Economics Exam 2

The quantity exchanged of a good ______ under a binding price ceiling. a. remains the same b. falls c. changes in an indeterminate direction d. rises

B.

Deadweight loss occurs when a. the gains from trade are lowered due to shifts in the supply or demand curve. b. there is a shortage of a good or service. c. consumer surplus transforms into producer surplus. d. consumer and/or producer surplus decrease without the surplus going to anyone.

D.

A nonbinding price ceiling leads to a(n) a. quantity of zero units. b. equilibrium quantity. c. shortage. d. surplus.

B.

A binding price ceiling leads to a(n) a. shortage. b. quantity of zero units. c.equilibrium quantity. d. surplus.

A.

Flexible prices ensure that a. resources are allocated to their highest-valued uses. b. prices will always be minimized. c. suppliers will always profit from necessity goods. d. self-interested individuals will not interfere with the efficiency of the market.

A.

If a price ceiling on gasoline results in long lines at the gas station and a rich businessman and an elderly retiree both need gasoline, who would have the higher-valued use for gasoline, and who would have the lower opportunity cost of waiting in line? a. The businessman would have the higher-valued use and the retiree would have the lower opportunity cost. b. The retiree would have the higher-valued use and the lower opportunity cost. c. The businessman would have the higher-valued use and the lower opportunity cost. d. The retiree would have the higher-valued use and the businessman would have the lower opportunity cost.

A.

If quantity supplied equals 80 units and quantity demanded equals 85 units under a price control, then it is a a. binding price ceiling. b. binding price floor. c. nonbinding price floor. d. nonbinding price ceiling.

A.

If there are 100 tickets to a concert and 200 fans that would like to go to the concert, each placing a slightly different value on the tickets, is it more efficient to hold an auction for the tickets or to hold a random drawing for the tickets? a. hold an auction b. hold a random drawing c. It is impossible to say which is more efficient. d. Both are equally efficient.

A.

The Edict on Maximum Prices, established by the Roman Emperor Diocletian, created price ceilings on various jobs and goods in a failed effort to curb inflation. For example, legal pay for a farm laborer could be no more than 10.8¢ a day (payment set in modern currency). If the the market rate of farm labor was 12¢ a day, which of the following would be a plausible consequence of this law? a. a laborer would work less hard than he otherwise would b. farms would produce more food than they otherwise would c. nothing unusual d. an increase in unemployment for farm hands

A.

Which of the following would most likely result after setting a price ceiling on automobiles? a. fewer safety features b. a surplus of automobiles c. more friendly automobile salesmen d. an increase in demand for automobiles

A.

A major hurricane damages many oil refineries, which increases the market price of gasoline from $3.50 to $5 per gallon. The Attorney General threatens legal action against gas station owners who raise prices above pre-hurricane levels causing gas station owners to reluctantly sell gas for $3.50 per gallon. At $3.50 per gallon, shortages cause buyers to wait in line for 2 hours. If the average purchase is 15 gallons and buyers value their time at $20 an hour, is the Attorney General helping? a. Yes, gas is cheaper at $3.50 per gallon because the waiting costs keep gas prices low. b. No, paying $92.50 at $3.50 per gallon is more expensive than $75 at $5.00 per gallon. c. No, $5.00 per gallon would insure that buyers could always buy as much as they want. d. Yes, paying $52.50 at $3.50 is cheaper than $75 at $5.00 per gallon.

B.

If prices are not allowed to rise because of a price ceiling, then a. a shortage will develop, but only temporarily until markets adjust to the lower prices. b. prices do not provide the correct information about consumers' valuation of the good. c. suppliers will compensate for the lower price by increasing the quality of their goods. d. suppliers have an incentive to provide a high level of customer service.

B.

In the case of a binding price ceiling, the price paid in the market will be a. more than the free market equilibrium price. b. less than the free market equilibrium price. c. unable to be compared with the free market equilibrium price. d. equal to the free market equilibrium price.

B.

Price ceilings do not have much effect a. ever. b. when market prices are at or below the ceiling. c. in times of high inflation. d. in non-market economies.

B.

Price controls instituted by President Nixon in 1971 a. were set above the equilibrium prices and made little impact as a result. b. generated shortages in the markets for construction, wool, oil, steel bars, toilets, jeans, and others. c. were successfully able to control inflation by 1973. d. generated shortages, confined mostly to just the markets for gasoline and oil

B.

Under a binding price ceiling, we expect the quality of a good to a. change in an indeterminate direction. b. fall. c. remain the same. d. rise.

B.

