Microeconomics Chapter 5

The figure shows a market in which a $2.00 price ceiling has been imposed. At the price ceiling, what is the quantity supplied? A. 100 B. 70 C. 0 D. 130

B. 70 The price ceiling causes the quantity supplied to be lower than otherwise.

The figure shows a market in which a $22 price floor has been imposed. At the price floor, what is the amount of the resulting surplus? A. 45 units B. 50 units C. 0 units D. 25 units

A. 45 units Without the intervening price floor, this surplus would create downward pressure on price.

The figure shows a market in which a $22 price floor has been imposed. At the price floor, what is the quantity supplied? A. 70 B. 95 C. 25 D. 50

A. 70 Quantity supplied has risen in response to the price floor.

Most industrialized nations have a minimum wage in effect in the unskilled labor market. Part 1: Use the line-drawing tool to indicate an effective minimum wage (Minimum wage). Part 2: Use drop lines to indicate the quantity of labor demanded (Qd) and the quantity of labor supplied (Qs) at this minimum wage level.

An effective minimum wage is one that is greater than the equilibrium wage. Use the line drawing tool to draw a horizontal line at a level above the wage at the intersection of the labor demand and labor supply curves. Then use drop lines to show the quantity of labor demanded and supplied at the minimum wage. To show the quantity of labor demanded at the minimum wage, put the dot of the drop tool at the point where the downward-sloping labor demand curve crosses the horizontal minimum wage line. To show the quantity of labor supplied at the minimum wage, put the dot of the drop tool at the point where the upward-sloping labor supply curve crosses the horizontal minimum wage line. Note that as a result of the higher-than-equilibrium wage the quantity of labor supplied exceeds the quantity of labor demanded. For further review, go back to Chapter 5; Section: Price Floors.

The figure shows a market in which a $2.00 price ceiling has been imposed. What would be the equilibrium price and quantity in the absence of the price ceiling? A. P = $3.50, Q = 70 B. P = $3.50, Q = 100 C. P = $3.50, Q = 130 D. P = $5.00, Q = 130

B. P = $3.50, Q = 100 If this were the outcome, there would be no deadweight loss.

The figure shows a market in which a $22 price floor has been imposed. What is the amount of the resulting deadweight loss? A. Triangle abc B. Triangle acd C. Triangle abe D. Triangle bec

B. Triangle acd This represents a loss of total surplus.

The figure shows a market in which a $2.00 price ceiling has been imposed. What is the area of the resulting deadweight loss? A. Triangle bde B. Triangle dac C. Triangle dec D. Triangle cbe

B. Triangle dac This represents the loss of total surplus due to transactions that have been prevented.

A price ceiling is A. the lowest price a producer will accept for a good. B. a maximum price established by government intervention. C. a minimum price established by government intervention. D. the highest price a consumer will pay for a good.

B. a maximum price established by government intervention. A price ceiling is typically imposed in response to claims that the current price is too high.

A price floor is A. the lowest price a producer will accept for a good. B. a minimum price established by government intervention. C. the highest price a consumer will pay for a good. D. a maximum price established by government intervention.

B. a minimum price established by government intervention. Price floors typically result in surpluses.

Price floors generate a deadweight loss because they A. result in an inefficiently low quality. B. prevent mutually beneficial transactions from occurring. C. result in an inefficiently high quantity. D. are unfair to producers.

B. prevent mutually beneficial transactions from occurring. Some potential customers who would be willing to pay enough to get the good to market will have to make do without it.

When a quota creates a difference between the demand price and the supply price of a good, the name given to this difference is A. licensed profit. B. quota rent. C. deadweight wedge. D. windfall profit.

B. quota rent. Producers who are able to sell in a quota-restricted market will tend to earn relatively high profits.

Price ceilings typically lead to inefficiencies because A. they result in inefficiently high quality. B. they misallocate resources. C. they cause higher profits for producers. D. they are unfair to consumers.

B. they misallocate resources. Price ceilings prevent some potentially beneficial transactions.

An upper limit on the amount of a good that can be transacted is known as A. a quantity boundary. B. a supply sanction. C. a quota. D. a quantity certificate.

C. a quota. An effective quota will typically cause an increase in price.

If a price floor is imposed above the equilibrium price in a market, it will result in A. an inefficiently low quality for the good. B. an inefficiently high quantity of the good being consumed. C. an inefficiently low quantity of the good being consumed. D. an increase in consumer surplus.

C. an inefficiently low quantity of the good being consumed. This inefficiently low quantity will result in a deadweight loss.

If the price of a good is held below the equilibrium price, A. demand will increase. B. supply will decrease. C. quantity demanded will exceed quantity supplied. D. quantity supplied will exceed quantity demanded.

C. quantity demanded will exceed quantity supplied. Consumers respond to the lower price by demanding more, but producers respond by supplying less.

The figure shows a market in which a $22 price floor has been imposed. At the price floor, the quantity demanded has fallen by _______ units below what it would have been in equilibrium. A. 70 B. 50 C. 20 D. 25

D. 25 Quantity demanded has fallen from 50 to 25 units.

Which of the following statements is true? A. Both price floors and price ceilings result in inefficiently high quantities. B. Both price floors and price ceilings create shortages. C. Both price floors and price ceilings create surpluses. D. Both price floors and price ceilings result in wasted resources.

D. Both price floors and price ceilings result in wasted resources. Price controls tend to create a deadweight loss.

Who benefits from a system of rent control? A. Tenants in apartments that are not subject to rent control B. Landlords of rent-controlled apartments C. All tenants D. Tenants in rent-controlled apartments

D. Tenants in rent-controlled apartments Keep in mind that the effect of rent control is to keep the rental price lower than otherwise.

If the price of a good is held above the equilibrium price, A. demand will decrease. B. supply will increase. C. quantity demanded will exceed quantity supplied. D. quantity supplied will exceed quantity demanded.

D. quantity supplied will exceed quantity demanded. This will result in a surplus.

Assume that the diagram below describes the apartment market in Newark. Part 1: Suppose that the government decides to impose rent control in the amount of $600. Draw the price ceiling line (Price ceiling). Part 2: Use drop lines to indicate the quantity demanded (Qd) and the quantity supplied (Qs) after the imposition of the rent control. Part 3: Use an area tool to illustrate the deadweight loss (DL) due to the imposition of the rent control.

To illustrate the price ceiling use an infinite line to draw a horizontal line at the level of 600, a price below the market equilibrium price. The quantity supplied at this government-imposed price will be at the point where the price ceiling line crosses the supply curve; label this point Qs. The quantity demanded will be at the point where the price ceiling line crosses the demand curve; label this point Qd. Notice that the quantity supplied is less than the quantity demanded because the price ceiling is below the equilibrium price; this inefficiently low level of transactions results in a deadweight loss. To illustrate the deadweight loss use the triangle area tool to highlight the triangular area between the demand curve and the supply curve from the quantity transacted at the price ceiling (3 units) to the equilibrium quantity. To be more specific, the triangle has one point where the price is $1,400 and the quantity is 3, a second point where the price is $1,000 and the quantity is 5, and a third point where the price is $600 and the quantity is 3. Go back to Chapter 5 and re-review the section entitled "Price Ceilings".