Question 1

Airline regulation from 1938 to 1978 was successful in keeping prices high because:

Accepted Answer

A)  it controlled price, but not entry into the airline market. 
B)  it controlled both price and entry into the airline market. 
C)  it listened to the requests of suppliers during this time at the expense of consumers. 
D)  of declining production costs. 
A)  it controlled price, but not entry into the airline market. 
B)  it controlled both price and entry into the airline market. 
C)  it listened to the requests of suppliers during this time at the expense of consumers. 
D)  of declining production costs.

Question 2

President Richard Nixon froze all prices and wages in 1971, which led to shortages of goods throughout the economy.

Accepted Answer

A) True 
 B)False

Question 3

Use the following to answer questions:
Figure: Losses from Price Ceilings  
-(Figure: Losses from Price Ceilings) Refer to the figure. A price ceiling of $1 causes lost consumer surplus equal to area ________, and lost producer surplus equal to area ________.

Accepted Answer

A)  c; e 
B)  bc; de 
C)  a; f 
D)  d; b 
A)  c; e 
B)  bc; de 
C)  a; f 
D)  d; b

Question 4

During the 1970s, the 11-tier oil production definitions came into play because of firms' attempts to bypass regulations and produce decontrolled oil.

Accepted Answer

A) True 
 B)False

Question 5

Deadweight loss is:

Accepted Answer

A)  necessary to ensure that resources are channeled to their highest-valued use. 
B)  the loss to the economy from firms going out of business due to competition. 
C)  usually offset by deadweight gains. 
D)  the total of lost consumer and producer surplus when not all mutually profitable gains from trade are exploited. 
A)  necessary to ensure that resources are channeled to their highest-valued use. 
B)  the loss to the economy from firms going out of business due to competition. 
C)  usually offset by deadweight gains. 
D)  the total of lost consumer and producer surplus when not all mutually profitable gains from trade are exploited.

Question 6

If price controls are so harmful, why would a country ever impose them?

Accepted Answer

A)  No one really knows. 
B)  Price controls are usually thought to be beneficial. 
C)  Politicians have strong incentives to respond to public opinion with price controls when prices increase sharply. 
D)  People usually see the consequences of price controls but think they will be a good policy. 
A)  No one really knows. 
B)  Price controls are usually thought to be beneficial. 
C)  Politicians have strong incentives to respond to public opinion with price controls when prices increase sharply. 
D)  People usually see the consequences of price controls but think they will be a good policy.

Question 7

Housing shortages caused by rent controls are larger in the long run because the supply of housing is more elastic in the long run.

Accepted Answer

A) True 
 B)False

Question 8

When the price of gasoline rose to $4 per gallon in the summer of 2008, many people were outraged at how gas companies were "price gouging" individuals, and called for price controls on gasoline. If the government had agreed to legally cap the price of gasoline, would this have lowered the cost to consumers? Explain.

Accepted Answer

No, this would not have decreased the to

Question 9

If a seller facing excess demand is unable to raise the price of the good due to a price ceiling, the seller might:

Accepted Answer

A)  increase the quantity supplied of the product. 
B)  decrease the price of the product. 
C)  increase the quality of the product. 
D)  decrease the level of service for that product. 
A)  increase the quantity supplied of the product. 
B)  decrease the price of the product. 
C)  increase the quality of the product. 
D)  decrease the level of service for that product.

Question 10

Which of these statements explains why price ceilings result in lost gains from trade?

Accepted Answer

A)  Buyers and sellers want to trade, but the threat of fines or jail time prevents them from doing so. 
B)  Sellers want to trade, but buyers prefer the lower prices. 
C)  Buyers want to trade, but sellers are indifferent at the lower prices. 
D)  Neither buyers nor sellers want to trade subject to a price ceiling resulting in lost gains from trade. 
A)  Buyers and sellers want to trade, but the threat of fines or jail time prevents them from doing so. 
B)  Sellers want to trade, but buyers prefer the lower prices. 
C)  Buyers want to trade, but sellers are indifferent at the lower prices. 
D)  Neither buyers nor sellers want to trade subject to a price ceiling resulting in lost gains from trade.

Question 11

A market with price ceilings fails to maximize all of the following EXCEPT:

Accepted Answer

A)  the gains from trade. 
B)  consumer surplus. 
C)  excess supply. 
D)  producer surplus. 
A)  the gains from trade. 
B)  consumer surplus. 
C)  excess supply. 
D)  producer surplus.

Question 12

Price ceilings create five important effects:

Accepted Answer

A)  shortages, reductions in product quality, wasteful lineups, a loss from gains to trade, and a misallocation of resources. 
B)  surpluses, increases in product quality, search costs, gains from trade, and resource attrition. 
C)  excess demand, long lines, poor service, efficiency, and arbitrage. 
D)  shortages, reduced time costs, low vacancy rates, blat, and deadweight loss. 
A)  shortages, reductions in product quality, wasteful lineups, a loss from gains to trade, and a misallocation of resources. 
B)  surpluses, increases in product quality, search costs, gains from trade, and resource attrition. 
C)  excess demand, long lines, poor service, efficiency, and arbitrage. 
D)  shortages, reduced time costs, low vacancy rates, blat, and deadweight loss.

Question 13

Figure: Minimum Wage for Country A   Refer to the figure. The deadweight loss from the $8 minimum wage is area:

Accepted Answer

A)  bc. 
B)  ad. 
C)  ce. 
D)  bd. 
A)  bc. 
B)  ad. 
C)  ce. 
D)  bd.

