Microeconomics Chapter 8

Determine whether each statement is true or false. 1. Price ceilings result in resources being allocated to activities with the highest possible value. 2. Price ceilings result in a reduction in mutually beneficial exchanges. 3. Though they may face higher prices, consumers usually see an increase in product quality when price ceilings are imposed. 4. A problem with price ceilings is that they lead to surpluses. 4. When price ceilings are imposed, consumers pay lower explicit prices but often face higher costs in terms of waiting in line for goods and services.

1. false 2. true 3. false 4. false 5. true

If there are 100 tickets to a concert and 200 fans who 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? 1. hold an auction 2. hold a random drawing 3. Both are equally efficient. 4. It is impossible to say which is more efficient.

1. hold an auction

Rent controls are a typical example of a price ceiling. Please select all likely consequences of rent controls when the price ceiling is binding. There is more than one correct answer. 1. reductions in apartment quality 2. shortage of affordable housing 3. surplus of affordable housing 4. inefficient allocation of apartments

1. reductions in apartment quality 2. shortage of affordable housing 4. inefficient allocation of apartments

Which statement is FALSE? 1. Politicians often blame speculators and profiteers, rather than changes in supply and demand, for rising prices. 2. A frost that destroys half the orange crop will create a surplus of oranges. 3. To eliminate a shortage, prices must rise. 4. It is possible to have a shortage of a good even if its supplies are abundant.

2. A frost that destroys half the orange crop will create a surplus of oranges.

Over time, housing shortages caused by rent control _____ because the supply of housing is _____ elastic in the long run. 1. decrease; more 2. increase; more 3. increase; less 4. decrease; less

2. increase; more

Figure 10: The government enacts a price control, causing a shortage of 15 units of the good. Therefore, the _____ is set at _____. 1. price ceiling; $17 2. price ceiling; $10 3. price floor; $31 4. price floor; $17

2. price ceiling; $10

Suppose the city council in a large city decides to pass a law which forces landlords to charge a maximum rent of $750/month for a one-bedroom apartment. Prior to the rent control, the average rent for a one-bedroom apartment was $1,750/month. Which is likely to occur as a result of the price ceiling? 1. Landlords will supply more apartments to the market than they did before the price ceiling. 2. Some landlords and renters will agree on a price of less than $750/month and not report it to the government. 3. Landlords will begin decreasing the quality of one-bedroom apartments by not making repairs or paying for upkeep. 4. The rental market will become more efficient.

3. Landlords will begin decreasing the quality of one-bedroom apartments by not making repairs or paying for upkeep.

When the minimum price that can be legally charged is above the market price, we say there is a price: 1. ceiling. 2. stability. 3. floor. 4. support.

3. floor.

When airlines were regulated, many offered wider seats and fancy meals. This is an example of: 1. lost gains from trade. 2. producer surplus. 3. quality waste. 4. consumer surplus.

3. quality waste.

An economy with permanent, universal price controls is in essence a: 1. social economy. 2. market economy. 3. free economy. 4. command economy.

4. command economy.

Some economists compare the destructiveness of rent control to that of aerial bombardment because it causes: 1. high search costs in apartment hunting. 2. apartments to go to renters who do not have the highest-valued use of the apartments. 3. there to be unexploited gains from trade. 4. landlords to neglect their buildings, allowing them to deteriorate over time.

4. landlords to neglect their buildings, allowing them to deteriorate over time.

A price ceiling is a(n): 1. illegally established maximum price that can be charged for a good. 2. illegally established minimum price that can be charged for a good. 3. legally established minimum price that can be charged for a good. 4. legally established maximum price that can be charged for a good.

4. legally established maximum price that can be charged for a good.

Which statement(s) is(are) TRUE? Price floors set above the equilibrium price cause: I. shortages. II. surpluses. III. deadweight losses. II and III only I and III only I is true if demand is elastic; however, II is true if demand is inelastic. III only

II and III only

Price ceilings create five important effects: 1. shortages, reduced time costs, low vacancy rates, blat, and deadweight loss. 2. surpluses, increases in product quality, search costs, gains from trade, and resource attrition. 3. excess demand, long lines, poor service, efficiency, and arbitrage. c

Over time, housing shortages caused by rent control _____ because the supply of housing is _____ elastic in the long run. 1. decrease; more 2. increase; more 3. increase; less 4. decrease; less

Steve decides not to rent out his second home since he is not allowed to set the rate above $1000 per month even though he knows he could find renters willing to pay much more. Select the term that best fits the scenario. price ceiling license black market price floor quota

price ceiling

Garret is an undergraduate looking for a job to pay for college. As Garret seeks employment, he is glad to know that he will be paid at least $7.25 per hour. Select the term that best fits the scenario. license quota price floor black market price ceiling

price floor

Figure 9: The table contains the demand and supply schedule for apartments in a city. Suppose the city council feels that the equilibrium rent is too high and imposes a price ceiling of $750/month.The price ceiling results in a...

shortage