4.3 Practice

Can economic analysis provide a final answer to the question of whether the government should intervene in markets by imposing price ceilings and price floors? Why or why not?

Economic analysis cannot provide such an answer because it seeks to address positive questions such as "what is."

Increasing the minimum wage will increase the income of some low-income workers, and will also likely increase employment.

False

Should government officials use regulations to try to provide dependable incomes to every business in the country?

It is very difficult to conceive of any scenario in which such an effort would improve economic efficiency.

A newspaper headline reads: "State Officials Take on Pricing Regulations to Try to Provide Better, Dependable Income to Dairy Farmers." Is providing dependable income to dairy farmers a good policy goal for government officials?

Maybe, but only if doing so promotes economics efficiency.

Why do some consumers tend to favor price controls while others tend to oppose them?

Price ceilings generate shortages. Consequently, the consumers who obtain the product at lower price win, but other consumers will lose because they would like to purchase the product but are unable to because of shortage.

Briefly explain whether you agree or disagree with the following statement: "If there is a shortage of a good, it must be scarce, but there is not a shortage of every scarce good."

The statement is correct because every good (except undesirable things) is scarce.

A black market is

a market in which buying and selling occur at prices that violate government price and regulations.

Government officials are likely to try to achieve this goal using pricing regulations by establishing

a price floor for milk.

Which of the following terms corresponds to a market in which buying and selling take place at prices that violate government price regulations?

black market

Black markets may arise

in reaction to binding price ceilings.

Discussions of the economic results of rent control and of federal farm programs would be considered ___ analysis, and discussions of whether rent control and the farm programs are good or bad policies would be considered ___ analysis.

positive; normative

The minimum wage acts like a ___ by keeping wages of low-skilled workers ___ their equilibrium level.

price floor; above

When the government imposes price floors or price ceilings, which of the following occurs?

some people win; some people lose; there is a loss of economic efficiency.

A landlord who intends to ignore the law and illegally charge the highest rent possible for his apartments

will be better off if he does not get caught because that amount will be above the equilibrium; will be worse off if he gets caught.

Someone who will be moving to Lowell next year and who intends to rent an apartment

will be better off if they are able to find an apartment to rent because rent is lower due to the price ceiling; will be worse off if they are unable to find an apartment to rent.

The competetive equilibrium rent in the city of Lowell is currently $1000 per month. The government decides to enact rent control and to establish a price ceiling for apartments of $750 per month. Briefly explain whether rent control is likely to make each of the following people better or worse off. Someone currently renting an apartment in Lowell

will be better off if thy keep their apartment because rent is lower due to the price ceiling; will be worse off if they lose their apartment.

A landlord who intends to abide by the rent control law

will be worse off because he will be receiving less rent.

Do producers tend to favor price floors or price ceilings? Why? Producers favor

price floors because, when binding, price floors increase price above the equilibrium and may increase producer surplus.

According to an article in the New York Times, the Venezuelan government "imposes strict price controls that are intended to make a range of foods and other goods more affordable for the poor. They are often the very products that are the hardest to find." Imposing price controls on goods would make them hard to find because

producers would not want to supply as much as they did before the price controls.

If San Francisco were to repeal its rent control law, the prices for short rentals in the city listed on Airbnb and other peer-to-peer sites would likely

fall because more housing units would become available as the average rent increased.