Chapter 6: Government Actions in Markets: Price and Quantity

If the government sets a quota on peanut production of 100 million bags a year, do buyers or sellers gain, and why? A. Growers gain because the price rises and peanuts are cheaper to grow. B. Consumers gain because only quality peanuts are grown. C. Growers gain because they don't bother to harvest all the peanuts they grow. D. Consumers gain because they switch to healthier nuts.

A. Growers gain because the price rises and peanuts are cheaper to grow. Who gains depends on how the production quota changes consumer surplus and producer surplus. Growers gain because the market price rises and the marginal cost of producing peanuts falls. Producer surplus increases. Consumers lose because the quantity they buy decreases and the price rises. Consumer surplus decreases.

Who gains and who loses from the minimum wage? With the minimum wage, ________ gain and ________ lose. A. fruit pickers who find work; fruit growers and unemployed pickers B. all fruit pickers; fruit growers C. fruit growers; fruit pickers who find work D. unemployed fruit pickers; fruit growers

A. fruit pickers who find work; fruit growers and unemployed pickers. The minimum wage creates unemployment. So the people who gain from the minimum wage are the workers who find work at the new minimum wage. The people who lose are the employers and the workers who become unemployed as a result of the minimum wage.

Is a rent ceiling fair? A rent ceiling is ________. A. unfair because it blocks voluntary exchange and unfair if it does not benefit the least well off B. unfair because it blocks voluntary exchange and fair because poorer people can pay lower rents C. fair because it most often uses first-come, first-served as the allocation method D. fair because newcomers have to pay high rents and fair because people who have lived in a city a long time are rewarded by paying low rents

A. unfair because it blocks voluntary exchange and unfair if it does not benefit the least well off To determine if a rent ceiling is fair, we consider rules and results. To be fair by the rules view, housing must be transferred by voluntary exchange. A rent ceiling is unfair by the rules view because it blocks voluntary transactions. To be fair by the results view, the poor must be made as well off as possible. A rent ceiling is unfair by the results view if it does not benefit the least well off.

Why is a minimum wage unfair? A minimum wage is unfair because the minimum wage ________. A. creates a deadweight loss B. blocks voluntary exchange and benefits only those workers who are paid the minimum wage C. is usually set too low D. encourages students to leave school before completing their courses

B. blocks voluntary exchange and benefits only those workers who are paid the minimum wage The minimum wage is unfair because it delivers an unfair result and imposes an unfair rule. The result is unfair because only the workers who have jobs benefit from the minimum wage. The minimum wage imposes an unfair rule because it blocks voluntary exchange. Firms are willing to hire more labor and people are willing to work more, but the minimum wage law blocks such transactions.

How does the introduction of a minimum wage change the labor market? If the minimum wage creates unemployment, the workers' surplus ________. A. decreases if firms hire on the basis of discrimination B. decreases if an illicit market develops C. decreases if the minimum wage is strictly enforced D. increases if workers spend more time and resources on job search

B. decreases if an illicit market develops If the minimum wage creates unemployment, the minimum wage is set above the market equilibrium wage. If an illicit market develops, workers are willing to work for less than the minimum wage to get employment, so the workers' surplus shrinks and firms' surplus increases.

Is a housing market with a rent ceiling below the equilibrium rent efficient? A housing market with a rent ceiling below the equilibrium rent is ________. A. inefficient because overproduction of housing arises, so a deadweight loss arises B. inefficient because the quantity of housing available is less than the market equilibrium quantity, and a deadweight loss arises C. efficient because landlords rent all of the housing they are willing to rent D. efficient because a black market can arise, which increases the sum of consumer surplus and producer surplus

B. inefficient because the quantity of housing available is less than the market equilibrium quantity, and a deadweight loss arises In an unregulated market, the marginal benefit of housing equals its marginal cost and the market is efficient. But when a rent ceiling is set below the equilibrium rent, the quantity of housing available is the quantity supplied, which is less than the market equilibrium quantity. At a quantity of housing less than the market equilibrium quantity, the marginal benefit of housing exceeds its marginal cost, and a deadweight loss arises. The market is inefficient.

Faced with rising college tuition, the government imposes a $15,000 ceiling on tuition. Describe the market for college places if the market tuition is $20,000 per year. A. Neither a surplus nor a shortage of college places emerges and the market is efficient. B. A shortage of college places emerges and tuition rises to $20,000 per year. C. A shortage of college places emerges and the market is inefficient. D. A surplus of college places emerges and the market is inefficient.

