Deck 6: Government Intervention

Question 1

Positive analysis:

A)evaluates whether a policy is a good idea.
B)leads to the best solutions.
C)is the only way to analyze a policy.
D)examines if a policy actually accomplished its goals.

Answer 1

examines if a policy actually accomplished its goals.

Question 2

A government might intervene in a market to:

A)increase the efficiency of the market.
B)reduce the consumption of a "bad" product.
C)correct a market failure.
D)All of these are reasons why a government might intervene in a market.

Answer 2

All of these are reasons why a government might intervene in a market.

Question 3

For a price ceiling to have an impact on a market it must be set:

A)above the equilibrium price.
B)below the equilibrium price.
C)equal to the equilibrium price.
D)anywhere along the demand curve.

Answer 3

below the equilibrium price.

Question 4

In evaluating policy effectiveness, economists rely on:

A)positive analysis.
B)normative analysis.
C)both normative and positive analysis.
D)Economists can never fully analyze any real-world policy effectiveness.

Question 5

Why might a government impose a minimum wage?

A)To correct a market failure
B)To redistribute surplus in a market
C)To encourage the consumption of inferior goods
D)To discourage the consumption of inferior goods

Question 6

Positive analysis:

A)involves the formulation and testing of hypotheses.
B)involves value judgments concerning the desirability of alternative outcomes.
C)weighs the fairness of a policy.
D)examines if an outcome is desirable.

Question 7

Which of the following exemplifies a market failure?

A)One person's consumption of a good imposes costs on others.
B)A firm selling a product faces competition from many other sellers.
C)A good is priced too high for poor families to afford.
D)The distribution of surplus in a market is unfair.

Question 8

Governments might choose to intervene in a market in an attempt to:

A)encourage the consumption of certain goods.
B)discourage the consumption of certain goods.
C)redistribute surplus.
D)All of these are correct.

Question 9

Government attempts to lower, raise, or simply stabilize prices will usually:

A)maintain the distribution of surplus.
B)create unintended side effects.
C)improve the efficiency of a market.
D)All of these are correct.

Question 10

Price controls:

A)are regulations that set a maximum or minimum legal price for a particular good.
B)allow a market to reach equilibrium.
C)prevent a good from being bought or sold.
D)All of these are correct.

Question 11

A market failure is most likely to occur when:

A)a sole producer of a good faces no threat of competition.
B)several producers of a good compete for customers by having price wars.
C)several producers of a good search for the lowest-cost method of production.
D)many producers produce identical products, and only the consumers are affected by the transactions.

Question 12

Government attempts to set prices below market equilibrium can:

A)lead to more producer surplus.
B)encourage more production.
C)reduce the total surplus in the market.
D)always create a better outcome.

Question 13

Governments can discourage the consumption of certain goods by:

A)giving a subsidy to consumers in those markets.
B)taxing substitute goods.
C)imposing a minimum price above the equilibrium price.
D)None of these policies decrease the consumption of goods.

Question 14

If a good has only one producer, with no threat of competition, it is likely that government intervention in the market will:

A)have no impact.
B)raise prices for consumers.
C)increase total surplus.
D)make buyers and sellers better off.

Question 15

If a good has only one producer, with no threat of competition, the market for this good likely:

A)has greater consumer surplus than in a competitive equilibrium.
B)has the price set inefficiently high.
C)has the price set below the competitive equilibrium price.
D)is efficient.

Question 16

Normative analysis:

A)involves the formulation and testing of hypotheses.
B)is a value-free evaluation of a policy.
C)involves a value judgement regarding the desirability of a policy.
D)examines if a policy actually accomplished its goal.

Question 17

What do we call situations in which the assumption of efficient, competitive markets fails to hold?

A)Market failures
B)Inelastic-response markets
C)Missing markets
D)Market interventions

Question 18

What type of public policy could a government set in response to rising prices of a basic necessity?

