ch. 8
Is the minimum wage a "price ceiling" or a "price floor?" What about rent control?
minimum wage: price floor rent control: price ceiling
Harry is lucky enough to get a rent-controlled apartment for $300 per month. The market rent on such an apartment is $3,000 per month. Harry himself values the apartment at $2,000 per month, and he'd be quite happy with a regular, $2,000 per month New York apartment. If he stays in the apartment, how much consumer surplus does he enjoy?
$1,700 per month
Which of the following is true about the increase in quality that results from a price floor? A.It is wasteful because consumers would rather not pay for higher quality. B.It is wasteful because it is better for the economy to produce more output rather than higher-quality output. C.It is beneficial because higher quality always increases consumer surplus. D.It is beneficial because when producers sell higher-quality output, they earn higher profits and hire more workers.
A
Without surge pricing, the number of Uber rides that take place at 2 a.m. on New Year's Eve would be: A.lower, because the higher price increases the quantity supplied in response to the increase in demand. B.the same, because the price is rising in order to keep the market in equilibrium. C.higher, because many Uber drivers prefer to work when prices are lower. D.higher, because the law of demand says that riders will not want to pay the higher surge prices.
A
Why might a person be willing to pay $40 for a flashlight during an emergency?
A person might really need a flashlight because she has no candles or other lights, or she might need to visit a sick relative late at night. There are many reasons why she might need it.
When a price ceiling is in place, keeping the price below the market price, what's larger: quantity demanded or quantity supplied? How does this explain the long lines and wasteful searches we see in price-controlled markets?
A price ceiling will make quantity demanded larger than quantity supplied. Those extra demanders wait in long lines and waste effort searching for scarce goods.
Skilled and unskilled labor are substitutes: For example, imagine that you can hire four low-skilled workers to move dirt with shovels at $5 an hour, or you can hire one skilled worker at $24 an hour to move the same amount of dirt with a skid loader. what will happen to the demand for skilled labor if the price of unskilled labor increases to $6.50 per hour?
At a wage of $5, it is cheaper to hire 4 low-skilled workers than to hire one skilled worker. However, if the wage is $6.50, then 4 low-skilled workers would cost $26, making the skilled worker cheaper. This increase in the wage of low-skilled workers will reduce the demand for this type of work.
The misallocation of resources from a price ceiling is the result of having _____ in the market. The misallocation of resources from a price floor is the result of having _____ in the market. A.high-value buyers; low-cost sellers B.low-value buyers; high-cost sellers C.low-cost sellers; high-value buyers D.high-cost sellers; low-value buyers
B
If there is a price ceiling in the market for cancer medication of $50 per pill, what is the widest price range within which you can definitely find both a buyer and a seller who would be willing to illegally exchange a pill for money?
Between $50 and $160, you can find both a buyer and a seller who are definitely willing to trade money for a pill. That creates a big incentive for a black market. The price can't be higher than $160 because those demanders might be getting their pills in the price-controlled market. And it can't be below $50 because those suppliers might already be supplying the price-controlled market.
With a price ceiling on bread, would you expect bread quality to rise or fall?
Bread quality is likely to fall, just as the quality of any price-controlled good is likely to fall (if the quality of the bread falls, so will the length of the line to get it)
Why are businesses reluctant to let unregulated markets cure the shortage?
Businesses don't like paying higher wages. They'd rather increase the supply of labor
What is a rent control? A.A price floor on rental housing that can lead to a shortage B.A price floor on rental housing that can lead to a surplus C.A price ceiling on rental housing that can lead to a shortage D.A price ceiling on rental housing that can lead to a surplus
C
assume that people must wait in line to get bread at the controlled price (half current price). Would consumer surplus rise or fall?
Consumer surplus must fall. The cost of waiting in line for the bread is the key: That "time-wasting" rectangle eats up any extra value that might have gone to consumers (lower price=ceiling=shortage=dw loss)
How do economists feel about the long lines that are created by price ceilings? A.Long lines are desirable because they increase the marginal value of the good. B.Long lines are an efficient way to determine who gets what because all people have time but not all people have money. C.Long lines are no better or worse than market prices at rationing goods. D.Long lines are wasteful because nobody receives the value of the time that is lost.
D
What is a price ceiling? A. Predetermined price below which sellers are not allowed to sell B. The price at which the quantity demanded equals the quantity supplied C.The maximum price at which there are gains from trade D.A maximum price allowed by law
D
Harry has a rent-controlled apartment for $300 per month. The market rent is $3,000 per month. Harry values the apartment at $2,000 per month. If he illegally subleases his apartment to Sally on the black market for $2,500 per month and instead rents a $2,000 apartment, is he better off or worse off than if he obeyed the law?
He is better off if he subleases the apartment—he can move into a regular $2,000 per month apartment plus have $500 in spending money left over.
The Canadian government has wage controls for medical doctors ($100,000 per year). It takes about 6 years to become a general practitioner or a pediatrician, but it takes about 8 or 9 years to become a specialist like a gynecologist, surgeon, or ophthalmologist. What kind of doctor would you want to become under this system?
