econ CH 8 quiz

In New York City, some apartments are under strict rent control, while others are not. This is a theme in many novels and movies about New York, including Bonfire of the Vanities and When Harry Met Sally. One predictable side effect of rent control is the creation of a black market. Let's think about whether it's a good idea to allow this black market to exist. Harry is lucky enough to get a rent-controlled apartment for $300 per month. The market rent on such an apartment is $3,000 per month. Harry himself values the apartment at $2,000 per month, and he'd be quite happy with a regular, $2,000-per-month New York apartment. If he stays in the apartment, how much consumer surplus does he enjoy?

$1,700

Let's count the value of lost gains from trade in a regulated market. The government decides it wants to make basic bicycles more affordable, so it passes a law requiring that all one-speed bicycles sell for $30, well below the market price. Use the table below to calculate the lost gains from trade. Assume that the supply and demand curves are straight lines. What is the value of the sum of lost consumer surplus and lost producer surplus?

$2,500

During a crisis such as Hurricane Katrina, governments often make it illegal to raise the price of emergency items like flashlights and bottled water. In practice, this means that these items get sold on a first-come, first-served basis. If a person has a flashlight that she values at $5, but its price on the black market is $40, what gains from trade are lost if the government shuts down the black market?

$35

If the demand and supply curves are as in the figure below, then what would consumer surplus be if the quantity supplied were 1,000 but there were no price controls?

$5,000

Let's count the value of lost gains from trade in a regulated market. The government decides it wants to make basic bicycles more affordable, so it passes a law requiring that all one-speed bicycles sell for $30, well below the market price. Use the figure below to calculate the lost gains from trade. Assume that the supply and demand curves are straight lines. If people have to wait in line to purchase bicycles, what is the total value of wasted time in the price-controlled market?

$5,000

Let's measure consumer surplus if the government imposes price controls and goods end up being randomly allocated among those consumers willing to pay the controlled price. If the demand and supply curves are as in the figure below, then what is consumer surplus under the price control?

$50,000

If the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price, what would you expect to happen to the quality of bread?

Bread quality will fall

In the late 1990s, the town of Santa Monica, California, made it illegal for banks to charge people ATM fees. As you probably know, it's almost always free to use your own bank's ATMs, but there's usually a fee charged when you use another bank's ATM. (Source: "The War on ATM Fees," Time, November 29, 1999.) As soon as Santa Monica passed this law, Bank of America stopped allowing customers from other banks to use their ATMs. In bank jargon, Bank of America banned "out-of-network" ATM use. In fact, this ban only lasted for a few days, after which a judge allowed banks to continue to charge fees while awaiting a full court hearing on the issue. Eventually, the court declared the fee ban illegal under federal law. But let's imagine the effect of a full ban on out-of-network fees. What is the amount of producer and consumer surplus in the out-of-network ATM market in Santa Monica after the ban?

Consumer surplus is $0 and producer surplus is $0.

Consider the figure above. In this market, supply is more elastic, and thus more flexible, in the long run. In other words, in the long run, landlords and homebuilders can find something else to do for a living. In a price-controlled market like this one, when will consumer surplus be larger: in the short run or in the long run? Do rent controls hurt landlords and homebuilders more in the short run or in the long run?

Consumer surplus is larger and rent controls hurt producers more in the short run.

If the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price, what would happen to consumer surplus if people must wait in line to get bread at the controlled price?

Consumer surplus will fall.

In New York City, some apartments are under strict rent control, while others are not. This is a theme in many novels and movies about New York, including Bonfire of the Vanities and When Harry Met Sally. One predictable side effect of rent control is the creation of a black market. Let's think about whether it's a good idea to allow this black market to exist. Harry is lucky enough to get a rent-controlled apartment for $300 per month. The market rent on such an apartment is $3,000 per month. Harry himself values the apartment at $2,000 per month, and he'd be quite happy with a regular, $2,000-per-month New York apartment. If Harry illegally subleases his apartment to Sally on the black market for $2,500 per month and instead rents a $2,000 apartment, is he better off or worse off than if he obeyed the law? By how much?

He would be $500 better off.

Labor unions are some of the strongest proponents of the minimum wage. Yet in 2008, the median full-time union member earned $886 per week, an average of more than $22 per hour. Therefore, a rise in the minimum wage doesn't directly raise the wage of many union workers. So why do unions support minimum wage laws?

High-skilled workers and low-skilled workers are substitutes. Thus, if the wages of low-skilled workers rise, the demand for high-skilled workers will go up and the wages of high-skilled workers will go up.

In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In an almost identical town of Meterville, parking costs $5 per hour. Where will it be easier to find parking: in Freedonia or Meterville? Which town will attract shoppers with higher incomes?

It will be easier to find parking in Meterville and Meterville will attract higher-income shoppers.

