Question 1

A predictable result of the imposition of binding price floors or price ceilings is
A)shortages.
B)a reduction in quantities exchanged.
C)surpluses.
D)production control by the government.
E)a more equitable distribution of commodities.

Accepted Answer

The answer of A predictable result of the imposition of...

Question 2

Suppose the government imposes a price ceiling on rental housing that is below the market-clearing price.The resulting shortage will be
A)greater the more recently the controlled price went into effect.
B)smaller the longer the controlled price has been in effect.
C)greater the more elastic the demand for rental housing.
D)smaller the more elastic the demand for rental housing.
E)diminished over time.

Accepted Answer

A price ceiling below the market-clearing price creates a shortage. The greater the elasticity of demand, the larger the quantity demanded will expand in response to lower prices, exacerbating the shortage. Elastic demand means consumers are more responsive to price changes, so when prices are artificially lowered, the quantity demanded increases significantly, leading to a larger shortage.

Question 3

The surpluses associated with a binding price floor will be the smallest when
A)both supply and demand are highly elastic.
B)both supply and demand are highly inelastic.
C)supply is highly elastic and demand is highly inelastic.
D)supply is highly inelastic and demand is highly elastic.
E)both supply and demand are unit elastic.

Accepted Answer

When both supply and demand are highly inelastic, the quantity supplied and demanded responds very little to price changes, resulting in the smallest surplus when a binding price floor is set above the equilibrium price.

Question 4

Assume that the long-run supply of housing is highly elastic.The imposition of binding rent controls will lead to
A)a reduction in the housing shortage over time.
B)a worsening of the housing shortage over time.
C)no significant change in the housing shortage over time.
D)only a temporary housing shortage.
E)the price of rental housing to revert back to its free-market equilibrium level.

Accepted Answer

If the long-run supply of housing is highly elastic, this means that there is a large capacity to build new housing or convert existing buildings into housing units. When rent controls are imposed, landlords may choose to convert their properties into owner-occupied or commercial properties, decreasing the overall supply of rental housing. This, combined with decreased incentives for developers to build new rental housing, will worsen the housing shortage in the long term.

Question 5

Assuming that the long-run supply of housing is more ________ than the short-run supply,the imposition of binding rent controls will generally ________.
A)inelastic; lead to a reduction in the housing shortage over time
B)elastic; lead to a worsening of the housing shortage over time
C)inelastic; lead to no significant change in the housing shortage
D)elastic; lead to only a temporary housing shortage
E)elastic; lead the price of rental housing to revert back to its equilibrium level

Accepted Answer

In the short run, the supply of housing is relatively fixed as it takes time to build new housing units. Therefore, the imposition of rent controls will lead to a shortage of available rental housing as there will be more demand than supply at the controlled rate. In the long run, however, developers will have time to build new housing units, but the supply is still likely to be relatively elastic as they may face difficulties attracting construction workers and obtaining necessary permits. This means that the housing shortage is likely to worsen over time as developers may be discouraged from building new units due to the rent control regulations.

Question 6

If a binding price ceiling is in place and if the demand curve for the product shifts rightward,one consequence would be
A)the quantity exchanged would increase.
B)the quantity exchanged would remain constant.
C)the quantity exchanged would decrease.
D)an increase in the amount of excess supply.
E)a decrease in the amount of excess demand.

Accepted Answer

EA binding price ceiling sets the maximum price below the equilibrium price, causing a shortage (excess demand). If demand increases (shifts rightward), the quantity exchanged remains constant because the price cannot adjust due to the ceiling. However, the amount of excess demand increases because more people want the product at the ceiling price, but suppliers cannot provide more due to the price restriction.

Question 7

If the government imposes a price ceiling for some product,and a black market subsequently develops that gains control of all of the reduced output of the product,then
A)the black market price will be lower than the ceiling price.
B)excess profits will flow back to consumers.
C)the quantity demanded will exceed quantity supplied at the black market price.
D)the black market price will be higher than the free-market equilibrium price.
E)consumers will be better off than they would be in the absence of the black market.

