Price Control - ECO2013

A portion of a hypothetical newspaper article recounting the events surrounding a hurricane that hit the Central Florida area appears below. "Before the arrival of Hurricane Zelda, normal market operations of gasoline were evident. However, after the hurricane hit the area, local governments imposed price ceilings on gasoline. After three weeks of shortages with their long lines at the gas pumps, local governments removed the price ceilings and the gasoline market began to return to normal." Assuming that demand and supply did not change, which of the answer choices best describes the price of gasoline (1) before the hurricane, (2) just after the hurricane when price ceilings were imposed, and (3) after the removal of price ceilings?

$2.50, $1.75, $2.00

In December of 2018, the Orlando Sentinel reported that rent prices in the Orlando area are rising faster than in any other city in America. As a result, community activists begin collecting petition signatures to put a constitutional amendment on the ballot to create rent control laws. If this ballot initiative were to pass, which of the following events are likely to occur? Group of answer choices

- Property ownership will be less profitable, and therefore less new housing will be built. - Many apartment buildings become dilapidated. - Property owners cannot afford to maintain their buildings.

Which of the answer choices would likely result as a consequence of rent controls?

- Unimproved buildings and apartment complexes. - Limits on tenant mobility. - A reduction in the rate of construction of rental housing units

What are some ways businesses will adapt to a higher minimum wage over time?

- Use machinery instead of workers - Move their businesses to areas lower/ no minimum wage law - Reduce hours for workers

Suppose the government enacts a price ceiling on ice cream. Which of the following actions would ice cream producers take to maintain their profits under this price ceiling?

- Using cheaper ingredients to create the ice cream - Reducing the size of each carton

Binding or non-binding price ceiling?

A price ceiling above the equilibrium price - Non-binding Binding

Binding or non-binding price ceiling?

A price ceiling below the equilibrium price - Binding

Binding or non-binding price ceiling?

A price ceiling that has no influence on the market - Non-binding Binding

Binding or non-binding price ceiling?

A price ceiling that prevents supply and demand clearing the market - Binding

Which of the following observations would be consistent with the imposition of a binding price floor on a market?

A smaller quantity of the good is bought and sold after the price floor becomes effective.

If there is a shortage caused by price controls, what kind of illegal activity will likely take place?

Black market will develop to provide consumers with what they want at a higher price.

Most economists agree that there should be a higher minimum wage.

False

Price controls generally create positive economic conditions. They are able to compensate for unfair prices in certain markets.

False

Unlike price ceilings, price floors create very positive effects.

False

Which of the answer choices would be the LEAST likely result of a binding price ceiling imposed on the market for rental cars?

Free gasoline given to people as an incentive to a rent a car.

One economist has argued that rent control is "the best way to destroy a city, other than bombing." Why would an economist say this?

He fears that rent control will eliminate the incentive to maintain buildings, leading to a deterioration of the city.

Minimum wage laws in the United States have generally been non-binding and therefore do not affect the equilibrium price of labor. In this case, what is the purpose of implementing a minimum wage?

It reduces the unemployment rate.

Which of the following is the most likely explanation for the imposition of a price floor on the market for corn?

Sellers of corn, recognizing that the price floor is good for them, have pressured policymakers into imposing the price floor.

What would happen in the market for rental housing if the local government legally mandated rents that were below the current market price?

There would be a shortage of rental housing

Why are price floors implemented by governments?

They are a response to political pressure from suppliers to keep prices high.

There will be a surplus of 35,000 tickets.

What would occur if the government imposed a price ceiling of $8 on movie tickets?

The market would reach equilibrium. - a price floor is a legal minimum price. Here, the equilibrium price is $11 and is above the price floor, so equilibrium can be reached. This price floor is non-binding.

What would occur if the government imposed a price floor of $8 on movie tickets?

Price ceilings and price floors that are binding _____.

cause surpluses and shortages to persist since price cannot adjust to the market equilibrium price

If the government removes a binding price floor from a market, then the price received by sellers will _____.

decrease and the quantity transacted in the market will increase

A minimum wage that is set above a market's equilibrium wage will result in an _____

excess supply of labor, that is, unemployment

When a binding price ceiling is removed, we would expect the price of the good to ____

increase and the quantity demanded to decrease

If the government removes a binding price ceiling from a market, then the price received by sellers will _____.

increase and the quantity transacted in the market will increase

An increase in the Federal minimum wage to $7.25 per hour from $5.15 per hour, assuming that $7.25 is a binding price floor and that all other things remain constant, will _____.

increase the number of unemployed

Under rent control, tenants can expect ___

lower rent and lower quality housing

If the Federal government sets a minimum price for wheat at $5.00 per bushel when the equilibrium price is $4.50, then a _____.

permanent surplus will develop because the government established the minimum price at $5.00

Recently Stuyvesant Town and Peter Cooper Village in Manhattan were sold for redevelopment. These villages had been rent controlled, but now that these neighborhoods are no longer rent controlled, one would expect the _____.

rent to increase in those neighborhoods

Suppose the equilibrium price of oranges is $0.79, but the government takes steps to prevent the price from exceeding $0.60. The likely result will be a _____.

shortage of oranges as the price ceiling keeps the market from reaching equilibrium

To keep the price of gas from rising quickly after a hurricane, some governments impose ceilings on the price of gasoline. These price ceilings cause ______ in the gasoline market.

shortages