Question 1

In order for a price ceiling to have an effect on the market, must it be set above or below the equilibrium price? Why?

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Question 2

Why do rent ceilings lead to shortages and black markets?

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Question 3

What is the difference between a rent ceiling set below the equilibrium rent and a rent ceiling set above the equilibrium rent?

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Question 4

Suppose that apartments rent for $1,300 a month in San Francisco, California and $850 a month in Los Angeles, California. If the state of California passes a state-wide rent ceiling for apartments of $1,100 a month, what occurs in the two cities?

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Question 5

The federal minimum wage in 2010 was $7.25. If this wage rate was less than the equilibrium wage, what is the effect?

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Question 6

What are the major economic effects of rent ceilings?

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Question 7

More than 80 percent of the home heating oil used in the United States goes to the Northeast. In Vermont, the vast majority of people there use oil to stay warm when it's cold outside. Richard Izor heats his home with oil and inquires, "I'd like to see them come in and put a ceiling on the oil price now before it gets any higher. Why they haven't done this is more than I can understand." Which of the following is NOT likely to occur if such a price ceiling was imposed?

Accepted Answer

A price ceiling would lead to a lower price for heating oil, likely causing an increase in demand for oil and a decrease in supply as oil producers find it less profitable to produce oil at lower prices. This could result in a shortage of heating oil rather than a surplus. A black market for heating oil could also be created as consumers try to find ways to obtain oil at the lower price. Additionally, a price ceiling could lead to inefficiencies in the market as oil producers and distributors may have less incentive to innovate and improve efficiency if they cannot charge higher prices for their products.

Question 8

Do rent ceilings result in any deadweight loss?

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Question 9

Suppose the government imposes a price ceiling that is lower than the equilibrium price. Discuss the effect, if any, on the price and quantity if the government later removes the price ceiling.

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Question 10

What are the effects of a rent ceiling set below the equilibrium rent?

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Question 11

One of the best defenses we have against malaria these days comes from a fern-like weed called wormwood. Fluctuating supply and demand have pushed the plant's price from $155 per kilo one year, to over $1000 the next. There is a push to set a price ceiling for the plant. Which of the following would NOT occur if there was a price ceiling set below the equilibrium price on wormwood?

Accepted Answer

Allocative efficiency occurs when the market price equals the marginal cost of production, which is not guaranteed by a price ceiling set below the equilibrium price. In fact, price ceilings are known to cause shortages and inefficient allocation of resources, which contradicts the concept of allocative efficiency.

Question 12

In the housing market, if a rent ceiling of $600.00 is imposed when the equilibrium rent is $500.00, why will nothing change?

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Question 13

What is a black market and how does it influence the market for rental housing if a rent ceiling creates a housing shortage? What determines the level of the black market rent?

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Question 14

The minimum wage in 2008 was $6.55 cents until July 2008 when it was raised to $7.25. If the minimum wage in June was below the equilibrium wage and the increased wage in July was above the equilibrium wage, then

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Question 15

"The tax on insulin in the Philippines is anywhere between 10 and 20 percent. If you are rich and living in the Philippines, this is not a problem, but if you are poor, then insulin becomes something that you cannot afford." If the government places the tax on sellers, what is the effect on the supply and demand curves?

Accepted Answer

Placing the tax on sellers would increase the cost of producing and selling insulin, meaning that suppliers would have to increase the price they charge consumers. This would cause a leftward shift in the supply curve, as the quantity supplied at each price level would decrease. The demand for insulin, however, would remain the same as it was before the tax was implemented, since people still require insulin for their health. Therefore, the demand curve would stay the same, while the supply curve shifts leftward.

Question 16

Explain why in cities such as New York City that have rent ceiling laws, so many people who work in the city commute from outside the city.

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Question 17

"The tax on insulin in the Philippines is anywhere between 10 and 20 percent. If you are rich and living in the Philippines, this is not a problem, but if you are poor, then insulin becomes something that you cannot afford." If the government places the tax on sellers, what is the most likely tax incidence?

Accepted Answer

The tax incidence would likely fall on the buyers, as sellers may increase the price of insulin to maintain their profit margin. As a result, the burden of the tax would be shifted onto the buyers, particularly those who are unable to afford the higher price, such as the poor.

Question 18

In the 1980s, one of the most common sights in the socialist countries, such as the former Soviet Union and North Korea, were long lines for bread, sugar, and other necessities. These countries had price ceilings on these necessities. Some of the socialist nations, such as the former Soviet Union, have moved to a market economy by lifting the price ceilings, while others, such as North Korea, have retained their price ceilings. What prediction do you make about the presence (or absence) of long lines today in the former Soviet Union and North Korea? Explain your answer.

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Question 19

"The tax on insulin in the Philippines is anywhere between 10 and 20 percent. If you are rich and living in the Philippines, this is not a problem, but if you are poor, then insulin becomes something that you cannot afford." Why do buyers care so much about a tax on insulin, a vital daily medicine for those with diabetes?

Accepted Answer

Buyers care about the tax on insulin because they pay virtually the entire tax due to the almost perfectly inelastic demand for insulin. This means that the quantity demanded does not change much in response to a change in price, so buyers cannot simply switch to a substitute or go without insulin. Therefore, they must bear the burden of the tax, which becomes a significant financial burden for poor individuals who require daily insulin injections.

Question 20

Most of us are dependent on crude oil in some shape or way, whether it's to power our cars or to heat our homes in some parts of the country. More than 80 percent of the home heating oil used in the United States goes to the Northeast. It is suggested that there needs to be government regulation to make it illegal to charge a very high price for oil. This type of regulation would be a ________.

Accepted Answer

A price ceiling is a government regulation that sets a maximum price that can be charged for a good or service. In this case, if the government were to set a price ceiling on oil, it would make it illegal for suppliers to charge a very high price, and consumers in the Northeast would be able to buy home heating oil at a more affordable cost.

Quiz 6: Government Actions in Markets