Econ 25 Ch. 4 Quiz

Using the following table, calculate total consumer surplus for Beanie, Mitch, and Frank if the price of the textbook is $110. Willingness to Pay for a New Economics Textbook Buyer Willingness to pay Beanie $200 Mitch $150 Frank $100

$130 -FEEDBACK: Consumer surplus is calculated as the difference between a consumer's willingness to pay and the price that he or she actually pays. For Beanie and Mitch, consumer surplus is calculated as follows: Beanie: $200 - $110 = $90 Mitch: $150 - $110 = $40 For Frank, his willingness to pay ($100) is LOWER than the price ($110), so he does not buy the textbook; therefore, he does not receive any consumer surplus. The total consumer surplus is Beanie's consumer surplus plus Mitch's consumer surplus, which equals $130.

Suppose that the equilibrium price of a mountain bike is $250. But then the government decides that people have a right to affordable mountain biking. To protect this new right, the government passes a law setting a maximum price of $150 for a bike. As a result of the legislation, and in the absence of a black market, the price of a mountain bike will be

$150 -FEEDBACK: Since the government decided that everyone should have a right to a bike that is cheaper than what the market equilibrium would provide, a binding price ceiling is created. The new price of a bike will fall to the price ceiling of $150.

Examine the graph. Sellers who are unable to sell their good at a price floor of $6 may still be able to sell their good at a price of

$2 -FEEDBACK: Since a surplus exists with a binding price floor, a black market emerges to resolve the surplus. To find the price of goods sold in the black market, draw a line from the intersection of the supply curve and the price ceiling down to the x-axis. When the line meets the demand curve you will find the black market equilibrium..

In the market portrayed in this graph, a nonbinding price floor of $2 will result in a price

$4 -FEEDBACK: A price floor is a minimum set on the price level. If a price floor is set below the equilibrium price, it is nonbinding because the price can rise freely to reach the equilibrium price.

Suppose the government decides the Big Mac hamburger is an American tradition. To recognize the value of the Big Mac, the government passes legislation making it illegal to sell a Big Mac for less than $8. The equilibrium price of a Big Mac is $4. As a result of the government legislation, and in the absence of a black market, the price of a Big Mac will be

$8 -FEEDBACK: Since the government decided that the value of the Big Mac should be recognized by all and placed a minimum price on Big Macs, the new price will be set to the price floor, or $8.

Examine the graph. Many consumers will be unable to buy the good at a price ceiling of $2.00 because of a shortage. However, they may still be able to purchase the good at the price of

$8.00 -FEEDBACK: Since a shortage exists along with a binding price ceiling, a black market forms to resolve the shortage. The black market price is set by supply and demand, based on the shortage created by the binding price ceiling.

The table below shows the willingness of three people to sell their tutoring services. Calculate the producer surplus for Frank if the price of the tutoring is $18 per hour. Willingness to Sell Tutoring Services Seller Willingness to sell Beanie $30/hr. Mitch $20/hr. Frank $10/hr.

$8/hr -FEEDBACK: If Frank is willing to tutor for a minimum of $10/hr. and he receives $18/hr., he receives $8/hr. more than the minimum price at which he is willing to sell tutoring services. Therefore, he receives a producer surplus of $8/hr.

Suppose the government decides the Big Mac hamburger is an American tradition. To recognize the value of the Big Mac, the government passes legislation making it illegal to sell a Big Mac for less than $8. The equilibrium price of a Big Mac is $4. This legislation is an example of

A price floor -FEEDBACK: A price floor is a minimum set on the price level. Since the government placed a minimum on the price of Big Macs, this legislation would be considered a price floor.

Suppose that the equilibrium price of a mountain bike is $250. But then the government decides that people have a right to affordable mountain biking. To protect this new right, the government passes a law setting a maximum price of $150 for a bike. As a result of the legislation, the quality of mountain bikes will most likely

Decline -FEEDBACK: Because the bicycle producers can earn less revenue for every bike they sell, they will be pressured to use cheaper parts and cut corners on manufacturing. Therefore, the quality can be expected to decline.

A price ceiling is a legally imposed __________ price.

Maximum -FEEDBACK: A price ceiling is a legally imposed maximum price.

A price floor is a legally imposed __________ price.

Minimum -FEEDBACK: A price floor is a legally imposed minimum price.

Suppose that the equilibrium price of a mountain bike is $250. But then the government decides that people have a right to affordable mountain biking. To protect this new right, the government passes a law setting a maximum price of $150 for a bike. As a result of the legislation, there will be

a smaller number of mountain bikes sold than before the legislation. -FEEDBACK: With the maximum price set at $150 for a mountain bike, suppliers are not willing to supply as many bikes as they were when the price was $250. Remember the law of supply: all other things being equal, when the price of a good falls, the quantity supplied will decrease. Therefore, the number of bikes bought and sold will be less after the legislation.

Farm price supports are an example of a price floor in the market for farm products. A binding price support will cause

a surplus of farm products -FEEDBACK: Farm price supports, as an example of a price floor, will result in a surplus of farm products when the price floor is binding.

