No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Four: Supply 99 CHAPTER FOUR: QUESTIONS FOR REVIEW 1. What is meant by arbitrage? Why is arbitrage essential for a market economy? 2. People can do a wide variety of tasks, whereas some machines can only be used for one purpose. How does the fact that people are very flexible in what they can do relate to the opportunity cost of supply? 3. In 2010, Governor Chris Christie of New Jersey cancelled a proposed tunnel to NYC. View here. New Jersey had already spent $600 million. That money is called a ________. Why is that $600 million irrelevant to the decision to cancel the tunnel? 4. What economic concept causes the marginal cost curve to initially go down, and then what causes it ultimately to rise? 5. Draw a supply curve, with correct labeling of the axes. Now, assume that the EPA just decided to treat milk the same way as oil spills, increasing the costs of production of milk. What would happen to the supply curve of milk? Draw this change on your diagram. 6. Draw a supply curve for natural gas, with correct labeling of the axes. Hydraulic “fracking” is opening significant new supply of natural gas. Show the effect of this process on your supply of natural gas diagram. Now draw a supply curve for wind power. Show how the “fracking” technology will affect that supply curve. 7. Identify whether each of the following will result in a change in supply or a change in quantity supplied for the gasoline market. Draw each of these with an appropriate diagram. a. A discovery of huge new oil field off the coast of Israel. b. A hike in the minimum wage. c. A new refining process required by the EPA is significantly more expensive. d. The summer driving season hits, with driving expected to significantly increase. 8. Will the following tend to make the supply curve for hamburgers more inelastic or more elastic? a. As time progresses from the short run to the long run (say 5 years later) b. New technology allows customers to order hamburgers with touch screens and pay via debit card, reducing the number of employees needed at McDonalds and other fast food restaurants. 9. Define Market period, Short Run, and Long Run. Provide an example of each of these time periods.