Mid-term1

Mid-term1 - ECON 1001 Mid-Term #1 Q1) When a market...

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ECON 1001 Mid-Term #1
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Q1) When a market equilibrium is achieved, A. those who are willing to pay the most for the good obtain it. B. government regulation will have succeeded. C. anyone who has the skills to produce the good sells some. D. shortages and surpluses become minor. E. anyone who is willing to pay anything for the good obtains it. Answer: A
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A simple illustration of market equilibrium : Price Quantity Demand Supply Q e P e
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Option B Is there any government regulations shown on the diagram? What happened if there are government interventions? (e.g. price ceiling or price floor, quotas?) The equilibrium is likely to be distorted, unless the regulations set by the government is ineffective So Option B is wrong.
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Option C: Anyone who has the skills to produce the good sells some. That means all the sellers of the product are selling some units in the market. Is this true? No!
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A simple illustration of market equilibrium : Price Quantity Demand Supply Q e P e Sellers of these units are not selling, because the cost of each unit is above the eq. price.
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Option D When equilibrium is attained, is there any surplus or shortage? No! At the equilibrium price, the quantity demanded under that price is equal to the quantity supplied. So Option D is not true.
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Option E: Anyone who is willing to pay anything for the good obtains it. Is it true? No! Those who are only willing to pay a price below P e will not be able to buy the good.
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A simple illustration of market equilibrium : Price Quantity Demand Supply Q e P e These quantities are not transacted because the prices people willing to pay is below P e .
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So, Options B, C, D and E are all wrong. Option A is the correct answer. People who are willing to pay a price equal to or larger than the equilibrium price can buy the good. Let us look at the Demand and Supply diagram.
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A simple illustration of market equilibrium : Price Quantity Demand Supply Q e P e Buyers of these units are willing to pay a price more than or equal to P e (but they only need to pay P e ).
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Q2) A regulated maximum price that is above the equilibrium price A. will lead to black markets. B. will lead to excess demand in the market. C. will lead to excess supply in the market. D. will have no effect on the market. E. Both (a) and (b) are true. Answer: D
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A regulated maximum price is also known as a price ceiling (P c ). Goods are not allowed to be sold for a price higher than the Price Ceiling. • Usually, P c is set lower than P e , the equilibrium price. • When P c < P e , Q d > Q s , and hence there will be a shortage.
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Price Quantity Demand Supply P e P c Regulated Max Price Qd Qs Shortage
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c > P e ? There will not be any effect on the market
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This note was uploaded on 10/02/2011 for the course ECON 1001 taught by Professor S.c during the Spring '10 term at HKU.

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Mid-term1 - ECON 1001 Mid-Term #1 Q1) When a market...

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