
A. increase his profit.
B. lose only a few buyers.
C. increase his sales.
D. lose almost all of his buyers.
8. The willingness to pay for a commodity:
A. increases as the consumption of the commodity increases.
B. is always less than the market price of the commodity.
C. decreases as the consumption of the commodity increases.
D. is always greater than the market price of the commodity.
9. Which of the following is likely to lead to a right shift in the supply curve of cotton?
A. An increase in labor productivity due to training programs
B. A rise in labor costs due to wage demands by labor unions
C. An increase in the price of cotton
D. A decrease in the price of cotton
10. The buyers of a good will want to purchase it as long as their willingness to pay for the good is:
A. equal to zero.
B. greater than or equal to the price.
C. greater than zero.
D. less than the price.
Considering the demand side of a market for a good, it is reasonable to expect that:
i. demand curves for a given good are identical between consumers
ii. demand curves for a given good differ between consumers
iii. an individual has identical demand curves for different goods
iv. an individual has different demand curves for different goods
| i |
| ii |
| iii |
| iv |
| i and iii |
| ii and iv |
Suppose the market demand curve for a good is represented by the linear equation Q = 60 - 0.75P. If the market price were to increase from P = $20 to P = $40, then holding all other factors constant:
| the quantity demanded would decrease by 10 units and total expenditures on the good would decrease by $400 |
| the quantity demanded would decrease by 15 units and total expenditures on the good would increase by $300 |
| the quantity demanded would decrease by 30 units and total expenditures on the good would increase by $1200 |
| the quantity demanded would increase by 20 units and total expenditures on the good would decrease by $800 |
| the quantity demanded would increase by 10 units and total expenditures on the good would increase by $100 |
| the quantity demanded would increase by 25 units and total expenditures on the good would increase by $1000 |
A perfectly competitive firms supply curve for a good identifies the:
i. minimum quantity supplied at each price, holding all other factors constant
ii. firms minimum willingness to accept for each incremental unit of the good (e.g., the first unit, second unit, etc.), holding all other factors constant
iii. maximum quantity supplied at each price, holding all other factors constant
iv. firms maximum willingness to accept for each incremental unit of the good (e.g., the first unit, second unit, etc.), holding all other factors constant
| i and ii |
| i and iv |
| ii and iii |
| iii and iv |
Considering the supply side of a market for a good, if a firms supply curve were vertical, then:
| the law of supply holds, and quantity supplied is completely insensitive to changes in price |
| the law of supply holds, and quantity supplied is highly sensitive to changes in price |
| the law of supply fails to hold, and quantity supplied is completely insensitive to changes in price |
| the law of supply fails to hold, and quantity supplied is highly sensitive to changes in price |
| none of the above |
The determinants of supply are:
i. factors other than price that will affect the quantity of a good or service a firm is willing and able to purchase
ii. factors that affect a producers maximum willingness-to-accept to produce various quantities of a good
iii. factors that affect a producers minimum willingness-to-accept to produce various quantities of a good
| i |
| ii |
| iii |
| i and ii |
| i and iii |
The market supply curve for a good is derived by:
i. horizontally summing the supply curves of the individual firms in the market
ii. vertically summing the supply curves of the individual firms in the market
iii. summing the quantity supplied by each firm at a given price and then repeating this over the range of prices
| i |
| ii |
| iii |
| i and ii |
| i and iii |
If the level of technology used in the production of a good improves, and assuming the quality of the good does not change, then:
i. more output may be obtained with a given amount of inputs compared to before the technological improvement
ii. a given amount of output may be obtained with fewer inputs compared to before the technological improvement
iii. the firm will increase its use of other inputs, such as the number of workers it employs
iv. market demand for the good will increase
| i |
| ii |
| iii |
| iv |
| i and ii |
| i, ii, and iii |
| i, ii, and iv |
| i, ii, iii, and iv |
Considering the market for gasoline, which of the following would result in an increase in market supply?
i. a decrease in the price of gasoline
ii. an improvement in oil extraction and refining technologies
iii. an increase in the wage rates paid to gasoline refinery workers
iv. a decrease in the price of crude oil, a key input used to produce gasoline
v. the imposition of a federal gasoline tax aimed a decreasing the emission of greenhouse gases
| i |
| ii |
| iii |
| iv |
| v |
| ii and iv |
| i, ii, and iv |
| i, ii, iii, and iv |
| i, ii, iii, iv and v |
Suppose a market has two identical sellers. If each sellers supply function is given by P = 20 + Q, then the market supply function is:
| P = 20 + 0.5Q |
| P = 20 + 2Q |
| P = 40 + Q |
| P = 40 + 2Q |
From the market framework discussed in class and the readings, it may be concluded that in order for a good to be exchanged between a seller and a buyer, it must be that:
| buyer maximum willingness-to-pay is greater than seller minimum willingness-to-accept |
| buyer maximum willingness-to-pay is greater than or equal to seller minimum willingness-to-accept |
| buyer minimum willingness-to-pay is greater than or equal to seller maximum willingness-to-accept |
| buyer minimum willingness-to-pay is greater than seller maximum willingness-to-accept |
If the market demand function is given by P = 80 - 0.3Q and the market supply is given by P = 20 + 0.1Q, then the equilibrium price and quantity are:
| P = $35 and Q = 150 |
| P = $65 and Q = 150 |
| P = $26 and Q = 60 |
| P = $28 and Q = 80 |
Of concern are the affects of sustained summer droughts on the domestic supply of wheat. Noting that wheat is a primary ingredient in the production of bread and that potatoes are a substitute for bread, if the supply of wheat declines then it is reasonable to expect:
| the price of wheat to fall, the supply of bread to increase, and the demand for potatoes to increase |
| the price of wheat to fall, the supply of bread to increase, and the demand for potatoes to decrease |
| the price of wheat to rise, the supply of bread to decrease, and the demand for potatoes to decrease |
| the price of wheat to rise, the supply of bread to decrease, and the demand for potatoes to increase |
| the price of wheat to rise, the supply of bread to increase, and the demand for potatoes to increase |
| the price of wheat to rise, the supply of bread to increase, and the demand for potatoes to decrease |
Suppose a perfectly competitive market is initially in equilibrium. If market demand and supply decrease simultaneously, then equilibrium:
| price will rise, but the equilibrium quantity may either rise, fall, or remain unchanged |
| quantity will rise, but the equilibrium price may either rise, fall, or remain unchanged |
| price will fall, but the equilibrium quantity may either rise, fall, or remain unchanged |
| quantity will fall, but the equilibrium price may either rise, fall, or remain unchanged |
Considering the demand side of a market for a good, the consumer surplus derived by an individual:
i. is the difference between the maximum amount the consumer is willing to pay on each unit and the minimum prices that producers are willing to accept
ii. is the difference between the minimum amount the consumer is willing to pay on each unit and the price he/she
actually pays
iii. is the difference between the maximum amount the consumer is willing to pay on each unit and the price he/she actually pays
iv. will decrease if price increases
| i |
| ii |
| iii |
| i and iv |
| ii and iv |
| iii and iv |
Suppose the market demand for a good is described by the equation P = 120 - 2Q. If a change in market supply results in price decreasing from P0 = $80 to P1 = $70, then the resulting change in consumer surplus is:
| $225 |
| $400 |
| $575 |
| $625 |
| $750 |
