Chapter 8: Price Ceilings and Floors

Economists blame the long lines at gasoline stations in the United States during the 1970s as well as the long delays in construction projects on: A. U.S. government regulation of gasoline prices. B. major oil companies operating in the U.S. C. the Organization of Petroleum Exporting Countries (OPEC). D. consumers who bought gas too frequently.

A. U.S. government regulation of gasoline prices.

Figure: Price Controls Reference: Ref 8-2 (Figure: Price Controls) Refer to the figure. Which of the following price controls would cause a shortage of 20 units of the good? A. a price ceiling of $6 B. a price ceiling of $10 C. a price floor of $6 D. a price floor of $10

A. a price ceiling of $6

Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers: A. higher quality. B. more quantity. C. more discount. D. various options.

A. higher quality.

The lower the price ceiling is relative to the market equilibrium price, the: A. larger the shortage. B. smaller the surplus. C. larger the surplus. D. smaller the shortage.

A. larger the shortage.

A deadweight loss is the total of: A. lost consumer and producer surplus when all mutually profitable gains from trade are not exploited. B. lost consumer and producer surplus when all mutually profitable gains from trade are exploited. C. consumer and producer surplus when all mutually profitable gains from trade are exploited. D. consumer and producer surplus when all mutually profitable gains from trade are not exploited.

A. lost consumer and producer surplus when all mutually profitable gains from trade are not exploited.

Under rent control tenants can expect: A. lower rent and lower quality housing. B. higher rent and a surplus of housing. C. lower rent and higher quality housing. D. higher rent and a shortage of housing.

A. lower rent and lower quality housing.

Figure: Price Ceiling Reference: Ref 8-1 (Figure: Price Ceiling) Refer to the figure. If a price ceiling were set at $12, there would be a: A. shortage of 0 units. B. surplus of 20 units. C. surplus of 40 units. D. shortage of 50 units.

A. shortage of 0 units.

Figure: Minimum Wage Reference: Ref 8-13 (Figure: Minimum Wage) Refer to the figure. How many workers are unemployed at a minimum wage of $8? A. 25 B. 20 C. 10 D. 35

B. 20

Figure: Price Floor Reference: Ref 8-14 (Figure: Price Floor) Refer to the figure. What are the lost gains from trade as a result of the imposition of the price floor? A. Area D B. Areas (C + F) C. Areas (B + E) D. Areas (B + C)

B. Areas ( C + F)

What happened as a result of the elimination of price controls on oil and gasoline in 1981? A. The shortage of gasoline was eliminated, but it took several years. B. The shortage of gasoline was eliminated nearly overnight. C. The price of oil increased dramatically, and stayed high until the early 1990s. D. The supply of gas and oil declined.

B. The shortage of gasoline was eliminated nearly overnight.

A price floor is: A. a maximum price allowed by law. B. a minimum price allowed by law. C. a tool used to increase government revenues. D. able to produce an efficient outcome.

B. a minimum price allowed by law.

Economists call the maximum legal price a price ceiling because the price: A. cannot legally go lower than the ceiling. B. cannot legally go higher than the ceiling. C. must match the legally established ceiling price. D. All of the answers are correct.

B. cannot legally go higher than the ceiling.

A legal maximum price at which a good can be sold is a price: A. support. B. ceiling. C. stabilization. D. floor.

B. ceiling.

Price ceilings reduce quality because: A. buyers are willing to accept lower quality of goods with lower prices. B. facing excess demand sellers cannot raise prices to increase profit. C. the law would mandate the quality of goods to match the price of the goods. D. None of the answers is correct.

B. facing excess demand sellers cannot raise prices to increase profit.

Rent controls are: A. quantity freezes on rental housing. B. price ceilings on rental housing. C. quality freezes on rental housing. D. price floors on rental housing.

B. price ceilings on rental housing.

An alternative to rent controls that increases the quantity of housing and targets consumers that need low-cost rental property is: A. not available. B. vouchers. C. tax credits. D. subsidies to landlords

B. vouchers.

Figure: Losses from Price Ceilings Reference: Ref 8-7 (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 ________. A. bc; de B. a; f C. c; e D. d; b

C. c; e

When the minimum price that can be legally charged is above the market price, we say there is a price: A. stability. B. ceiling. C. floor. D. support.

C. floor.

A price ceiling is a(n): A. legally established minimum price that can be charged for a good. B. illegally established maximum price that can be charged for a good. C. legally established maximum price that can be charged for a good. D. illegally established minimum price that can be charged for a good.

C. legally established maximum price that can be charged for a good.

Rent controls are: A. quantity freezes on rental housing. B. price floors on rental housing. C. price ceilings on rental housing. D. quality freezes on rental housing.

C. price ceilings on rental housing.

The minimum wage is an example of a(n): A. wage subsidy. B. price ceiling. C. price floor. D. efficient policy.

C. price floor.

The Federal minimum wage causes unemployment mostly among: A. middle-class workers. B. highly skilled workers. C. young unskilled workers. D. college graduates.

C. young unskilled workers.

Because of government price controls, a business must now sell soft-serve ice cream at half its original price. This business might respond by: A. offering smaller servings of ice cream. B. skimping on toppings of nuts, fudge, and cherries. C. reducing hours of operation. D. All of the answers are correct.

D. All of the answers are correct.

If price controls are so harmful, why would a country ever impose them? A. No one really knows. B. People usually see the consequences of price controls but think they will be a good policy. C. Price controls are usually thought to be beneficial. D. Politicians have strong incentives to respond to the public when prices increase sharply.

D. Politicians have strong incentives to respond to the public when prices increase sharply.

Over time, housing shortages caused by rent control ______ because the supply of housing is ______ elastic in the long run. A. decrease; less B. increase; less C. decrease; more D. increase; more

D. increase; more

A deadweight loss is the total of: A. lost consumer and producer surplus when all mutually profitable gains from trade are exploited. B. consumer and producer surplus when all mutually profitable gains from trade are exploited. C. consumer and producer surplus when all mutually profitable gains from trade are not exploited. D. lost consumer and producer surplus when all mutually profitable gains from trade are not exploited.

D. lost consumer and producer surplus when all mutually profitable gains from trade are not exploited.

A price ceiling creates a ________ when it is set ________. A. shortage; above the equilibrium price B. surplus; below the equilibrium price C. surplus; above the equilibrium price D. shortage; below the equilibrium price

D. shortage; below the equilibrium price

Price floors would create all of the following effects EXCEPT: A. surpluses. B. misallocation of resources. C. deadweight loss. D. wasteful decreases in product quality.

D. wasteful decreases in product quality.

A price floor causes: A. a shortage. B. excess demand. C. a surplus. D. quantity demanded to exceed quantity supplied.

C. a surplus.

True or False: Most economists favor price controls as a way of allocating resources.

False