If a government decides to make health insurance affordable by requiring all health insurance companies to cut their prices by 30%, what will probably happen to the number of people covered by health insurance?

It will go down because insurance companies will only sell insurance to healthy people now that the rates are set at lower levels. The quantity of coverage supplied will decrease.

Which of the following best describes when a price ceiling is effective in keeping the actual market price below the equilibrium market price?

Quantity supplied is less than quantity demanded.

Is the minimum wage a "price ceiling" or a "price floor?" What about rent control?

The minimum wage is a price floor, while rent control is a price ceiling.

In rich countries, governments almost always set the fares for taxi rides. The prices for taxi rides are the same in safe neighborhoods and in dangerous neighborhoods. Because of this, it is generally easier to find a cab in safe neighborhoods. If these taxi price controls were ended, what would probably happen to the price and quantity of cab rides in dangerous neighborhoods?

The price and quantity would both rise

When the United States had price controls on oil and gasoline, some parts of the United States had plenty of heating oil while other states had long lines for heating oil. As in the chapter, let's assume that winter oil demand is higher in New Jersey than in California. If there had been no price controls, what would have happened to the prices of heating oil in New Jersey and in California? And how would "greedy businesspeople" have responded to these price differences?

The price of oil would have been higher in New Jersey and producers would have responded by sending more oil to New Jersey

President Jimmy Carter not only deregulated airline prices, he also deregulated much of the trucking industry as well. Trucks carry almost all of the consumer goods that you purchase, so almost every time you purchase something, you're paying money to a trucking company. Based on what happened in the airline industry after prices were deregulated, what do you think happened in the trucking industry after deregulation?

The price of trucking services fell, truckers earned less money, and consumers saved a lot of money.

If the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price, what would happen to the quantity supplied of bread?

The quantity supplied will fall.

Suppose you're doing some history research on shoe production in ancient Rome during the reign of the famous Emperor Diocletian. Your records tell you how many shoes were produced each year in the Roman Empire, but it doesn't tell you the price of shoes. You find a document that says that in the year 301, Emperor Diocletian issued an "Edict on Prices," but you don't know whether he imposed price ceilings, price floors, or subsidies—your Latin is a little rusty. However, you can clearly tell from the documents that the number of shoes actually sold in markets fell dramatically, and that both potential shoe sellers and potential shoe buyers were unhappy with the edict. With the information given, can you tell what Diocletian imposed? (Yes, there really was an Edict of Diocletian.)

The type of price control cannot be determined from the information given.

In the 1970s, AirCal and Pacific Southwest Airlines flew only within California. At that time, federal price floors didn't apply to flights within just one state. A major route for these airlines was flying from San Francisco to Los Angeles, a distance of 350 miles. This is about the same distance as from Chicago, Illinois, to Cleveland, Ohio. How do you think meals on AirCal flights compared with those on flights from Chicago to Cleveland?

Their meals would have been worse

The Canadian government has wage controls for medical doctors. To keep things simple, let's assume that they set one wage for all doctors: $100,000 per year. It takes about six years to become a general practitioner or a pediatrician, but it takes about eight or nine years to become a specialist like a gynecologist, surgeon, or ophthalmologist. (Note: The actual Canadian system allows specialists to earn a bit more than general practitioners, but the difference isn't big enough to matter.) What do you suppose the situation is in the Canadian health system?

There are lots of general practitioners and pediatricians, but few specialists.

Suppose that the quantity demanded and quantity supplied in the market for milk is as follows: If the government places a price ceiling of $2 on milk, will there be a shortage or surplus of milk? How large will it be? How many gallons of milk will be sold?

There will be a shortage of 2,100; 2,000 units of milk will actually be sold.

In the market depicted below there is either a price ceiling or a price floor— surprisingly, it doesn't matter which one it is: Whether it's an $80 price floor or a $30 price ceiling, the chart looks the same. In the chart, there's a rectangle labeled A and a triangle labeled B. Which of the following best describes these two areas?

Triangle B represents value lost from the "deals that don't get made." Rectangle A represents the value lost in the "deals that do get made."

How do U.S. business owners change their behavior when the minimum wage rises? How does this affect teenagers?

When the minimum wage rises, business owners hire fewer low-skilled, teenage workers and conditions get worse for teenage workers.

How does the free market eliminate a shortage?

by causing the price to rise

Suppose that the quantity demanded and quantity supplied in the market for milk is as follows: What is the equilibrium price and quantity of milk?

price = $3; quantity = 3,500

President Jimmy Carter not only deregulated airline prices, he also deregulated much of the trucking industry as well. Trucks carry almost all of the consumer goods that you purchase, so almost every time you purchase something, you're paying money to a trucking company. Who do you think asked Congress and the President to keep price floors for trucking in place?

the trucking companies