C. A shortage of college places emerges and the market is inefficient. When the tuition ceiling is below the market equilibrium tuition, the quantity of college places supplied is less than the quantity demanded at the tuition ceiling. A shortage of college places emerges. With the quantity supplied less than the market equilibrium quantity, marginal benefit exceeds marginal cost, so the market is inefficient.

When a minimum wage creates unemployment, who gains and who loses? A. Both workers and firms gain if firms discriminate on the basis of personal characteristics. B. Firms gain, but workers lose if they use more resources in job search. C. Firms gain and workers lose if an illicit market arises. D. Both workers and firms gain if the minimum wage is strictly enforced.

C. Firms gain and workers lose if an illicit market arises. Well done! When a minimum wage creates unemployment, the minimum wage is set above the market equilibrium wage. If an illicit market arises, some unemployed workers will offer to work for a wage below the minimum wage. Firms gain because their surplus expands and workers lose because their surplus shrinks.

When a rent ceiling is imposed in a housing market, a fair result depends on how the housing is allocated. Are the lottery, first-come, first-served, and discrimination allocation methods fair? A. A fair allocation method is first-come, first-served. B. A fair allocation method is discrimination. C. Lottery, first-come, first-served, and discrimination are not fair allocation methods. D. A fair allocation method is a lottery.

C. Lottery, first-come, first-served, and discrimination are not fair allocation methods. A lottery is not a fair allocation of housing because the housing is allocated to those who are lucky, not to those who are most in need. First-come, first-served allocates housing to those who have the greatest foresight and who get their names on a list first, not to those who are most in need. And when discrimination allocates scarce housing, those who meet a certain criteria receive the housing, not those who are most in need. Lotteries, first-come, first-served, and discrimination are not fair methods of allocating housing in the absence of market price.

When a government introduces a rent ceiling below the market equilibrium rent, how do consumer surplus and producer surplus change? Consumer surplus ________ and producer surplus ________. A. decreases; increases if landlords discriminate against casual workers B. increases; increases if an illicit market operates C. decreases; decreases if the rent ceiling is strictly enforced D. increases; decreases if an illicit market operates and discrimination occurs

C. decreases; decreases if the rent ceiling is strictly enforced When a government introduces a rent ceiling below the market equilibrium rent, a housing shortage arises. How consumer surplus and producer surplus change depends on how the available housing is distributed. If the rent ceiling is strictly enforced, producer surplus decreases. But people who want to rent but can't will increase their search costs, which decreases consumer surplus.

How does a production quota change consumer surplus and producer surplus? Consumer surplus ________ and producer surplus ________. A. increases; decreases B. increases; increases C. decreases; increases D. decreases; decreases

C. decreases; increases A production quota decreases the quantity produced. With no change in the demand for the good, the price rises. Consumers buy a smaller quantity and pay a higher price, so consumer surplus decreases. As producers reduce the quantity they grow, the marginal cost of producing the good decreases. Producers receive the higher price and incur the lower marginal cost, so producer surplus increases.

Is the market with a production quota efficient? The market is ________ because ________. A. efficient; the sum of producer surplus and consumer surplus is maximized B. efficient; price equals marginal benefit C. inefficient; at the quantity produced marginal benefit exceeds marginal cost D. inefficient; at the quantity produced marginal cost exceeds marginal benefit

C. inefficient; at the quantity produced marginal benefit exceeds marginal cost With a production quota, the quantity produced is less than the market equilibrium quantity, so the market is inefficient. When the quantity produced is less than the market equilibrium quantity, marginal benefit from the demand curve exceeds marginal cost from the supply curve.

Jared is having a difficult time finding an apartment after the local government imposes a rent ceiling. What can you say about the rent ceiling? A. The rent ceiling set by the government is not blocking the law of market forces. B. The government set the rent ceiling above the market equilibrium rent. C. The government set the rent ceiling equal to the market equilibrium rent. D. The government set the rent ceiling below the market equilibrium rent.

D. The government set the rent ceiling below the market equilibrium rent. Jared is facing the results of the local government setting the rent ceiling below the equilibrium rent. When the rent ceiling is set below the market equilibrium rent, the quantity of apartments demanded exceeds the quantity of apartments supplied, so a housing shortage results.

In the market for rice, how does a production quota change the quantity produced and the price? A production quota ________ the quantity of rice produced and ________ the price. A. decreases; lowers B. increases; lowers C. increases; raises D. decreases; raises

D. decreases; raises A production quota decreases the quantity supplied below the equilibrium quantity. The price is the maximum that people are willing to pay, and is taken from the demand curve. When the quantity decreases, the price that people are willing to pay rises.