Accepted Answer

When a price ceiling is imposed, suppliers are unable to increase their profits by charging a higher price. They may eventually withdraw from supplying the product, which creates shortages in the market. The quantity supplied is lower than the quantity demanded, which creates an opportunity for a black market. The black market price then tends to be higher than the price ceiling since the suppliers in the black market have to compensate for the risks and costs associated with operating illegally. Therefore, the black market price will be higher than the free-market equilibrium price.

Question 8

The long-run elasticity of supply of rental housing is greater than the short-run elasticity of supply because
A)changes in supply can occur very quickly,especially when rent controls are in place.
B)investment in new rental housing has such a short payback period.
C)changes in supply occur only after investment decisions are made regarding,for example,new construction or conversion of rental housing to other uses.
D)in the long run,landlords have no incentive to alter the supply of rental housing.
E)the demand for rental housing is changing continuously.

Accepted Answer

In the short run, supply of rental housing cannot be adjusted much as it requires investment decisions regarding new construction or conversion of rental housing to other uses, which takes time. However, in the long run, supply can be adjusted as landlords will have enough time to make decisions about their housing stock. This means that the long-run elasticity of supply of rental housing is greater than the short-run elasticity of supply. Therefore, option C is the correct answer.

Question 9

Suppose a negatively sloped demand curve and a positively sloped supply curve intersect at a price and quantity combination of $100 and 600 units of the good.But suppose that producers actually produce and sell 610 units.What can we correctly say about market efficiency in this case?
A)The value placed on the final 10 units of the good by consumers exceeds the additional costs associated with their production - this market is not efficient.
B)The production and consumption of the additional 10 units of the good increases total economic surplus and increases market efficiency.
C)This market is efficient because economic surplus is maximized as production and consumption increase simultaneously.
D)This market is not efficient because quantity demanded for the good exceeds quantity supplied.
E)The value placed on the final 10 units of the good by consumers is less than the additional costs associated with their production - this market is not efficient.

Accepted Answer

The market is not efficient because the production of the additional 10 units leads to a situation where the value placed on these extra units by consumers is less than the additional costs of producing these units. This implies that resources are being wasted and economic surplus is not being maximized. Ideally, the market would have been efficient if production and consumption stopped at 600 units, where the demand curve intersects with the supply curve.

Question 10

Consider the supply curve for a product such as shipping crates,which shows how many crates producers want to sell at each possible price.Alternatively,we could view this supply curve in the following way:
A)for each quantity of shipping crates,the supply curve shows the economic surplus generated by the provision of that ticket.
B)for each possible price,the supply curve shows the economic surplus generated by the provision of those crates.
C)for each quantity of shipping crates,the supply curve shows the extent of market inefficiency and deadweight loss.
D)for each quantity of shipping crates,the supply curve shows the value that consumers place on that particular crate.
E)for each quantity of shipping crates,the price on the supply curve shows the additional cost to the producer of supplying that crate.

Accepted Answer

The supply curve shows the quantity of shipping crates that producers are willing and able to supply at different prices. Each point on the supply curve represents the marginal cost of producing an additional unit of the product. Therefore, for each quantity of shipping crates, the price on the supply curve shows the additional cost to the producer of supplying that crate. Choice A is incorrect because the supply curve does not show economic surplus for each ticket; this would be shown on the demand curve. Choice B is incorrect because the supply curve does not show economic surplus for each possible price; again, this would be shown on the demand curve. Choice C is incorrect because the supply curve does not show market inefficiency and deadweight loss; this would be shown in market diagrams that include both supply and demand curves. Choice D is incorrect because the supply curve does not show the value that consumers place on the crate; this would be shown on the demand curve.

Question 11

Suppose a downward-sloping demand curve intersects the horizontal axis at a point where quantity demanded equals 1250 units.What is the ʺvalueʺ that consumers place on the 1250th unit of this good?
A)a negative value
B)a positive value
C)$0
D)$1250
E)it depends on the position of the supply curve

Accepted Answer

The "value" that consumers place on the 1250th unit of this good, where the demand curve intersects the horizontal axis, is $0. This point represents the maximum quantity that consumers are willing to take for free, indicating no additional value is placed on consuming more beyond this quantity.