Suppose that the market equilibrium price for a good is $1. A nonbinding price ceiling in this market will result in a price set at

above $1 -FEEDBACK: A price ceiling is a maximum set on the price level. If a price ceiling is set above the equilibrium price it is nonbinding, since prices can fall freely to reach the equilibrium price.

In order for a price floor to be binding, it must be set

above the equilibrium price -FEEDBACK: Refer to the following figure for a visual example of a binding price floor. For a price floor to have any effect on the market, it must be set above the equilibrium price. A minimum price set above the equilibrium price prevents prices from falling to the equilibrium price. A price floor set below the equilibrium price does not prevent prices from rising to the equilibrium price, and therefore has no effect on the market.

Suppose that the equilibrium price of a mountain bike is $250. But then the government decides that people have a right to affordable mountain biking. To protect this new right, the government passes a law setting a maximum price of $150 for a bike. As a result of the legislation, there will be

an excess demand for mountain bikes -FEEDBACK: As a result of the price decrease from $250 to $150, the quantity demanded increases while the quantity supplied decreases. This creates an excess demand for mountain bikes.

Suppose the government decides the Big Mac hamburger is an American tradition. To recognize the value of the Big Mac, the government passes legislation making it illegal to sell a Big Mac for less than $8. The equilibrium price of a Big Mac is $4. As a result of the government legislation, there will be

an excess supply of Big Macs -FEEDBACK: As a result of the price increase from $4 to $8 per Big Mac, the quantity demanded will decrease, while the quantity supplied will increase. This will create an excess supply of Big Macs.

Based on the graph below, at a price __________/hr. neither Frank, Mitch, nor Beanie will tutor, but at a price __________/hr., all three of them will tutor.

below $10; above $30 -FEEDBACK: Frank's willingness to supply tutoring is $10, Mitch's willingness to supply tutoring is $20, and Beanie's willingness to supply tutoring is $30. At prices less than $10 no one will tutor, since all have a minimum price that is either equal to or greater than $10. At prices above $30 everyone will tutor since all three have a willingness to supply tutoring at $30 or less.

In order for a price ceiling to be binding, it must be set

below the equilibrium price -FEEDBACK: Take a look at this figure. Price ceilings are a maximum price imposed on the market to keep prices from reaching the equilibrium price. Therefore, for a price ceiling to make any difference to prices, it must be set below the equilibrium price. When a price ceiling is set above the equilibrium price, prices are free to fall to the equilibrium price and the ceiling has no effect on the market.

The difference between the willingness to pay for a good and the price that is paid to get it is

consumer surplus -FEEDBACK: Willingness to pay is the maximum price a consumer will pay for a good. Consumer surplus is the difference between the willingness to pay for a good and the price that is paid to get it.

If you were willing to pay $3.05 for a slice of coconut cream pie purchased at the grocery store but were required to pay only $2.05, you will have gained a

consumer surplus amounting to $1.00 -FEEDBACK: Consumer surplus is defined as the difference between your willingness to pay for a good and the price that you actually pay for it. In this case, that's $3.05 minus $2.05, or $1.00.

Suppose the government decides the Big Mac hamburger is an American tradition. To recognize the value of the Big Mac, the government passes legislation making it illegal to sell a Big Mac for less than $8. The equilibrium price of a Big Mac is $4. As a result of the government legislation, there will be

fewer Big Macs bought and sold than before -FEEDBACK: The law of supply tells us that when the price of Big Macs is set at a minimum of $8, suppliers will be willing to supply more Big Macs than they were at the equilibrium price of $4. But the law of demand tells us that consumers will not be willing to buy as many Big Macs as at a price of $4. Therefore, the number of Big Macs bought and sold will be less after passage of the legislation.

Rent control is an example of a

price ceiling -FEEDBACK: Price ceilings are legally established maximum prices for goods or services. Rent control is a price ceiling that applies to the housing market. Under rent control, a local government caps the price of apartment rentals to keep housing more affordable.

The difference between the willingness to sell a good and the price that the seller receives for it is

producer surplus. -FEEDBACK: Willingness to sell is the minimum price the seller will accept to sell a good or service. Producer surplus is the difference between the willingness to sell a good and the price that the seller receives.

At a price ceiling of $2.00, this market is experiencing a(n)

shortage -A shortage exists when quantity demanded exceeds quantity supplied. A binding price ceiling always results in a shortage. Why? Because if a price ceiling is binding, the price will be below the market equilibrium price. Therefore, the quantity demanded is higher than it would be at equilibrium, but the quantity supplied is lower than it would be at equilibrium. In this example, at a price ceiling of $2.00, quantity demanded clearly exceeds quantity supplied, resulting in a shortage of gallons of gasoline.

At a price floor of $6, this market is experiencing

surplus -A surplus exists when quantity supplied exceeds quantity demanded. In this graph, at a price floor of $6, quantity supplied clearly exceeds quantity demanded resulting in a surplus. A binding price floor always results in a surplus.