Information and Incentives Practices Questions

If a nation’s government made it impossible for inefficient firms to fail by giving them loans, cash grants, and other bailouts to stay in business, is that nation likely to be poorer or richer as a result of this strategy? (Hint: Steven Davis and John Haltiwanger. 1999. “Gross Job Flows.” In Handbook of Labor Economics (Amsterdam: North–Holland) found than in the United States, 60% of the increase in U.S. manufacturing efficiency was caused by people moving from weak firms to strong firms.) *

a. Richer.

b. Poorer.

Suppose a new invention comes along that makes it easier and much less expensive to recycle clothing: perhaps a new device about the size of a washing machine can bleach, re-weave, and re-dye cotton fabric to closely imitate any cotton item you see in a fashion magazine. Head into the laundry room, drop in a batch of old clothes, scan in a couple of pages from Vogue, and come back in an hour.

If you think of the “market for clothing” as the “market for new clothing,” does this shift the demand or the supply of clothing, and in which direction?

a. The supply of clothing shifts right: a rise in supply.

b. The supply of clothing shifts left: a fall in supply.

c. The demand for clothing shifts right: a rise in demand.

d. The demand for clothing shifts left: a fall in demand.

If you instead think of the “market for clothing” as the “market for clothing, whether it’s new or used,” does this shift the demand or supply of clothing, and in which direction? *

a. The supply of clothing shifts right: a rise in supply.

b. The supply of clothing shifts left: a fall in supply.

c. The demand for clothing shifts right: a rise in demand.

d. The demand for clothing shifts left: a fall in demand.

What happens to the price of new, unrecycled clothing? *

a. The price of new clothing increases.

b. The price of new clothing decreases.

c. The change in price direction depends on the size of the supply curve’s shift.

d. The price of new clothing will not change.

After this invention, will society’s scarce productive resources (machines, workers, retail space) flow toward the “new clothing” sector or away from it? (Note: You may think this theoretical question is fanciful but three-dimensional printers, which can create plastic or plaster prototypes of small items such as toys, cups, etc., have fallen dramatically in price. Every day, you’re getting just a bit closer to having your own personal Star Trek replicator.) *

a. Resources will flow toward the new clothing sector.

b. Resources will flow away from the new clothing sector.

c. Resource flows will remain unchanged.

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Practice Questions

Information and Incentives Practices Questions

Introduction

Supply, Demand, and Equilibrium

Elasticity and Its Applications

Taxes and Subsidies

The Price System

Price Ceilings and Price Floors

Trade

Externalities

Costs and Profit Maximization Under Competition

Competition and the Invisible Hand

Monopoly

Price Discrimination

Labor Markets

Public Goods and the Tragedy of the Commons

Asymmetric Information

Consumer Choice

Bonus Topics

Exam