Question 12

If a binding price floor is in place and if the demand curve for the product shifts rightward,one consequence would be
A)an increase in the amount of excess demand.
B)a decrease in the amount of excess demand.
C)an increase in the amount of excess supply.
D)a decrease in the amount of excess supply.
E)a decrease in the quantity exchanged.

Accepted Answer

If the demand curve shifts rightward, it means that there is an increase in consumer demand for the product. With a binding price floor in place, the price cannot adjust to clear the market. However, the increase in demand will lead to a decrease in excess supply because more consumers are willing to purchase the product at the higher price. Therefore, the answer is D, a decrease in the amount of excess supply.

Question 13

If a binding price ceiling is in effect and if the demand for the product increases,one consequence would be
A)a decrease in the amount of excess supply.
B)a decrease in the amount of excess demand.
C)an increase in the amount of excess supply.
D)an increase in the amount of excess demand.
E)no change in the excess supply or demand for the product.

Accepted Answer

A binding price ceiling is a maximum price set below the equilibrium price. If demand increases, it means that consumers are willing to pay more for the product than the price ceiling allows, creating excess demand. This means that there will be more people trying to buy the product than there is available, causing a shortage. Therefore, the amount of excess demand will increase.

Question 14

The short-run supply for rental housing is quite ________ while the long-run supply for housing is quite________.
A)elastic; inelastic
B)inelastic; elastic
C)flat; steep
D)inelastic; inelastic
E)elastic; elastic

Accepted Answer

In the short run, the supply of rental housing is inelastic because it takes time to build new houses or apartments, so the quantity supplied doesn't change much with price changes. In the long run, the supply is more elastic because new housing can be built, allowing the quantity supplied to adjust to price changes.

Question 15

Who are likely to be the biggest beneficiaries of rent controls?
A)landlords
B)prospective tenants
C)current tenants
D)construction companies
E)no group will benefit from the controls

Accepted Answer

Rent controls are designed to benefit tenants by limiting how much their rent can increase over time. This would make it more affordable for current tenants to continue living in their rented homes. Landlords may not benefit as much, as they would have less flexibility in setting rental prices. Construction companies may not be affected at all, as rent controls would apply only to existing properties, not new ones. Therefore, the likely biggest beneficiaries of rent controls are current tenants.

Question 16

The use of legislated rent controls typically
A)has no effect on the distribution of income between tenants and landlords or on the availability of rental accommodations.
B)affects the distribution of income between tenants and landlords but does not affect the supply of rental accommodations.
C)has no effect on the distribution of income between tenants and landlords but does affect the supply of rental accommodations.
D)affects the distribution of income between tenants and landlords and also affects the availability of rental accommodations.
E)has much worse effects in the short run than in the long run.

Accepted Answer

Legislating rent controls affects the distribution of income between tenants and landlords as it limits landlords' ability to charge market rents. This can lead to landlords reducing the quality of their units or choosing to exit the rental market altogether, reducing the supply of rental accommodations. Therefore, rent controls affect both the distribution of income and the availability of rental accommodations.

Question 17

The shortages associated with a binding price ceiling will be the smallest when
A)both supply and demand are highly elastic.
B)both supply and demand are highly inelastic.
C)supply is highly elastic and demand is highly inelastic.
D)supply is highly inelastic and demand is highly elastic.
E)none of the above-the size of the shortage has nothing to do with demand and supply elasticities.

Accepted Answer

When both supply and demand are highly inelastic, the quantity demanded and supplied responds very little to price changes, leading to a smaller shortage under a binding price ceiling compared to more elastic conditions.

Question 18

If the equilibrium price for some product is $1000,a price ceiling of $1200 will result in
A)the same general effects as a price floor of $1200.
B)the same general effects as an administered price of $1200.
C)the same general effects as a price ceiling of $600.
D)massive surpluses of the good.
E)no effects because the price ceiling is not binding at that price.

