Lecture 2 Quiz

Model Answers Submitted By Students

  1. In a free market, the price and quantity at which goods are sold are where _____ equals _______.“Supply equals demand.” (Instructor)
  2. Suppose the price demand curve is P = $20 – Q, where P is price and Q is quantity. Also suppose the price supply curve is P = $4 + Q. At what price and quantity will the good be sold?“The price will be $12, and the quantity is 8.” (Alyssa G.)
  3. What is the supply and demand for a non-scarce (i.e., free) good? What is the supply and demand for a good that cost $1 trillion dollars? (Note: no individual or company or even the U.S. government can afford to pay $1 trillion to buy a good).“By definition, the supply of a non-scarce good must always be higher than the demand for the good at any specified price.” (Eric J.)

    “… For the trillion dollar good, supply would be zero and demand would be zero ….” (Kirstin L.)

    “… The highest possible demand for a $1 trillion good is 0 currently. As inflation weakens our dollars, however, that number could rise into the millions or even billions.” (Michael N.)

  4. Suppose 1000 persons in a town each have the following weekly demands for gas, and the gas stations have the following weekly supplies: 

    GallonsDemand
    Price/gallonSupply
    Price/gallon

    10$2.50$.50

    20$2.00$.75

    30$1.00$1

    40$.75$1.50

    1. What is the price and overall quantity of gas sold each week?“1000 people are buying 30 gallons of gas at $1 a gallon (supply = demand). This adds up to a total of 30,000 gallons sold and a total of $30,000 in sales.” (Cara M.)
    2. Suppose Congress declares war and imposes a price control of $.75 per gallon. At what price and overall quantity will gas sell each week?“The demand will rise to 40,000 gallons, but supply will be cut back to only 20,000 gallons. So the price overall will be $0.75 per gallon and all 20,000 gallons will be sold. However, because the demand is greater than the supply, it will force a black market.” (Mary Rose B.)

      “… [T]here would be an undersupply of gas because supply would be 20,000 gallons and demand would be 40,000 gallons. The result would be 20,000 gallons sold for $.75 per gallon. (see chart 3)” (Tim S.)

     

  5. Suppose you went to see the opening of your favorite new movie, but it is sold out. However, there are four independent scalpers selling tickets outside. (A scalper is someone willing to resell his ticket, usually for a higher price.) You and three strangers are each willing to pay at most $15, $10, $9 and $8 for a ticket. The scalpers are initially willing to sell each of their tickets for at least $7, $8, $9, and $12. The eight of you get together and bargain, and then tickets are sold at a common price. What is the price and how many tickets sell at that price?“3 people will buy tickets for $9 apiece.” (Abby L.)

    C1: customer willing to pay $15. C2: customer willing to pay $10. C3: $9. C4: $8.

    S1: scalper willing to sell for $7. S2: scalper willing to sell for $8. S3: $9. S4: $12.

    “If C1, C2, and C3 buy tickets from S1, S2, and S3 for $9 each, everyone is happy, with the exception of C4 and S4 who end up leaving due to their unwillingness to spend more/sell for less.” (Lisa H.)

    “… [S]calping is illegal in New Jersey so I wouldn’t be in this situation anyway … the cost of possibly going to jail or the fine imposed would be too great to just want to see a movie. Not worth it!” (Sarah C.)

  6. Explain price discrimination. Is it a friend or foe of free enterprise?“Price discrimination is an attempt by a seller to capture additional money from buyers who are willing to pay more. This term may sound ugly but it is actually a friend in free enterprise.” (Anthony B.)

    “Price discrimination is when someone does not charge everyone equally. An example would be to charge $10 for a single person, $15 for a couple, and $20 for a family of 4. Price discrimination is a friend of free enterprise because it is allowing the sellers to charge whatever they want.” (Scott J.)

    “Price discrimination means selling the same good or service at different prices to different people. It is a friend of free enterprise as it maximizes profit without losing business, but it cannot coexist with resale of the same good or service.” (Chris J.)

    “Quite simply, perfect price discrimination allows the highest possible number of mutually beneficial transactions to occur in an economy.” (Eric J.)

  7. The demand curve for cash-only medical services depends on the alternatives, which consist of third-parties like insurance companies or the government paying for medical care. Third-party payers have been increasing costs for patients in the form of “co-pays”. Many patients now have to pay $20 as a “co-pay” when they see a doctor, even though they have insurance. What effect does an increase in “co-pay” have on the demand curve for cash-based medical services that disfavor or reject insurance as payment? Explain.“The demand curve will shift to the right because people will not want to pay an increased ‘co-pay’. [They will] opt for cash-based medical services.” (Alexandra S.)