A)Make it illegal to charge higher prices for the good
B)Hire more producers of the good
C)Subsidize the price of the good
D)All of these are ways a government can try to address rising prices of a basic necessity.

Question 19

How might a government attempt to protect dairy farmers from low milk prices?

A)Banning households from hoarding milk
B)Setting a minimum price on milk
C)Increasing taxes on dairy farmers
D)Reducing subsidies on the price of milk

Question 20

A price ceiling is:

A)a legal maximum price.
B)a legal minimum price.
C)a legal maximum quantity that can be sold at a particular price.
D)a legal minimum quantity that can be sold at a particular price.

Question 21

The graph shown best represents:

A)a binding price ceiling.
B)a binding price floor.
C)a missing market.
D)a market for an inferior good.

Question 22

If a price ceiling is set at $8 in the market in the graph shown, the total number of units traded will:

A)fall by 8, relative to equilibrium.
B)fall by 15, relative to equilibrium.
C)fall by 23, relative to equilibrium.
D)increase by 15, relative to equilibrium.

Question 23

In order for a price ceiling to be binding, it must be set _______ the equilibrium price, and it will likely cause _______.

A)above; a shortage
B)below; a shortage
C)above; excess supply
D)below; excess supply

Question 24

If a price ceiling is set at $8 in the market shown in the graph:

A)some surplus will be transferred from consumer to producer.
B)some surplus will be transferred from producer to consumer.
C)all consumers will be better off.
D)all producers will be better off.

Question 25

A price ceiling that is set at $8 in the market shown in the graph is:

A)non-binding and would not affect the market.
B)binding and would cause a shortage.
C)binding and would cause excess supply.
D)non-binding and would not prevent the market from reaching equilibrium.

Question 26

If a price ceiling is set at $8 in the market shown in the graph, which area(s)would represent producer surplus?

A)C + D + E
B)C + D + F + G
C)E
D)A + C + E

Question 27

Which action could cause the price ceiling shown in the graph to become non-binding?

A)An increase in demand (shift to the right)
B)A decrease in demand (shift to the left)
C)A decrease in supply (shift to the left)
D)None of these would cause the price ceiling to become non-binding.

Question 28

Why do governments tend to set price ceilings?

A)To ensure everyone can afford certain goods.
B)To encourage producers to make enough for everyone.
C)To help producers make enough profit to stay in the industry.
D)To prevent consumers from choosing the wrong goods.

Question 29

If a price ceiling is set at $8 in the market shown in the graph:

A)a shortage of 7 units will occur.
B)a shortage of 15 units will occur.
C)a shortage of 23 units will occur.
D)a shortage of 8 units will occur.

Question 30

If a price ceiling is set at $8 in the market in the graph shown:

A)some consumers will benefit because they pay a lower price.
B)producers will lose because they sell at a lower price.
C)the quantity traded in the market will fall.
D)All of these are correct.

Question 31

A binding price ceiling:

A)will cause quantity supplied to exceed quantity demanded.
B)will increase total well-being.
C)will set a legal minimum price in a market.
D)will cause quantity demanded to exceed quantity supplied.

Question 32

Which action could cause the price ceiling shown in the graph to become non-binding?

A)An increase in demand (shift to the right)
B)A decrease in supply (shift to the left)
C)An increase in supply (shift to the right)
D)None of these would cause the price ceiling to become non-binding.

Question 33

If a price ceiling is set at $8 in the market shown in the graph, which areas would represent total surplus?

A)A + B + C + D + E + F + G
B)A + B + C + D + E
C)A + C + E
D)A + B + C + D + E + F

Question 34

If a binding price ceiling is set in the market shown in the graph:

A)quantity demanded will exceed quantity supplied.
B)quantity supplied will exceed quantity demanded.
C)the demand curve will have to shift.
D)the supply curve will have to shift.