If both jobs pay about the same, most people would rather be a general practitioner—the job is easier, the hours are better, and you get out of school sooner. That's actually what's happening in Canada: They have lots of generalists and few specialists.
assume that winter oil demand is higher in New Jersey than in California. If there had been no price controls, what would have happened to the prices of heating oil in New Jersey and in California and how would "greedy businesspeople" have responded to these price differences
If the demand for heating oil rose in New Jersey, then the price in New Jersey would rise relative to that in California. This would encourage greedy businesspeople to ship the gasoline on trucks or in pipelines from California to New Jersey until prices equalized. This would reduce the shortage in New Jersey.
If the minimum wage rises, will that increase or decrease the demand for the average union worker's labor? Why?
If the minimum wage rises, that will increase the demand for the average union worker's labor, because the competition (unskilled labor) is getting priced out of the market.
Why might a person want to sell a flashlight for $40 during an emergency?
Many reasons are possible. The person might have another flashlight, or might have candles, or might need money to buy water or medicine or food more than he needs a flashlight.
In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In the almost identical town of Meterville, parking costs $5 per hour (or $1.25 per 15 minutes). Where will it be easier to find parking: in Freedonia or Meterville?
Meterville bc in Freedonia, there will be a shortage of parking spots. In Meterville, there will be parking for those willing to pay the price.
In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In the almost identical town of Meterville, parking costs $5 per hour (or $1.25 per 15 minutes). b. One town will tend to attract shoppers who hate driving around looking for parking. Which one?
Meterville. Their stronger preference for easy-to-find parking suggests a higher willingness to pay for it. Thus, the meters are a worthwhile price to pay to ensure a parking space.
Why will the town meterville also attract shoppers with higher incomes?
People who have money to spend on meters typically have a higher opportunity cost for their free time. That typically means they earn higher wages.
The prices for taxi rides are the same in safe neighborhoods and in dangerous neighborhoods. Where is it easier to find a cab? Why? If these taxi price controls were ended, what would probably happen to the price and quantity of cab rides in dangerous neighborhoods?
Since taxi drivers prefer to drive in safe neighborhoods it is probably easier to find a cab in a safe neighborhood. If price controls were ended, taxis could charge more in dangerous neighborhoods, and they would probably drive there more often.
Why were most Soviet shop workers "boorish" while the McDonald's workers in Moscow were "polite"?
The Soviet shop workers were mean because they worked in a world of shortages: No matter how badly they behaved, all the goods would end up sold. The McDonald's workers were trained to be polite because McDonald's always faces competition from other restaurants. If their workers are boorish, customers will go somewhere else.
. If the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price, what would happen to the quantity supplied of bread?
The quantity supplied must fall—that's the easy part.
During a crisis, governments often make it illegal to raise the price of emergency items. If a person has a flashlight that she values at $5, but its price on the black market is $40, what gains from trade are lost if the government shuts down the black market?
The total gains from trade if trade is allowed are $35; these gains from trade would be split between the buyer and the seller, depending on the exact price they agreed upon
In the chart, there's a rectangle and a triangle. One represents the value lost from the "deals that don't get made" and one represents the value lost from "the deals that do get made." Which is which?
Triangle B represents value lost from the "deals that don't get made." Rectangle A represents the value lost in the "deals that do get made": the waiting in line by consumers if it's a price ceiling, or the wasteful searching (e.g., advertising, marketing) by suppliers if it's a price floor.
How is minimum wage really a "loss" from the worker's point of view? It's obvious why business owners would love to hire workers for less than the minimum wage; but if all companies obey the minimum wage law, why are some workers still willing to work for less than that?
They'd be willing to work for less than minimum because for many workers a low-paying job is better than not working at all. The minimum wage prices some low-skilled workers out of the market
If a government decides to make health insurance affordable by requiring all health insurance companies to cut their prices by 30%, what will probably happen to the number of people covered by health insurance?
This is a price ceiling: It will create a shortage in health insurance, and not all people demanding health insurance will be covered
Why might high-wage labor unions support an increase in the minimum wage?
Unions might support a rise in the minimum wage because it makes high-wage union labor more attractive than lower-wage labor
How do unregulated markets cure a "labor shortage" when there are no immigrants to boost the labor supply
Unregulated markets cure a labor shortage by pushing up the wage
When will entrepreneurs be more likely to fill up their pickup trucks with flashlights and drive into a disaster area: when they can sell their flashlights for $5 each or when they can sell them for $40 each?
When the price is $40, entrepreneurs are more likely to drive in with pickup trucks full of flashlights.
If each consumer with value between $110 and $10 stands an equal chance of getting the good, then on average each of the 1,000 units sold will be valued at $60. What is consumer surplus under the price control?
consumer surplus under random allocation will be ($60 − $10) × 1,000 = $50,000
Price controls distribute resources in many unintended ways. In the following cases, who will probably spend more time waiting in line to get scarce, price-controlled goods? Lawyers who charge $800 per hour or fast-food employees who earn $8 per hour?
fast-food employees who earn $8 per hour (more willing to stand in line; opportunity cost of free time is higher for the other groups)
Price controls distribute resources in many unintended ways. In the following cases, who will probably spend more time waiting in line to get scarce, price-controlled goods? People with desk jobs or people who can disappear for a couple of hours during the day?
people who can disappear for a couple of hours during the day (more willing to stand in line; opportunity cost of free time is higher for the other groups)
Price controls distribute resources in many unintended ways. In the following cases, who will probably spend more time waiting in line to get scarce, price-controlled goods? Working people or retired people?
retired people (more willing to stand in line; opportunity cost of free time is higher for the other groups)
