A Price is a Signal Wrapped up in an Incentive Practice Questions

Circa 1200 BCE, a decreasing supply of tin due to wars and the breakdown of trade led to a drastic increase in the price of bronze in the Middle East and Greece (tin being necessary for its production). It is around this time that blacksmiths developed iron- and steel-making techniques (as substitutes for bronze). What does the increasing price of bronze signal? *

a. It tells people that bronze is getting harder to find and its higher price will signal consumers to conserve it more or seek substitutes.

b. It tells people that there is a price bubble forming around bronze and that people are overvaluing the price of bronze.

c. It tells people that the wars in the Middle East and Greece are coming close to being resolved because of bronze scarcity.

d. It tells people to buy more bronze because it is going to be more valuable in the future.

How is the increasing price of bronze an incentive? *

a. Consumers will save more money by conserving bronze.

b. Consumers who switch to substitutes can save money.

c. Entrepreneurs can profit by developing new alternatives to bronze.

d. Entrepreneurs can profit by developing ways to recycle bronze.

e. All of the above.

Why do you think iron and steel became more common around the same time as the increase in price of bronze? *

a. An increase in the demand for bronze signals that people are wealthy enough to afford iron and steel.

b. An increase in the price of bronze encourages innovation to produce substitutes.

c. An increase in the price of a resources signals that it is too competitive to make a profit, so entrepreneurs seek other alternatives.

d. The introduction of iron and steel differentiates bronze for specific uses and therefore causes its price to increase.

After the development of iron, did the supply or demand for bronze shift? Which way did it shift? Why? *

a. The demand for bronze shifted to the left (down) because there was now a good substitute for bronze.

b. The demand for bronze shifted to the right (up) because there was now a good substitute for bronze.

c. The supply for bronze shifted to the right (down) because there was now a good substitute for bronze.

d. The supply for bronze shifted to the left (up) because the quantity demanded of bronze decreased.

One question that economics students often ask is “In a market with a lot of buyers and sellers, who sets the price of the good?” There are two possible correct answers to this question: “Everyone” and “No one.” a. What is meant by “Everyone?” *

a. In a market operating in a western democracy, everyone gets to vote on price controls and restrictions to ensure the market operates fairly.

b. In a market with many participants, each person’s actions push the supply or the demand just a little bit, so everyone has some small influence.

c. In a market with many suppliers and demanders, each person’s actions have a negligible effect on supply or the demand, so everyone has to work together to influence the market.

d. Everyone has to consume something.

b. What is meant by “No one?” *

a. No one person’s behavior can affect prices.

b. No one wants the equilibrium price. Everyone wants the lowest price possible.

c. There is too much information for suppliers to know how to set prices.

d. Nobody actually plans for a given price to be the equilibrium price.

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Practice Questions

A Price is a Signal Wrapped up in an Incentive Practice 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