Market types

1.Define scarcity. Provide examples of goods that are not scarce.

2.How does Adam Smith’s concept of the invisible hand explain why markets move toward equilibrium? Do market participants need to know about the invisible hand for it to function? Explain your answer.

3.What is the difference between a positive statement and a normative statement? Determine whether each of the following statements is positive or normative.

The minimum wage creates unemployment among young and unskilled workers.

The minimum wage ought to be abolished.

If the price of a product in a market decreases and other things remain equal, quantity demanded will increase.

A little bit of inflation is worse for society than a little bit of unemployment.

There is a trade-off between inflation and unemployment in the short run.

If consumer income increases and other things remain equal, the demand for automobiles will increase.

The U.S. income distribution is not equitable.

U.S. workers deserve more liberal unemployment benefits.

If interest rates increase, investment will decrease.

If welfare benefits were reduced, the country would be better off.

4. Gary and Diane must prepare a presentation. As part of their presentation, they must do a series of calculations and prepare 50 PowerPoint slides. It would take Gary 10 hours to do the required calculation and 10 hours to prepare the slides. It would take Diane 12 hours to do the calculations and 20 hours to prepare the slides.

How much time would it take the two to complete the project if they divide the calculations equally and the slides equally?

How much time would it take the two to complete the project if they use comparative advantage and specialize in calculating or preparing slides?

If Diane and Gary have the same opportunity cost of $5 per hour, is there a better solution than for each to specialize in calculating or preparing slides?

5. Thoroughly describe the characteristics of each of the following market types. Give an example of a firm in each market type and explain how it meets the criteria for that market type.

Perfect competition



Monopolistic competition

6.The government decides that eating ice cream is a socially desirable activity and passes a law giving consumers 50 cents for each ice cream cone they eat. What is likely to happen in the marketplace once this policy is in effect? What are consumers likely to do? How are suppliers likely to respond?


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