    “An increase in co-pay would, even if it doesn’t exceed the price of the treatment, cause demand for cash-based medical services because people are already paying the insurance company and don’t want to pay extra.” (Brandon M.)

    “If the price for insurance is going up then the demand for insurance will be going down and thus the number of people buying insurance will go down. The price for cash-only medical services is going down in relation to the price of insurance so that demand for cash-only medical services is going to go up.” (Chris B.)

    “[As] the co-pay increases then the demand for cash-only medical services is going to go up. Because people will realize that they are paying more for insurance and a co-pay than they would at a cash-only doctor.” (Zack S.)

  8. It has been said that the only good governmental regulations are those that require disclosure of information by sellers to buyers. Do you agree? Explain.“I would agree that it is the only good government regulation because it is the only one that works the way it is supposed to.” (Joshua H.)

    “I agree that those regulations are among the only good governmental regulations. I agree because the buyer must still beware of the seller taking advantage of him, but can do so with more information than before.” (Patricia H.)

    “Caveat emptor. Buyer beware. This little phrase has been going around a long time. It’s going to take a lot more than just some governmental regulations to phase this phrase out of existence. … I believe it would be a good thing to make people tell the truth about a product. But I don’t think it’s really possible to do this because no matter what the government says, companies will always find a way to get around it.” (Sarah C.)

    “… I do not agree that any government regulations are good, and free enterprise is built on the premise of no government interference. So therefore, I do not agree with the above statement. Caveat emptor! And let the seller be truthful, without being forced to do so.” (Rebecca B.)

  9. Consider the supply and demand for workers (labor). What effect would the minimum wage have on the demand for employment of illegal aliens, assuming that they can be paid in ways that circumvent the minimum wage laws?“As the minimum wage goes up, the demand for employment for illegal aliens which are paid cash will also increase. This is because the employer can pay less for the same work and the illegal alien is happy to have any job and he won’t have to pay taxes.” (Matt P.)

    “The higher the minimum wage is, the higher the demand for low-cost labor.” (Sarah S.)

    “Unfortunately the demand for cheaper work would rise, because employers want to make more money.” (Kevin H.)

  10. Define “invisible hand” as best you can in your own words. What causes the “invisible hand”? Where would we be without it?”The invisible hand is an economic theory that states that people who are acting to help themselves inadvertently help others in the process. …” (Greg J.)

    “I believe that the invisible hand is caused by God — it is part of the genius of His creation. … No one needs to restrict the rights and liberties that have been gifted to mankind in order to attempt to do what god has already established through what we call the ‘invisible hand.’” (Sarah B.)

    “… The invisible hand ‘guides’ the process. It also enforces the thought of just concentrating on your own work, and not others. If you do, everything will turn out all right.” (Phyllis S.)

    “… Without the invisible hand we would have nothing, because the civilized world as we know it depends on the invisible hand to survive.” (Kris T.)

  11. How can misinformation or lack of information distort demand? Give an example. Do sellers have an incentive to mislead buyers?“Misinformation distorts demand by putting two products on the market: the real one and the one described by the seller. The buyer pays for the [second] but receives the [first] … [M]isinformation increases demand for a product by pretending that it is a better product that people want more and will pay more for.” (Joseph S.)

    “… Sellers do have an advantage. They can say kids eat free and it’s true but they fail to mention that it is only on Monday-Thursday. …” (Jessica H.)

    “Misinformation or lack of information can distort demand, because if consumers don’t know everything they should know about a product, then they might buy, even if it is dangerous for them. Two examples of this are cigarettes and abortions. … Sellers can have a big incentive to mislead buyers because if the buyers knew that information, then they might not purchase that product.” (Daniel L.)

    “… I think that most sellers will try to deceive buyers as long as they can get away with it.” (Chris R.)

  12. Suppose you were planning a dinner to raise money for charitable projects. You would invite a speaker and reserve a number of seats for dinner, before you know how many people will purchase tickets. Assume the meal will cost $30 apiece. What price would you set for (i) one person, (ii) a couple, (iii) children and (iv) a table of 10? Explain, mentioning price discrimination.“One person, $60. A couple, $100. A child, $40. Table of ten, $400. My price discrimination would be designed to encourage more than one person in all situations possible. …” (Charles D.)

    “For (i)- $100, (ii)-$160 (iii)-$60 (iv)-$700. It is necessary to charge less for people buying in bulk, thus the group of ten is priced cheaply, comparatively speaking. Children have to be less than adults, and a couple has to have a slight discount as well. The group to hit is the single adult, they aren’t going to think about high prices as much as a couple, or a group of people would. This is an example of price discrimination.” (Patricia H.)

    “… I would try to charge an average of $45 per person. I can’t do this exactly so I would charge $60 for one person, $100 for a couple, $40 for kids and $310 for a group of 10. …” (Ben S.)