Question 35

If a price ceiling is set at $8 in the market shown in the graph:

A)excess supply of 7 units will occur.
B)excess supply of 15 units will occur.
C)excess supply of 23 units will occur.
D)no excess supply will occur.

Question 36

A price ceiling in the market shown in the graph would be non-binding if it were set at:

A)$5.
B)$8.
C)$10.
D)$13.

Question 37

A price ceiling is non-binding when:

A)it is set above the equilibrium price.
B)it is set below the equilibrium price.
C)it reduces the output in a market.
D)it increases the output in a market.

Question 38

If a price ceiling is set at $8 in the market shown in the graph, which area(s)would represent consumer surplus?

A)A + C
B)A + B
C)A + B + C
D)A + B + C + D + F + G

Question 39

If a price ceiling is set at $8 in the market shown in the graph, which area(s)would represent deadweight loss?

A)F + G
B)B + D
C)E
D)B + D + F + G

Question 40

If a price ceiling is set at $8 in the market shown in the graph, which area(s)would represent the surplus that is transferred from producers to consumers?

A)C + D + F + G
B)C + D
C)F + G
D)C

Question 41

According to the market in the graph shown, at which of the following prices could a binding price ceiling be set?

A)$15
B)$11
C)$8
D)A binding price ceiling could not be set at any of these prices.

Question 42

The graph shown best represents:

A)a binding price ceiling.
B)a binding price floor.
C)a missing market.
D)the market for an inferior good.

Question 43

If a price ceiling of $12 is set in the market shown in the graph, what will consumer surplus be?

A)$260
B)$130
C)$88
D)$60

Question 44

If the intended aim of the price ceiling set at $6, as shown in the graph, was a net increase in the well-being of consumers, then positive analysis would conclude that the policy was:

A)effective because the surplus gained by consumers through lower prices is greater than the surplus they lost due to fewer transactions taking place.
B)ineffective because the surplus gained by consumers through lower prices is less than the surplus they lost due to fewer transactions taking place.
C)effective because the surplus lost by producers through lower prices is less than the surplus gained by consumers through lower prices.
D)ineffective because the amount of deadweight loss is greater than the surplus gained by consumers from lower prices.

Question 45

A binding price floor:

A)will cause quantity demanded to exceed quantity supplied.
B)will cause quantity supplied to exceed quantity demanded.
C)will increase total well-being.
D)will set a legal maximum price in a market.

Question 46

If a price ceiling of $14 is set in the market shown in the graph: QS appears to be incomplete.I. Total surplus will be $90.II. Deadweight loss will be $8.III. Producer surplus will be $25.

A)I only
B)III only
C)II and III only
D)I, II, and III

Question 47

If the intended aim of the price ceiling set at $6, as shown in the graph, was a net increase in the well-being of consumers, then normative analysis would conclude that the policy was:

A)effective because the surplus gained by consumers through lower prices is less than the surplus they lost due to fewer transactions taking place.
B)ineffective because the surplus gained by consumers through lower prices is less than the surplus they lost due to fewer transactions taking place.
C)effective because the surplus lost by producers through lower prices is less than the surplus gained by consumers through lower prices.
D)There is no "right" conclusion to be reached (in a normative sense)because different people will have different opinions concerning what constitutes a better outcome.

Question 48

In order for a price floor to be binding, it must be set _______ the equilibrium price, and it will likely cause _______.

A)above; a shortage
B)below; a shortage
C)above; excess supply
D)below; excess supply

Question 49

How can one allocate a good that is undersupplied due to a binding price ceiling?

A)Offer it on a first-come, first-served basis.
B)Ration a certain quantity per household.
C)Give the good to the friends and family of the producers.
D)All of these are correct.

Question 50

Because a price ceiling causes:

A)a shortage, some form of rationing must occur.
B)excess supply, some form of rationing must occur.
C)a shortage, the outcome will be efficient.
D)excess supply, the outcome will be inefficient.

