Supply, Demand, and Market Equilibrium

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Questions and Answers

In a perfectly competitive market, how does asymmetric information between buyers and sellers regarding product quality most profoundly challenge the attainment of Pareto optimality, assuming rational expectations and no transaction costs?

It leads to adverse selection, causing the market to unravel as high-quality products are driven out, resulting in a suboptimal allocation where potential gains from trade are unrealized. (correct)
It disrupts the signaling mechanisms, preventing producers of high-quality goods from effectively differentiating their products and capturing the associated price premium, thereby reducing incentives for quality improvements.
It fosters moral hazard, inducing producers to reduce quality post-transaction, leading to ex-post regret among consumers and a contraction in market demand.
It necessitates costly monitoring and verification mechanisms, which introduce deadweight losses and distort resource allocation, moving the market away from the efficient equilibrium.

Consider a scenario where a negative externality, generated during the production of a good, is not internalized. How does this discrepancy between private and social costs distort resource allocation in a market operating under otherwise ideal conditions, assuming perfect information and costless bargaining?

It causes an under-allocation of resources to the production of the good, as producers face artificially low private costs and restrict output to maximize profits.
It leads to a redistribution of wealth from producers to consumers, with no effect on overall social welfare.
It results in an over-allocation of resources to the production of the good, leading to a Pareto-inefficient outcome where the marginal social cost exceeds the marginal social benefit. (correct)
It has no impact on resource allocation, as the market equilibrium remains efficient as long as private costs are minimized.

Assume a perfectly competitive market for widgets. If a technological innovation drastically reduces the marginal cost of producing widgets, what would be the most likely sequence of market adjustments, assuming constant demand elasticity and no barriers to entry?

The market experiences no change, as perfectly competitive markets are inherently resistant to technological shocks.
The supply curve shifts rightward, leading to a lower equilibrium price and a higher equilibrium quantity, with firms initially earning economic profits that are eroded over time due to new entrants. (correct)
The demand curve shifts rightward, leading to a higher equilibrium price and a higher equilibrium quantity, as consumers demand more widgets due to the lower production costs.
The supply curve shifts leftward, leading to a higher equilibrium price and a lower equilibrium quantity.

Consider a scenario where the government imposes a binding price ceiling on a commodity. Assuming a standard supply and demand framework, what is the most probable long-term consequence of this intervention, considering market dynamics and potential behavioral responses from both buyers and sellers?

A shortage of the commodity, as the artificially low price encourages consumption and discourages production, potentially leading to black markets and non-price rationing. (B) Signup and view all the answers

Suppose the government imposes a per-unit tax on the production of a good in a perfectly competitive market. How is the incidence of this tax distributed between consumers and producers, assuming that demand is relatively more elastic than supply?

Producers bear a larger share of the tax burden, as they are less responsive to price changes. (A) Signup and view all the answers

In a duopoly market with differentiated products, what is the likely outcome of a Cournot competition, assuming firms simultaneously choose output levels and aim to maximize profits, considering that demand functions are downward sloping and cost functions are upward sloping?

Firms will produce quantities that are higher than the monopoly output but lower than the perfectly competitive output, resulting in positive but lower profits than under collusion. (D) Signup and view all the answers

Assess the impact of a binding minimum wage on employment levels in a perfectly competitive labor market, considering different labor supply elasticities. Which scenario would result in the largest employment reduction?

Perfectly elastic labor supply. (D) Signup and view all the answers

In an economy with significant technological advancements, how would you expect the aggregate supply curve to shift in the long run, assuming that these advancements primarily affect the productivity of capital and labor?

Shift Right. (D) Signup and view all the answers

How will the imposition of a tariff on imported steel affect the domestic market for steel, assuming the domestic supply curve is upward-sloping and the demand curve is downward-sloping ?

Increase in the domestic price of steel and an increase in the quantity of domestic steel produced. (C) Signup and view all the answers

What is the equilibrium price when supply and demand are in balance?

When goods supplied are equal to what is being demanded. (B) Signup and view all the answers

Flashcards

Supply

The amount of a resource that is available.

Demand

The quantity of a resource that people want.