When the minimum wage for gardeners is set at $12.50 an hour, is this minimum wage efficient and fair? The minimum wage is ________. A. inefficient because at the minimum wage there is a surplus of labor and unfair because employers must pay more than the market equilibrium wage B. efficient because no deadweight loss arises and unfair because employers must pay more than the minimum wage C. inefficient because the minimum wage creates a surplus of labor and fair because all transactions are voluntary D. efficient because the quantity of labor hired does not change and fair because everyon

D. efficient because the quantity of labor hired does not change and fair because everyone who wants a job at the market equilibrium wage rate can find one. When the minimum wage is set below the market equilibrium wage rate, nothing changes because firms are already paying more than the minimum wage and 200 gardeners are employed. Because firms pay the market equilibrium wage, there is no shortage of labor and the labor market is efficient. This minimum wage is fair in terms of results because everyone who wants a job at the market equilibrium wage rate can find one. And the minimum wage is fair in terms of rules because all transactions are voluntary.

If California introduces a minimum wage for fruit pickers of $12 an hour, is the labor market efficient or fair? The labor market is ________. A. efficient but not fair B. efficient and fair C. inefficient but fair D. inefficient and not fair

D. inefficient and not fair. When the minimum wage rate is $12 an hour, firms pay $12 an hour and hire 1,500 pickers, which is the quantity of labor demanded at a wage rate of $12 an hour. Efficiency occurs when marginal benefit is equal to marginal cost. At a quantity of 1,500 pickers, marginal benefit is greater than marginal cost, so the California labor market is not efficient. The minimum wage is also not fair. It delivers an unfair result and imposes unfair rules. The result is unfair because only the pickers who find jobs benefit. The unemployed end up worse off than they would be with no minimum wage. And those who get jobs were probably not the least well off. Also, the minimum wage imposes unfair rules because it blocks voluntary exchange.

Is the labor market efficient if the minimum wage is set above the market equilibrium wage? The labor market is ________. A. inefficient because the quantity of labor hired is greater than the market equilibrium quantity B. efficient because both firms and workers receive a surplus C. efficient because the minimum wage increases the wage firms pay workers D. inefficient because a deadweight loss arises

D. inefficient because a deadweight loss arises This labor market is inefficient because the quantity of labor hired is less than the quantity at which total surplus is maximized, so a deadweight loss arises.

Evan and Matt unsuccessfully try to rent an apartment in a town with a rent ceiling. Evan offers the landlord more than the rent ceiling. Matt is willing to spend his weekends and evenings to find an apartment. Describe the activities of Evan and Matt. Evan is ________. Matt is ________. A. responding to a housing surplus; responding to a housing shortage B. acting the same as he would with no rent ceiling; acting the same as he would with no rent ceiling C. operating in a legal market because he is willing to pay the equilibrium rent; operating in an illlicit market D. operating in an illicit market; engaging in increased search activity

D. operating in an illicit market; engaging in increased search activity When Evan offers the landlord more than the rent ceiling, Evan is operating in an illicit and illegal market to rent an apartment. The government-regulated market keeps rents below the equilibrium rent. In the illicit market, rents are creatively higher than the rent ceiling. When Matt spends his weekends and evenings to find an apartment, he is engaging in increased search activity. Because the rent ceiling creates a housing shortage, Matt spends more time searching and his search cost increases.

How is the quantity of labor employed determined in a market when the minimum wage exceeds the equilibrium wage? The quantity of labor employed is the ________. A. market equilibrium quantity of labor B. quantity of labor supplied at the minimum wage C. quantity of labor that maximizes the sum of firms' surplus and workers' surplus D. quantity of labor demanded at the minimum wage

D. quantity of labor demanded at the minimum wage When the minimum wage exceeds the market equilibrium wage, the quantity of labor employed is the quantity of labor demanded by the firms at the minimum wage.

When a rent ceiling is imposed below the market equilibrium rent, what is the range of illicit market rents or search costs? The illicit market rent or search cost ________. A. ranges from the market equilibrium rent to as high as the amount that renters are willing to pay B. ranges from the rent ceiling to the market equilibrium rent C. does not exceed the rent ceiling D. ranges from the rent ceiling to as high as the amount that renters are willing to pay

D. ranges from the rent ceiling to as high as the amount that renters are willing to pay When a rent ceiling is imposed below the market equilibrium rent, the price in the housing market is the rent ceiling. At the rent ceiling, the quantity supplied is less than the market equilibrium quantity. The demand curve tells us how much renters are willing to pay for this quantity. So the illicit market rent or search cost ranges from the rent ceiling to the rent that renters are willing to pay for the quantity supplied.