Question 51

If the intended aim of the price ceiling set at $6, as shown in the graph, was a net increase in the well-being of consumers, what would positive analysis consider?

A)Whether the surplus transferred from consumers to producers is greater than the consumer surplus lost.
B)Whether the producer surplus lost to deadweight loss is greater than the producer surplus gained from a higher price.
C)Whether the surplus transferred from producers to consumers is greater than the consumer surplus lost.
D)Whether the producer surplus lost due to lower prices is greater than the producer surplus lost due to fewer transactions taking place.

Question 52

If the intended aim of the price ceiling set at $6, as shown in the graph, was a net increase in the well-being of consumers, then positive analysis would conclude that the policy was:

A)effective because areas A + C are larger than areas B + D.
B)effective because area B is smaller than area D.
C)ineffective because area D is larger than area E.
D)ineffective because areas A + C + D are larger than areas B + E.

Question 53

Suppose S1 represents the initial market supply in the graph shown. A price ceiling is then set at $8. If supply shifts from S1 to S2, what will occur?

A)The price ceiling will no longer be binding.
B)The price ceiling will prevent output from changing.
C)The size of the shortage will increase.
D)The market will not reach equilibrium.

Question 54

According to the market in the graph shown, at which of the following prices could a binding price floor be set?

A)$10
B)$6
C)$8
D)A binding price floor could not be set at any of these prices.

Question 55

If the intended aim of the price ceiling set at $6, as shown in the graph, was a net increase in the well-being of consumers, the policy was:

A)effective because consumers gained in surplus overall.
B)ineffective because some consumers lost surplus.
C)ineffective because consumers lost surplus overall.
D)effective because all consumers gained surplus.

Question 56

Which of the following is a prominent argument against the use of price ceilings?

A)They are unfair.
B)They lead to an increase in surplus but a waste of society's resources.
C)They lead to a decrease in total surplus.
D)They raise corporate profits.

Question 57

A price floor is:

A)a legal maximum price.
B)a legal minimum price.
C)a legal maximum quantity that can be sold at a particular price.
D)a legal minimum quantity that can be sold at a particular price.

Question 58

The graph shown best represents:

A)a non-binding price ceiling.
B)a non-binding price floor.
C)a missing market.
D)the market for an inferior good.

Question 59

The graph shown best represents:

A)a non-binding price ceiling.
B)a non-binding price floor.
C)a missing market.
D)the market for an inferior good.

Question 60

Which of the following is an unintended consequence of price ceilings?

A)The loss of surplus always outweighs the benefits of the policy.
B)Non-price rationing must occur and can lead to bribes.
C)The transfer of surplus from producer to consumer rarely is recognized.
D)Producers will increase the quality of the goods sold.

Question 61

If a price floor is set at $23 in the market shown in the graph, the total number of units traded will:

A)fall by 20, relative to equilibrium.
B)fall by 27, relative to equilibrium.
C)fall by 37, relative to equilibrium.
D)rise by 10, relative to equilibrium.

Question 62

If a price floor is set at $23 in the market shown in the graph, which areas would represent producer surplus?

A)B + C + D + F
B)B + E
C)B + C + D
D)B + C + E + F

Question 63

If the intended aim of the price floor set at $12, as shown in the graph, was a net increase in the well-being of producers, then normative analysis would conclude that the policy was:

A)effective because the surplus gained by producers through higher prices is greater than the surplus they lost through deadweight loss.
B)ineffective because the surplus gained by producers through higher prices is greater than the surplus they lost through deadweight loss.
C)effective because the surplus gained by producers through higher prices is greater than the surplus lost by consumers through higher prices.
D)There is no "right" conclusion to be reached in a normative sense, because normative analysis is not based on value judgements.

Question 64

If a price floor is set at $23 in the market shown in the graph, which area(s)would represent consumer surplus?

