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Question: Explain the two main causes of market


Explain the two main causes of market failure and give an example of each.


> Suppose that your demand schedule for DVDs is as follows: a. Use the midpoint method to calculate your price elasticity of demand as the price of DVDs increases from $8 to $10 if (i) your income is $10,000 and (ii) your income is $12,000. b. Calculate

> Cups of coffee and donuts are complements. Both have inelastic demand. A hurricane destroys half the coffee bean crop. Use appropriately labeled diagrams to answer the following questions. a. What happens to the price of coffee beans? b. What happens to

> Make up an example of a monthly demand schedule for pizza and graph the implied demand curve. Give an example of something that would shift this demand curve, and briefly explain your reasoning. Would a change in the price of pizza shift this demand curv

> What is a market? • What are the characteristics of a perfectly competitive market?

> The government has decided that the free-market price of cheese is too low. a. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and demand diagram to show the effect of this policy on the price of cheese and the qu

> Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price

> On the appropriate diagram, show what happens to the market for pizza if the price of tomatoes rises. On a separate diagram, show what happens to the market for pizza if the price of hamburgers falls.

> Make up an example of a monthly supply schedule for pizza, and graph the implied supply curve. Give an example of something that would shift this supply curve, and briefly explain your reasoning. Would a change in the price of pizza shift this supply cur

> Does a change in consumers’ tastes lead to a movement along the demand curve or a shift in the demand curve? Does a change in price lead to a movement along the demand curve or a shift in the demand curve? Explain your answers.

> What are the demand schedule and the demand curve, and how are they related? Why does the demand curve slope downward?

> What is a competitive market? Briefly describe a type of market that is not perfectly competitive.

> Describe the role of prices in market economies.

> Beer and pizza are complements because they are often enjoyed together. When the price of beer rises, what happens to the supply, demand, quantity supplied, quantity demanded, and price in the market for pizza?

> Define the equilibrium of a market. Describe the forces that move a market toward its equilibrium.

> What are the supply schedule and the supply curve, and how are they related? Why does the supply curve slope upward?

> Lovers of classical music persuade Congress to impose a price ceiling of $40 per concert ticket. As a result of this policy, do more or fewer people attend classical music concerts? Explain.

> Suppose that the price of basketball tickets at your college is determined by market forces. Currently, the demand and supply schedules are as follows: a. Draw the demand and supply curves. What is unusual about this supply curve? Why might this be tru

> Because bagels and cream cheese are often eaten together, they are complements. a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What could be responsible for this pattern—a fall in the pric

> Consider the following events: Scientists reveal that eating oranges decreases the risk of diabetes, and at the same time, farmers use a new fertilizer that makes orange trees produce more oranges. Illustrate and explain what effect these changes have on

> The market for pizza has the following demand and supply schedules: a. Graph the demand and supply curves. What is the equilibrium price and quantity in this market? b. If the actual price in this market were above the equilibrium price, what would dri

> Ketchup is a complement (as well as a condiment) for hot dogs. If the price of hot dogs rises, what happens to the market for ketchup? For tomatoes? For tomato juice? For orange juice?

> Explain each of the following statements using supply-and-demand diagrams. a. “When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country.” b. “When the weather turns warm in New England every summer, the price

> In a supply-and-demand diagram, show how a tax on car buyers of $1,000 per car affects the quantity of cars sold and the price of cars. In another diagram, show how a tax on car sellers of $1,000 per car affects the quantity of cars sold and the price of

> Define price ceiling and price floor and give an example of each. Which leads to a shortage? Which leads to a surplus? Why?

> What mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium?

> Which causes a shortage of a good—a price ceiling or a price floor? Justify your answer with a graph.

> A subsidy is the opposite of a tax. With a $0.50 tax on the buyers of ice-cream cones, the government collects $0.50 for each cone purchased; with a $0.50 subsidy for the buyers of ice-cream cones, the government pays buyers $0.50 for each cone purchased

> “An increase in the demand for notebooks raises the quantity of notebooks demanded but not the quantity supplied.” Is this statement true or false? Explain.

> Maria can read 20 pages of economics in an hour. She can also read 50 pages of sociology in an hour. She spends 5 hours per day studying. a. Draw Maria’s production possibilities frontier for reading economics and sociology. b. What is Maria’s opportunit

> Are the following statements true or false? Explain in each case. a. “Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods.” b. “Certain very talented people have a comparative a

> Suppose that in a year an American worker can produce 100 shirts or 20 computers and a Chinese worker can produce 100 shirts or 10 computers. a. For each country, graph the production possibilities frontier. Suppose that without trade the workers in each

> A German worker takes 400 hours to produce a car and 2 hours to produce a case of wine. A French worker takes 600 hours to produce a car and X hours to produce a case of wine. a. For what values of X will gains from trade be possible? Explain. b. For wha

> The following table describes the production possibilities of two cities in the country of Baseballia: a. Without trade, what is the price of white socks (in terms of red socks) in Boston? What is the price in Chicago? b. Which city has an absolute adv

> Why do economists sometimes offer conflicting advice to policymakers?