When a price ceiling is in effect, quantity ______ will be greater than quantity ______ creating a ______. a. supplied; demanded; shortage b. demanded; supplied; shortage c. supplied; demanded; surplus d. demanded; supplied; surplus

B.

When the maximum legal price is set below the market price then I. a price floor is in effect. II. a shortage will develop. III. there will be lost gains from trade. IV. there will be no impact on the quantity demanded or supplied. a. I, II, and III only b. II and III only c. I and II only d. IV only

B.

Which of these statements explains why price ceilings result in lost gains from trade? a. Buyers want to trade, but sellers are indifferent at the lower prices. b. Buyers and sellers want to trade, but the threat of fines or jail time prevents them from doing so. c. Neither buyers nor sellers want to trade subject to a price ceiling resulting in lost gains from trade. d. Sellers want to trade, but buyers prefer the lower prices.

B.

If quantity supplied equals 40 units and quantity demanded equals 50 units under a price control, then it is a a. nonbinding price ceiling. b. binding price floor. c. binding price ceiling. d. nonbinding price floor.

C.

In the late 1500s, the city of Antwerp was under siege by the Duke of Parma. The siege caused the price of food to rise so the government of Antwerp established a price ceiling set at a value similar to that before the siege. (This bears a striking resemblance to modern antigouging laws used in times of disaster.) Merchants, fearing the Duke's ability to sink their ships, refused to ferry food into the city that they could only sell at a normal price. Which important effect of a price control best describes this story? a. wasteful lines b. reduction of product quality c. a loss in gains from trade d. a misallocation of resources

C.

Price ceilings a. increase market output to the point where consumer surplus equals producer surplus. b. increase the gains from trade because lower prices encourage consumers to buy more. c. reduce the size of the market, shrinking both consumer and producer surplus. d. help reduce the deadweight losses owing to taxation.

C.

The statement that "price controls do not eliminate competition" a. means that sellers will increase the quality of their product when they cannot legally increase their prices. b. is false because price controls prevent rich consumers from outbidding poor consumers for goods and services. c. reflects the idea that consumers will compete for price controlled products by waiting in line and offering bribes to sellers. d. is false because firms are no longer allowed to exploit consumers by charging higher prices after hurricanes or major snow storms.

C.

A price ceiling a. has little effect on market activity. b. has an effect only when it is set above the market price. c. is a minimum price allowed by law. d. is a maximum price allowed by law.

D.

How can sellers increase profits when they face a price ceiling? a. produce and sell more output b. charge a higher price for the good c. charge a lower price for the good to undercut rival sellers d. reduce the quality of the product and provide less customer service

D.

In Ancient Egypt, the "Bronze Law" set maximum prices for wages, preventing them from rising above what rulers perceived as the minimum needed to survive. If this was 10¢ a day for a porter (someone who carries things short distances) and the market wage was 8¢ a day, which of the following would be a plausible consequence of this law? a,Porters would travel less quickly than they otherwise would. b. Unemployment for porters would decrease. c. Porters would transport items they normally would not. d. Nothing unusual would happen.

D.

The U.S. government establishes a price floor of $1,000 on personal computers. The market price for netbooks (personal computers that specialize in Internet and other basic computer functions) is about $500. How would this price control affect the netbook market? a. Consumers would have a harder time finding conventional netbooks since most would be too powerful. b. Producers would leave the market for netbooks. c. There would be long lines for netbooks. d. There would be no notable effect.

D.

Typical of price ceilings, the ancient India political philosopher known as Kautilya advocated controls to protect against merchant greed, fixing a profit of 5 percent over the fixed price of local commodities, including textiles. If severe weather were to render the textile market more uncertain (for example, if transportation routes were damaged), what would reasonably happen? a. Textile quality would wastefully increase. b. There would be no effect. c. Deadweight loss would fall. d.Fewer merchants would be willing to supply textiles.

D.

When a price ceiling is in effect a. all of demanders' needs are met at the lower price, so there is no need to signal anything to suppliers. b. demanders have no incentive to signal their needs to suppliers. c. suppliers get too strong of a signal from demanders about their needs. d. demanders cannot signal their needs to suppliers.

D.

Which of the following best represents the misallocation of resources that would occur under a price ceiling on bottled water following a major hurricane? a. A family in a distant state takes time off work to bring bottled water to the hurricane ravaged area. b. Families in the hurricane area brush their teeth with bottled water, but cannot find enough to drink. c. Bottles of water sit on the shelves because nobody can afford it. d. A family in a distant state gives bottled water to its dog, but a family in the hurricane area cannot find bottled water to drink.

D.