A)A
B)A + B
C)A + B + C
D)A + B + C + D

Question 65

If a price floor is set at $23 in the market shown in the graph:

A)some surplus will be transferred from consumers to producers.
B)some surplus will be transferred from producers to consumers.
C)all producers will be better off.
D)all consumers will be better off.

Question 66

If a price floor is set at $23 in the market shown in the graph, which area(s)would represent total surplus?

A)A
B)B + C + E + F
C)A + B + E
D)A + B + C + E + F

Question 67

If a price floor is set at $23 in the market shown in the graph, which area(s)would represent deadweight loss?

A)C + F
B)C + D + F
C)G
D)B + C + E + F

Question 68

Suppose the market in the graph shown is in equilibrium. If a price floor is set at $13, the total number of units traded:

A)falls by 5.
B)falls by 3.
C)increases by 2.
D)increases by 5.

Question 69

Suppose a price floor is set at $10 in the market shown in the graph. Which of the following statements is true?I. All consumers are worse off due to the higher price.II. All producers are better off, because producer surplus increases.III. The economy as a whole is worse off, because total surplus falls.

A)II only
B)I and III only
C)III only
D)I, II, and III

Question 70

If a price floor is set at $23 in the market shown in the graph:

A)excess supply of 27 will occur.
B)excess supply of 37 will occur.
C)excess supply of 10 will occur.
D)no excess supply will occur.

Question 71

A price floor in the market shown in the graph would be non-binding if it were set at:

A)$30.
B)$23.
C)$16.
D)Any of these prices.

Question 72

If a price floor is set at $23 in the market shown in the graph:

A)some consumers would lose because they will pay a higher price.
B)some producers would gain because they will sell at a higher price.
C)the quantity traded in the market would fall.
D)All of these are correct.

Question 73

Suppose a price floor is set at $10 in the market shown in the graph. Which of the following statements is true?

A)A shortage of five units occurs
B)Excess supply of five units occurs
C)Total surplus increases
D)Deadweight loss falls

Question 74

If a price floor is set at $23 in the market shown in the graph:

A)a shortage of 37 will occur.
B)a shortage of 10 will occur.
C)a shortage of 27 will occur.
D)no shortage will occur.

Question 75

If a binding price floor were placed in the market shown in the graph:

A)quantity demanded would exceed quantity supplied.
B)quantity supplied would exceed quantity demanded.
C)the demand curve would have to shift.
D)the supply curve would have to shift.

Question 76

Which action could cause the price floor shown in the graph to become non-binding?

A)An increase in demand (shift to the left)
B)A decrease in supply (shift to the left)
C)An increase in supply (shift to the right)
D)None of these would cause the price floor to become non-binding.

Question 77

If a price floor is set at $23 in the market shown in the graph, which area(s)would represent the surplus that is transferred from consumers to producers?

A)B + C + D
B)B + C
C)C
D)B

Question 78

If the intended aim of the price floor set at $23, as shown in the graph, was a net increase in the well-being of producers, then positive analysis would have us consider whether:

A)the surplus transferred from producers to consumers is greater than the consumer surplus lost due to fewer transactions taking place.
B)the surplus transferred from consumers to producers is greater than the consumer surplus lost due to fewer transactions taking place.
C)the producer surplus lost due to fewer transactions taking place is greater than the producer surplus gained from a higher price.
D)the producer surplus lost due to lower prices is greater than the producer surplus lost due to fewer transactions taking place.

Question 79

If the intended aim of the price floor set at $12, as shown in the graph, was a net increase in the well-being of producers, then positive analysis would consider the policy to be:

A)effective if area C is larger than area E.
B)effective if areas E + B are larger than areas C + D + F.
C)ineffective if area B is larger than area E.
D)ineffective if areas E + B are larger than areas A + C + D + F.

Question 80

A price floor that is set at $23 in the market shown in the graph is:

A)binding and would cause a shortage.
B)non-binding and would not affect the market.
C)binding and would cause excess supply.
D)non-binding and would not prevent the market from reaching equilibrium.