Competitive Market Equilibrium and Failures Practice Quiz (16 questions)

Explanation

Supply is the quantity sellers are willing to sell or provide at a given price, including the resources producers offer for sale. The price sensitivity of essential, difficult-to-replace goods such as eggs or fuel concerns demand rather than supply, while consumer purchases and intended purchases describe demand.

Explanation

The law of supply links a higher price with a greater quantity supplied and a lower price with a smaller quantity supplied. Supply at a given price also depends on production costs, the stock of productive resources, natural hazards and expected demand; consumer income is not identified as a supply determinant, and natural hazards do not increase productive resources.

Explanation

Equilibrium price equalizes supply and demand. A surplus instead occurs when quantity supplied exceeds quantity demanded, so statements describing excess supply as equilibrium are incorrect.

Explanation

In perfect competition, flexible prices spontaneously balance supply and demand because individual buyers and sellers are price takers. Individual participants do not impose the market price, and perfect competition does not depend on seller control.

Explanation

Consumer surplus is the difference between a buyer’s maximum willingness to pay and the equilibrium price. The minimum selling price and gains above production cost define producer surplus, not consumer surplus.

Explanation

Producer surplus is the difference between the equilibrium price and the minimum price at which a producer would sell. The other statements describe consumer surplus or reverse the producer-surplus relationship.

Explanation

An exogenous shock is an external event or policy action that immediately changes supply or demand. Price adjustment is an internal market response, and exogenous shocks are often unpredictable rather than necessarily predictable.

Explanation

The increase in quantity supplied represents a positive supply shock, so the supply curve shifts to the right. It is not a shift of the demand curve to the left, and the event is not a positive demand shock.

Explanation

When supply is lower than demand, the market has a shortage, also called underproduction. When supply exceeds demand, it has a surplus or overproduction; underconsumption and overproduction are not interchangeable here.

Explanation

A surplus leads to lower prices, which increases demand and reduces supply until the two quantities become equal. The alternative statements reverse these adjustment effects or describe movement away from equilibrium.

Explanation

A soda tax increases the price paid by consumers and decreases the quantity exchanged. When the tax is not fully passed on, producers receive less per unit. The tax therefore does not leave the quantity unchanged or lower the price paid by consumers.

Explanation

Information asymmetry concerns incomplete information held by buyers or sellers and may involve goods, services, or exchange conditions. Transparency instead means both sides have the relevant information; identical information is not required for asymmetry, and transparency does not describe unequal knowledge.

Explanation

Adverse selection occurs before contracting when poorly informed buyers choose low-quality goods and high-quality sellers are discouraged. Behavioural changes after contracting describe moral hazard, including risk-taking encouraged by insurance.

Explanation

Moral hazard is a post-contract phenomenon in which an agent changes behaviour because the agent does not bear the full costs. Insurance may encourage risk-taking, whereas pre-contract selection of low-quality goods is adverse selection and full personal cost-bearing would reduce the mechanism described.

Explanation

Controls, sanctions, information, and prevention are all identified as public responses to information asymmetries. Relying on market prices without institutional action is not one of the listed approaches.

Explanation

Labour inspection may impose fines for undeclared or hidden work, protect workers' rights, and limit unfair competition. Its stated response is enforcement and sanctioning, not increasing insurance coverage for risky behaviour.