Question

If the market price is above the equilibrium price:

A) A shortage will occur and producers will produce more and lower prices

B) A surplus will occur and producers will produce less and lower prices

C) A surplus will result and consumers will bid prices up

D) Producers will make extremely high profits

A product market is in equilibrium:

A) when there is no surplus of the product.

B) when there is no shortage of the product.

C) when consumers want to buy more of the product than producers offer for sale.

D) when the quantity demanded equals the quantity supplied

The circular-flow model demonstrates how firms buy resources from one-another:

A) True

B) False

Absolute advantage is based on opportunity cost:

A) True

B) False

Answer 1

1.

Since the price floor is the legal minimum price which can be charged and it is set above the equilibrium price. It leads surplus of outputs.

So when the price floor is set above the equilibrium price, only then it is effective but when it is set either below the equilibrium price or at the equilibrium price, then it will be ineffective. So there will be no unintended inventory and market gets cleared.

Hence it can be said that if the market price is above the equilibrium price a surplus will occur and producers will produce less and lower prices.

Hence option B is the correct answer.

2.

A product market will said be in equilibrium when the quantity demanded equals the quantity supplied.

Hence option D is the correct answer.

3.

In simple circular flow diagram, households supply labor to firms and government and purchase government bonds. It means that in the simple circular flow diagram households receives wages for labor supply and interest for holding bonds and transfer payment.

Hence it can be said that the given statement about the circular flow is not correct. ‘circular-flow model demonstrates how firms buy resources from one-another’

Hence the given statement is false.

Hence option B is the correct answer.

4.

The opportunity costs can be defined as the lost units of output of other goods for producing an additional unit of output of a good. A country has comparative advantage in the production of that good in which it has lower opportunity cost.

With the comparative advantage each country produces maximum goods by using its available resources efficiently. Hence total goods produced due to comparative advantage will be greater than the situation when every country produces every goods by using its resources inefficiently

Since absolute advantage can be defined as the ability of a party to produce a greater quantity of a goods or services compare to its rivals by using the same amount of resources.

Absolute advantage is based on opportunity cost:

Hence the above statement is false.

Hence option B is the correct answer.