Question 14

Flexible prices ensure that:

Accepted Answer

A)  resources are allocated to their highest-valued uses. 
B)  suppliers will always profit from necessity goods. 
C)  self-interested individuals will not interfere with the efficiency of the market. 
D)  prices will always be minimized. 
A)  resources are allocated to their highest-valued uses. 
B)  suppliers will always profit from necessity goods. 
C)  self-interested individuals will not interfere with the efficiency of the market. 
D)  prices will always be minimized.

Question 15

If prices are not allowed to rise because of a price ceiling, then:

Accepted Answer

A)  suppliers have an incentive to provide a high level of customer service. 
B)  suppliers will compensate for the lower price by increasing the quality of their goods. 
C)  prices do not provide the correct information about consumers' valuation of the good. 
D)  a shortage will develop, but only temporarily until markets adjust to the lower prices. 
A)  suppliers have an incentive to provide a high level of customer service. 
B)  suppliers will compensate for the lower price by increasing the quality of their goods. 
C)  prices do not provide the correct information about consumers' valuation of the good. 
D)  a shortage will develop, but only temporarily until markets adjust to the lower prices.

Question 16

(Figure: Labor Market 3   Refer to the figure. In the diagram, a minimum wage of $7 causes a deadweight loss of:

Accepted Answer

A)  W + X. 
B)  X + Z. 
C)  V + Y. 
D)  Y + W. 
A)  W + X. 
B)  X + Z. 
C)  V + Y. 
D)  Y + W.

Question 17

Which statement(s) is TRUE?
I. Regulations that limit the rate of increase in rents are equally as inefficient as rent controls.
II. Rent regulations reduce the incentive for landlords to cut back on maintenance.
III. Regulations that limit the rate of increase in rents allow the price of rental housing to respond to market forces.

Accepted Answer

A)  I only 
B)  I and III only 
C)  I, II, and III 
D)  II and III only 
A)  I only 
B)  I and III only 
C)  I, II, and III 
D)  II and III only

Question 18

When an effective price ceiling causes a shortage, some of the buyers who value the good the most may not be able to get the good. Why does this occur?

Accepted Answer

A)  The highest-value users cannot outbid the lower-valued users and so the seller cannot distinguish between them. 
B)  The highest-value users are eliminated from the market due to the price ceiling. 
C)  The price ceiling causes the price to rise so high that even the highest-value users cannot afford the good. 
D)  The government purchases most of the goods. 
A)  The highest-value users cannot outbid the lower-valued users and so the seller cannot distinguish between them. 
B)  The highest-value users are eliminated from the market due to the price ceiling. 
C)  The price ceiling causes the price to rise so high that even the highest-value users cannot afford the good. 
D)  The government purchases most of the goods.

Question 19

In Ancient Egypt, the "Bronze Law" set maximum prices for wages, preventing them from rising above what rulers perceived as the minimum needed to survive. If this was 10¢ a day for a porter (someone who carries things short distances) and the market wage was 8¢ a day, which of the following would be a plausible consequence of this law?

Accepted Answer

A)  Porters would travel less quickly than they otherwise would. 
B)  Porters would transport items they normally would not. 
C)  Unemployment for porters would decrease. 
D)  Nothing unusual would happen. 
A)  Porters would travel less quickly than they otherwise would. 
B)  Porters would transport items they normally would not. 
C)  Unemployment for porters would decrease. 
D)  Nothing unusual would happen.

Question 20

When he was president, Richard Nixon froze all prices and wages in the United States.

Accepted Answer

A) True 
 B)False

Exam 8: Price Ceilings and Floors

Airline regulation from 1938 to 1978 was successful in keeping prices high because:

President Richard Nixon froze all prices and wages in 1971, which led to shortages of goods throughout the economy.

Use the following to answer questions: Figure: Losses from Price Ceilings -(Figure: Losses from Price Ceilings) Refer to the figure. A price ceiling of $1 causes lost consumer surplus equal to area ________, and lost producer surplus equal to area ________.

During the 1970s, the 11-tier oil production definitions came into play because of firms' attempts to bypass regulations and produce decontrolled oil.

Deadweight loss is:

If price controls are so harmful, why would a country ever impose them?

Housing shortages caused by rent controls are larger in the long run because the supply of housing is more elastic in the long run.

If a seller facing excess demand is unable to raise the price of the good due to a price ceiling, the seller might:

Which of these statements explains why price ceilings result in lost gains from trade?

A market with price ceilings fails to maximize all of the following EXCEPT:

Price ceilings create five important effects:

Figure: Minimum Wage for Country A Refer to the figure. The deadweight loss from the $8 minimum wage is area:

Flexible prices ensure that:

If prices are not allowed to rise because of a price ceiling, then:

(Figure: Labor Market 3 Refer to the figure. In the diagram, a minimum wage of $7 causes a deadweight loss of:

When an effective price ceiling causes a shortage, some of the buyers who value the good the most may not be able to get the good. Why does this occur?

When he was president, Richard Nixon froze all prices and wages in the United States.

The Big Ideas

The Power of Trade and Comparative

Supply and Demand

Equilibrium

Elasticity and Its Applications

Taxes and Subsidies

The Price System

International Trade

Externalities- When the Price Is Not Right

Costs and Profit Maximization Under Competition

Competition and the Invisible Hand

Monopoly

Price Discrimination

Oligopoly and Game Theory

Competing for Monopoly

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Managing Incentives

Stock Markets and Personal Finance

Price Discrimination

Consumer Choice

Filters

Use the following to answer questions: Figure: Losses from Price Ceilings -(Figure: Losses from Price Ceilings) Refer to the figure. A price ceiling of $1 causes lost consumer surplus equal to area , and lost producer surplus equal to area .