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2.4.5 Test

An increase in price indicates that a good's scarcity has increased and that people must pay more for it. Price increases can be caused by either reduced input resources or increased demand for the good. When searching for a lost $5 bill, the money should be considered a sunk cost since it is already lost, so searching too long would be a waste of time. A minimum wage sets a price floor, creating a labor surplus. A price ceiling on loan interest rates creates a shortage of loans. Price controls like these will decrease both the quantity of labor exchanged and the quantity of borrowing. A change in demand shifts the demand curve, while a change in quantity demanded moves along the curve, affected by the good's own price.

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575 views

2.4.5 Test

An increase in price indicates that a good's scarcity has increased and that people must pay more for it. Price increases can be caused by either reduced input resources or increased demand for the good. When searching for a lost $5 bill, the money should be considered a sunk cost since it is already lost, so searching too long would be a waste of time. A minimum wage sets a price floor, creating a labor surplus. A price ceiling on loan interest rates creates a shortage of loans. Price controls like these will decrease both the quantity of labor exchanged and the quantity of borrowing. A change in demand shifts the demand curve, while a change in quantity demanded moves along the curve, affected by the good's own price.

Uploaded by

Dios TE Ama
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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1.

Price as a Rationing Tool

A. How does price ration scarce goods in a market economy? (3 points)

Price rations scarce goods in a market economy since scarce goods have
higher price than the goods that are less scarce, meaning that a large part
of the economy would not be able to pay for the scarce goods and only
those who are willing and able to pay for the goods would be able to get the
goods.

B. An increase in price provides information about the relative scarcity of a good. What
does it say? (3 points)

An increase in price says that the scarcity of goods has increased, and that
the value of the good has increased. This also means that people would
have to be willing to pay more for the good.

C. An increase in price may be caused by either of two things. What are those two
things? (3 points)

An increase in price may be caused by the scarcity of input resources, or


increase in the demand for the good.

2. Suppose you're absolutely confident that you've misplaced a $5 bill somewhere in


your neighborhood. How long will you search for that money? Explain your answer,
using the concept of sunk costs in your explanation. (6 points)

I wouldn't spend too long searching for the money because there is a very
low possibility that I will be able to find the bill. As the bill has already been
lost and there would be no way that the bill would be recovered, I would
have to consider the lost bill as a sunk cost that has already been paid and
not waste my time in searching for something that is already gone.

3. Supply and Demand


A. Assuming that coffee and tea are substitutes, show the effect that an increase in the
price of tea will have on the market for coffee. Use a graph to answer the question. (3
points)
B. Explain why a change in the price of coffee might not change the demand for coffee.
(3points)

The change in the price of coffee might not change the demand for coffee
because if the price of coffee is lower than the price of tea, people would
still demand for coffee rather than for tea.

C. In an attempt to protect the lifestyle of domestic coffee workers, the government


prohibits the importation of foreign coffee. Show the effect this has on the market for
domestically grown coffee, using a graph. (3 points)

D. In an attempt to protect the lifestyle of domestic coffee workers, the government


prohibits the importation of foreign coffee. Show The effect this has on the domestic
market for all coffee. (3 point)
4. Price Controls

A. Show in a diagram the effect of a law that imposes a minimum wage. What is the
effect of this law? (3 points)

The effect of this law is that a price floor is set, creating a surplus of labor.

B. Show in a diagram the effect of a law that sets a price ceiling on the interest rate that
may be charged on a loan. What effect does this law have on the market for loans? (3
points)

The effect of this law is that a price ceiling is set, creating a shortage of
loans.
C. What effect will these laws have on the quantity of labor exchanged and on the
quantity of borrowing done? (6 points)

The effect these laws have on the quantity of labor exchanged and on the
the quantity of borrowing done is that they both will decrease.

5. Demand
Explain the difference between a change in demand and a change in the quantity
demanded. You should be sure to mention what might cause each of these things and
how each would be graphed. (6 points)

The change in demand is shown in the graph as a shift in the demand curve,
being caused by the changes in income, population, tastes, prices of
substitute or complement goods, and expectations about the future. The
change in quantity demanded is shown in the graph as a movement along
the demand curve, being caused by the change in the price of a good.

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