> What is the difference between a positive and a normative statement? Give an example of each.

> Use a production possibilities frontier to describe the idea of “efficiency.”

> England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour. a. Which country has the abs

> Draw and explain a production possibilities frontier for an economy that produces milk and cookies. What happens to this frontier if disease kills half of the economy’s cows?

> Imagine a society that produces military goods and consumer goods, which we’ll call “guns” and “butter.” a. Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out sh

> Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities. a. Selena pays a storekeeper $1 for a quart of milk. b. Stuart earns $4.50 per h

> Classify each of the following statements as positive or normative. Explain. a. Society faces a short-run trade-off between inflation and unemployment. b. A reduction in the rate of money growth will reduce the rate of inflation. c. The Federal Reserve s

> Classify the following topics as relating to microeconomics or macroeconomics. a. a family’s decision about how much income to save b. the effect of government regulations on auto emissions c. the impact of higher national saving on economic growth d. a

> An economy consists of three workers: Larry, Moe, and Curly. Each works 10 hours a day and can produce two services: mowing lawns and washing cars. In an hour, Larry can either mow one lawn or wash one car; Moe can either mow one lawn or wash two cars; a

> The first principle of economics is that people face trade-offs. Use a production possibilities frontier to illustrate society’s trade-off between two “goods”—a clean environment and the quantity of industrial output. What do you suppose determines the s

> List and briefly explain the three principles that describe how the economy as a whole works.

> Why is a country better off not isolating itself from all other countries? Why do we have markets, and according to economists, what roles should government play in them?

> Give three examples of important trade-offs that you face in your life.

> Give an example of a positive statement and an example of a normative statement that somehow relates to your daily life. Name three parts of government that regularly rely on advice from economists.

> Water is necessary for life. Is the marginal benefit of a glass of water large or small?

> What items would you include to figure out the opportunity cost of a vacation to Disneyworld?

> Suppose Americans decide to save more of their incomes. If banks lend this extra saving to businesses, which use the funds to build new factories, how might this lead to faster growth in productivity? Who do you suppose benefits from the higher productiv

> In what ways is your standard of living different from that of your parents or grandparents when they were your age? Why have these changes occurred?

> Discuss each of the following statements from the standpoints of equality and efficiency. a. “Everyone in society should be guaranteed the best healthcare possible.” b. “When workers are laid off, they should be able to collect unemployment benefits unti

> Explain whether each of the following government activities is motivated by a concern about equality or a concern about efficiency. In the case of efficiency, discuss the type of market failure involved. a. regulating cable TV prices b. providing some po

> A 1996 bill reforming the federal government’s antipoverty programs limited many welfare recipients to only two years of benefits. a. How does this change affect the incentives for working? b. How might this change represent a trade-off between equality

> The Social Security system provides income for people over age 65. If a recipient of Social Security decides to work and earn some income, the amount received in Social Security benefits is typically reduced. a. How does the provision of Social Security

> The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your ne

> In what sense is economics like a science? Draw a production possibilities frontier for a society that produces food and clothing. Show an efficient point, an inefficient point, and an infeasible point. Show the effects of a drought. Define microeconom

> Why should policymakers think about incentives?

> You were planning to spend Saturday working at your part-time job, but a friend asks you to go skiing. What is the true cost of going skiing? Now suppose you had been planning to spend the day studying at the library. What is the cost of going skiing in

> You are trying to decide whether to take a vacation. Most of the costs of the vacation (airfare, hotel, and forgone wages) are measured in dollars, but the benefits of the vacation are psychological. How can you compare the benefits to the costs?

> Describe some of the trade-offs faced by each of the following: a. a family deciding whether to buy a new car b. a member of Congress deciding how much to spend on national parks c. a company president deciding whether to open a new factory d. a professo

> Draw an example of a production possibilities frontier for Robinson Crusoe, a shipwrecked sailor who spends his time gathering coconuts and catching fish. Does this frontier limit Crusoe’s consumption of coconuts and fish if he lives by himself? Does he

> Suppose that a skilled brain surgeon also happens to be the world’s fastest typist. Should she do her own typing or hire a secretary? Explain.

> Robinson Crusoe can gather 10 coconuts or catch 1 fish per hour. His friend Friday can gather 30 coconuts or catch 2 fish per hour. What is Crusoe’s opportunity cost of catching 1 fish? What is Friday’s? Who has an absolute advantage in catching fish? Wh

> Suppose that there are 10million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year. a. What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a bushel

> Pat and Kris are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris

> American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100million workers. a.

> How is economics a science?

> When component auditors are involved in the audit of group financial statements, the group auditors may issue a report that a. Refers to the component auditors, describes the extent of the component auditors’ work, and expresses an unmodified opinion. b.

