Q1W10AnswersExplained

Q1W10AnswersExplained - January 29, 2010 Quiz 1 True-False...

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January 29, 2010 Quiz 1 True-False Questions 1. If a series of trades yields positive profits for each of the buyers and sellers participating in those trades, the trades result in an efficient outcome. Answer: False Think of the matchmaker demonstration we did in class or Problem 1.8 of homework 1. In both cases, we are trying to arrange trades to maximize the number of trades in which both parties to the trade have positive profit. Those arrangements are examples of a “series of trades yielding positive profits”. Yet, we showed that these arrangements did not maximize total profits and thus the outcomes of those trades are not efficient. Just because we have a series of profitable trades, the outcome does not necessarily maximize total profits. 2. The Law of Supply holds that a decrease in the price of a good will decrease the quantity of the good supplied. Answer: True The Law of Supply is stated on page 65 of Taylor: “The pattern that a higher price is associated with a greater quantity supplied is so common that economists have named it the law of supply.” If an increase in prices increases the quantity supplied, a decrease in price decreases that quantity. Supply curves are upward sloping. That’s the Law of Supply! 3. A supplier's reservation price for a good is the lowest price at which he or she is willing to sell the good. Answer: True A supplier’s reservation price is defined on page 17 of Bergstrom and Miller. That definition is precisely the statement above.
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4. Assume the supply curve for a good shifts in (less supplied at every price) and the demand curve for the good does not change. If the total revenue of suppliers falls as a result of this shift, then the demand for the good is inelastic. Answer: False Let’s start with the formula for the change in total revenue: q q p p R R Δ + , where R is total revenue ( pq ), p is price, and q is quantity. If supply shifts in, the equilibrium point is moving along the demand curve. Equilibrium quantity is decreasing, and equilibrium price is increasing. Which effect dominates? Is the percentage decrease in quantity greater than the percentage increase in price? Let’s look at the formula for price elasticity: p p q q E d = An inelastic demand curve means that this price elasticity is a number between zero and -1. Moving up the demand curve, the percentage decrease in quantity must be less than the percentage increase in price. The price effect dominates and price is increasing, so total revenue is increasing, too. So, an inelastic demand curve implies that total revenue increases, which contradicts that statement in the question.
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5. The facts that the price of a good is lower in November than July and that more of the good is sold in November than July is best explained by a shift in the supply curve of the good between November and July. Answer:
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Q1W10AnswersExplained - January 29, 2010 Quiz 1 True-False...

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