ECO 1104 Lecture Notes - Lecture 14: Opportunity Cost, Invisible Hand, Black Market
ECO 1104 Full Course Notes
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Look at the two tables below, which show, respectively, the willingness to pay and willingness to accept of buyers and sellers of bags of oranges. For the following questions, assume that the equilibrium price and quantity will depend on the indicated changes in supply and demand. Assume that the only market participants are those listed by name in the two tables.
| Consumers | Producers | |||||
| Person | Maximum Price Willing to Pay |
Actual Price (Equilibrium Price) |
Person | Minimum Acceptable Price | Actual Price (Equilibrium Price) |
|
| Bob | $16 | $10 | Carlos | $5 | $10 | |
| Barb | 14 | 10 | Courtney | 6 | 10 | |
| Bill | 13 | 10 | Chuck | 7 | 10 | |
| Bart | 12 | 10 | Cindy | 8 | 10 | |
| Brent | 11 | 10 | Craig | 9 | 10 | |
| Betty | 10 | 10 | Chad | 10 | 10 | |
a. Given the equilibrium price of $10, what is the equilibrium quantity given the data above?
Equilibrium quantity = ...... bag(s)
b. What if, instead of bags of oranges, the data in the two tables dealt with a public good like fireworks displays?
If all the buyers' free ride, what will be the quantity supplied by private sellers?
c. Assume that we are back to talking about bags of oranges (a private good), but that the government has decided that tossed orange peels impose a negative externality on the public that must be rectified by imposing a $3-per-bag tax on sellers.
What is the new equilibrium price? $
What is the new equilibrium quantity?
....bag(s)
If the new equilibrium quantity is the optimal quantity, by how many bags were oranges being overproduced before?
.....bag(s)
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 |