Accepted Answer

Since the equilibrium price is below the price ceiling of $1200, the price ceiling is not binding and will have no impact on the market for that product. Therefore, there will be no general effects as listed in choices A, B, and C, nor will there be massive surpluses as listed in choice D.

Question 19

Consider the demand curve for a product such as movie tickets,which shows how many tickets consumers wish to purchase at each possible price.Alternatively,we could view this demand curve in the following way:
A)for each quantity of movie tickets,the price on the demand curve shows the value that consumers place on that particular movie ticket.
B)for each quantity of movie tickets,the demand curve shows the economic surplus generated by the purchase of the tickets.
C)for each possible price,the demand curve shows the economic surplus generated by the purchase of the tickets.
D)for each quantity of movie tickets,the demand curve shows the extent of market inefficiency and deadweight loss.
E)for each quantity of movie tickets,the demand curve shows the additional cost to the producer of supplying that particular movie ticket.

Accepted Answer

The demand curve shows the value that consumers place on each particular movie ticket, as it indicates how many tickets they are willing to purchase at each possible price. This is because consumers are unlikely to pay more for a ticket than the value they place on it, and therefore the demand curve reflects the maximum price they are willing to pay for each additional ticket.

Question 20

If the equilibrium price for some product is $1000,a price ceiling of $800 will result in
A)the same general effects as a price ceiling of $1200.
B)the same general effects as a price floor of $1200.
C)the same general effects as a price ceiling of $600.
D)massive surpluses of the good.
E)no effects because the price ceiling is not binding at that price.

Accepted Answer

A price ceiling of $800 is below the equilibrium price of $1000, so it is binding and will create a shortage of the product. This shortage will lead to rationing of the product, either through long lines or favoritism towards certain buyers. This is the same general effect that would be seen with a price ceiling of $600, as both prices are below the equilibrium price. A price ceiling of $1200, on the other hand, would not be binding as it is above the equilibrium price, and would have no effect on the market. A price floor of $1200 would not be relevant to the question as it is not a price ceiling.

Quiz 5: Price Controls and Market Efficiency

A predictable result of the imposition of binding price floors or price ceilings is

Suppose the government imposes a price ceiling on rental housing that is below the market-clearing price.The resulting shortage will be

The surpluses associated with a binding price floor will be the smallest when

Assume that the long-run supply of housing is highly elastic.The imposition of binding rent controls will lead to

Assuming that the long-run supply of housing is more than the short-run supply,the imposition of binding rent controls will generally .

If a binding price ceiling is in place and if the demand curve for the product shifts rightward,one consequence would be

If the government imposes a price ceiling for some product,and a black market subsequently develops that gains control of all of the reduced output of the product,then

The long-run elasticity of supply of rental housing is greater than the short-run elasticity of supply because

Suppose a negatively sloped demand curve and a positively sloped supply curve intersect at a price and quantity combination of $100 and 600 units of the good.But suppose that producers actually produce and sell 610 units.What can we correctly say about market efficiency in this case?

Consider the supply curve for a product such as shipping crates,which shows how many crates producers want to sell at each possible price.Alternatively,we could view this supply curve in the following way:

Suppose a downward-sloping demand curve intersects the horizontal axis at a point where quantity demanded equals 1250 units.What is the ʺvalueʺ that consumers place on the 1250th unit of this good?

If a binding price floor is in place and if the demand curve for the product shifts rightward,one consequence would be

If a binding price ceiling is in effect and if the demand for the product increases,one consequence would be

The short-run supply for rental housing is quite while the long-run supply for housing is quite.

Who are likely to be the biggest beneficiaries of rent controls?

The use of legislated rent controls typically

The shortages associated with a binding price ceiling will be the smallest when

If the equilibrium price for some product is $1000,a price ceiling of $1200 will result in

Consider the demand curve for a product such as movie tickets,which shows how many tickets consumers wish to purchase at each possible price.Alternatively,we could view this demand curve in the following way:

If the equilibrium price for some product is $1000,a price ceiling of $800 will result in