> R. Wolfe became the new auditor for Royal Corporation, succeeding C. Mason, who audited the financial statements last year. Wolfe needs to report on Royal’s comparative financial statements and should disclose in the report an explanation about other aud

> Which of these situations would require auditors to append an emphasis-of-matter paragraph about consistency to an otherwise unmodified opinion? a. Entity changed its estimated allowance for uncollectible accounts receivable. b. Entity corrected a prior

> Assume that the auditors encountered the following separate situations when deciding on the report to issue for the current-year financial statements. 1. The auditors decided that sufficient appropriate evidence could not be obtained to complete the au

> Lando Corporation is a domestic company with two wholly owned subsidiaries. Michaels, CPA, has been engaged to audit the financial statements of the parent company and one of its subsidiaries and to serve as the group auditor. Thomas, CPA, has audited th

> D. Brady has been engaged as the auditor of Patriot Company and is currently planning the year-end physical inventory counts. Patriot is a retailer that holds significant inventories in its warehouses and stores in six regions across the United States. B

> Following are four possible scenarios that reflect scope limitations encountered by J. Bruce, CPA, during the audit of Weaver Inc. In all cases, assume that the ending balance in inventory is material to Weaver’s financial position, results of operations

> Which of the following statements is not true with respect to the audit examinations and reports for public and nonpublic entities? a. Audit examinations for nonpublic entities are based on user demand but based on legislative requirements for public ent

> The auditors determined that the entity is suffering financial difficulty and its going-concern status is seriously in doubt. Assuming that the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of

> Auditors found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options? a. Unmodified opinion or

> Situations in which auditors are unable to obtain sufficient appropriate evidence necessary to support their opinion on the entity’s financial statements are referred to as scope limitations. Required: a. Distinguish between client-imposed scope limitat

> If the opinion issued on prior years’ financial statements is no longer appropriate and financial statements are presented in comparative form, the auditors’ current report should a. Not reference the prior years’ financial statements. b. Indicate that t

> When financial statements are presented in comparative form and another firm audited the prior years’ financial statements (but the other firm’s report is not presented with the financial statements), the auditors’ report on the current-year financial st

> If the auditors decide to present separate reports on the entity’s financial statements and internal control over financial reporting, which of the following should be modified to refer to the other report? Report on Internal Contr

> Which of the following is not included in the standard (unmodified) report on the financial statements? a. An identification of the financial statements that were audited. b. A general description of an audit. c. An opinion that the financial statements

> Company A hired Samson & Delilah, CPAs, to audit the financial statements of Company B and deliver the report to Megabank. Who is the client? a. Megabank. b. Samson & Delilah. c. Company A. d. Company B.

> How is the auditors’ responsibility for expressing the opinion on financial statements disclosed in the standard (unmodified) report for a nonpublic company? a. Stated explicitly in the Auditor’s Responsibility section. b. Unstated but understood in the

> Which of the following is not required by generally accepted auditing standards? a. Written representations. b. Attorney letter. c. Management letter. d. Engagement letter.

> What actions should auditors take if evidence suggests that substantial doubt exists about the client’s ability to continue as a going concern?

> Under which of the following conditions can a disclaimer of opinion never be issued? a. The entity’s going-concern problems are highly material and pervasive. b. The entity does not allow the auditors access to evidence about important accounts. c. The a

> When auditors wish to issue an unmodified opinion but highlight that the entity changed its method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following? a. The intr

> What factors may indicate that substantial doubt exists about the client’s ability to continue as a going concern?

> The auditing standards regarding subsequently discovered facts refers to knowledge obtained after a. The date the fieldwork began. b. The date of the auditor’s report. c. The date of the financial statements. d. The date interim audit work was complete.

> For each of the following departures from GAAP, indicate the type of opinion that the auditors would issue as well as any modifications that would be made to the standard (unmodified) report. a. A departure that had an immaterial effect on the financial

> The concepts of materiality and pervasiveness are important to auditors in examinations of financial statements and expressions of opinion on these statements. Required: How will materiality influence auditors’ reporting decisions in the following circu

> In December of the current year, Williams Company changed its method of accounting for inventory and cost of goods sold from LIFO to FIFO. The account balances shown in the trial balance have already been recalculated and adjusted retroactively as requir

> On January 1, Graham Company purchased land (the site of a new building) for $100,000. Soon thereafter, the state highway department announced that a new feeder road would run next to the site. The effect was a dramatic increase in local property values.

> Gustav Humphreys (chair of the board) and Ingrid VanEns (vice president, finance) prepared the draft of the financial review section of the annual report. You are reviewing it for consistency with the audited financial statements. The draft contains the

> AOW is the group auditor for the December 31, 2017, consolidated financial statements of Ferguson Company and subsidiaries. However, component auditors perform the work on certain subsidiaries for the year under audit amounting to 29 percent of total ass

> AOW has completed the audit of the financial statements of Musgrave Company for the year ended December 31, 2017, and is now preparing the report. AOW has audited Musgrave’s financial statements for several years, but this year Musgrave delayed the start

> Pitts Company has experienced significant financial difficulty. Current liabilities exceed current assets by $1 million, cash has decreased to $10,000, the interest on the long-term debt has not been paid, and a customer has brought a lawsuit against Pit

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