MicroEconomics Chapter 4 Roger A. Arnold 10th edition self-test
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8 terms
Terms | Definitions |
|---|---|
 Why is there a need for a rationing device, whether it is price or something else? | A rationing device is necessary because scarcity exists. If scarcity did not exist, a rationing device would not be needed. |
| If price is not the rationing device used, then individuals won't have as sharp an incentive to produce. Explain. | If (dollar) price is the rationing device used, then individuals have an incentive to produce goods and services, sell them for money (for the dollar price), and then use the money to buy what they want. If another rationing device were used (say, first-come-first-service, or "need," etc.), then the incentive to produce would be dramatically dampened. Why produce a good if the only way you can "sell" it (i.e., ration the good) is by way of first-come-first-served. |
| What kind of information does price often transmit? | Price conveys information about the relative scarcity of a good. In the orange juice example, a rise in the price of orange juice transmitted information relating to the increased relative scarcity of orange juice due to a cold spell in Florida. |
| Do buyers prefer lower prices to higher prices? | Yes, if nothing else changes—that is, yes, ceteris paribus. If other things change, though, they may not. For example, if the government imposes an effective price ceiling on gasoline, Jamie may pay lower gas prices at the pump but have to wait in line to buy the gas (due to first-come-first-served rationing of the shortage). Whether Jamie is better off paying a higher price and not waiting in line or paying a lower price and waiting in line is not clear. The point, however, is that buyers don't necessarily prefer lower prices to higher prices unless everything else (quality, wait, service, etc.) stays the same. |
| "When there are long-lasting shortages, there are long lines of people waiting to buy goods. It follows that the shortages cause the long lines." Do you agree or disagree? Explain your answer. | Disagree. Both long-lasting shortages and long lines are caused by price ceilings. First, the price ceiling is imposed, creating the shortage; then the rationing device of first-come-first-served emerges because price isn't permitted to fully ration the good. Every day, shortages occur that don't cause long lines to form. Instead, buyers bid up price, output and price move to equilibrium, and there is no shortage. |
| Who might argue for a price ceiling? A price floor? | Buyers might argue for price ceilings on the goods they buy, especially if they don't know that price ceilings have some effects they may not like (e.g., fewer exchanges, first-come-first-served rationing devices, etc.). Sellers might argue for price floors on the goods they sell, especially if they expect their profits to rise. Employees might argue for a wage floor on the labor services they sell, especially if they don't know that they may lose their jobs or have their hours cut back as a result. |
| If the absolute (or money) price of good A is $40 and the absolute price of good B is $60, what is the relative price of each good? | 1A = ⅔B and 1B = 1.5A |
| Someone says, "The price of good X has risen; so good X is more expensive than it used to be." In what sense is this statement correct? In what sense is this statement either incorrect or misleading? | The statement is correct in the sense that good X has a higher money price than it used to have. It is misleading because a higher money price doesn't necessarily mean a higher relative price. For example, if the absolute (money) price of good X is $10 and the absolute price of good Y is $20, then the relative price of X is ½ units of Y. Now suppose the absolute price of X rises to $15 while the absolute price of Y rises to $60. The new relative price of X is now ¼ units of Y. In other words, the absolute price of X rises (from $10 to $15) while its relative price falls (from ½Y to ¼Y). Good X can become more expensive in money terms as it becomes cheaper in terms of other goods. |
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