Question 1

Minimum wage laws are an example of price floors.

Accepted Answer

Price floors refer to a legal minimum price set by the government that is above the equilibrium price. Minimum wage laws set a legally mandated minimum hourly wage for workers, which is a type of price floor.

Question 2

The Civil Aeronautics Board regulated airline fares above the free-market rates, which led airlines to compete by offering fancy meals, wide seats, and frequent flights.

Accepted Answer

The Civil Aeronautics Board did regulate airline fares above the free-market rates, which led airlines to compete by offering luxury amenities like meals, comfortable seats, and frequent flights.

Question 3

Figure: Random Allocation under Price Ceilings  
Refer to the figure. The government enacted a price ceiling of $6 per unit. Using the information provided in the graph, calculate the following:
a. If the goods are allocated randomly between the high-value uses and the low-value uses, what is the total amount of consumer surplus in dollars?
b. What is the lost amount of consumer surplus when goods are allocated randomly, when compared to a situation in which the goods are allocated only to the highest-value uses?

Accepted Answer

The answer of Figure: Random Allocation under Price Ceilings ...

Question 4

In the presence of a price floor, some suppliers are willing to take a lower price for their goods, but these trades never take place because they are illegal. This illustrates the problem of misallocation of resources.

Accepted Answer

The answer of In the presence of a price floor,...

Question 5

Regulation of entry in the airline industry increased costs and reduced innovation.

Accepted Answer

Regulation of entry in the airline industry limits competition and reduces incentives for airlines to innovate in order to stand out from their competitors. Additionally, regulations often require airlines to meet certain safety and operational standards, which can be costly to implement and maintain. Overall, increased regulation tends to lead to higher costs and less innovation in the industry.

Question 6

Many times after natural disasters such as hurricanes, prices are controlled so that it is illegal to charge any price greater than "pre-hurricane" levels. For consumers who value these goods very highly, is this a good policy? If prices were allowed to increase, what do you think would happen to supply of these highly valued goods? Explain.

Accepted Answer

The answer of Many times after natural disasters such as...

Question 7

The minimum wage is an example of a price floor in the labor market.

Accepted Answer

The minimum wage sets a legal floor below which employers cannot pay their employees, thus creating a price floor in the labor market.

Question 8

A market's demand and supply curves are given by: Q_d = 400 - 3P Q_s = 100 + 2P where Q_d is quantity demanded, Q_s quantity supplied, and P is the price. a. Suppose the government enacts a price ceiling of $60. What is the quantity demanded and supplied? Is the market characterized by a shortage? b. Suppose that supply conditions in the market change to Q_s = 80 + 2P. Given the price ceiling of $60, what happens to quantity demanded and quantity supplied? Is the market characterized by a shortage? How much are consumers willing to pay per unit for the quantity transacted?

Accepted Answer

The answer of A market's demand and supply curves are...

Question 9

Price floors and price ceilings both result in lost gains from trade and decreases in the quality of the product.

Accepted Answer

The answer of Price floors and price ceilings both result...

Question 10

Although a minimum wage increases unemployment, it doesn't create a deadweight loss.

Accepted Answer

According to economic theory, a minimum wage creates a deadweight loss because it increases the price of labor above the market equilibrium level, leading to reduced employment and economic efficiency.

Question 11

If the equilibrium wage is $10 an hour and the government sets a minimum wage of $8, there will be a shortage of labor.

Accepted Answer

If the equilibrium wage is $10 an hour and the government sets a minimum wage of $8, the minimum wage will not have any effect on the labor market as it is already below the equilibrium wage. There will be no shortage or surplus of labor.

Question 12

Assume that a market is defined by two equations: the demand equation is Q_d = 60 - 5P, and the supply equation is Q_s = 5P. Now suppose that a price ceiling is instituted at $3. Use this information to answer the questions below. a. What is the equilibrium price and quantity in this market? b. What is the amount of the shortage at the price ceiling? c. What is the total value of time wasted by consumers standing in line?

Accepted Answer

The answer of Assume that a market is defined by...

Question 13

A price floor makes it illegal for firms to compete for more customers by lowering prices, causing firms to compete by offering customers higher quality.

Accepted Answer

The answer of A price floor makes it illegal for...

Question 14

Price floors set above equilibrium encourage quality waste and wasteful lines.

Accepted Answer

The answer of Price floors set above equilibrium encourage quality...

Question 15

Using a supply and demand diagram as a reference, discuss the way a price ceiling causes a reduction in gains from trade.

Accepted Answer

The answer of Using a supply and demand diagram as...

Question 16

When the price of gasoline rose to $4 per gallon in the summer of 2008, many people were outraged at how gas companies were "price gouging" individuals, and called for price controls on gasoline. If the government had agreed to legally cap the price of gasoline, would this have lowered the cost to consumers? Explain.

Accepted Answer

The answer of When the price of gasoline rose to...

Question 17

Illustrate on a supply and demand diagram how price ceilings may distort the market outcome and specify what secondary effects price ceilings can create.

Accepted Answer

The answer of Illustrate on a supply and demand diagram...

Question 18

Briefly discuss the U.S. experience with price ceilings during the early 1970s. What effects of the price ceilings became apparent during this period, and how did that period eventually end?

Accepted Answer

The answer of Briefly discuss the U.S. experience with price...

Question 19

A minimum wage mostly creates unemployment among older workers.

Accepted Answer

While it is controversial among economists, research has found that minimum wage increases do not lead to significant unemployment among older workers. However, there may be some negative effects on younger or less-skilled workers who may be priced out of the market.

Question 20

Figure: Allocating Goods under Price Ceilings  
Refer to the figure. Using the information provided in the graph, answer the following questions:
a. If the goods were allocated only to those users who had the highest-value uses, find the total dollar amount of consumer surplus.
b. If the goods are allocated randomly between the high-value uses and the low-value uses, then what is the average value of the good?
c. If goods are allocated randomly, what is the total dollar amount of consumer surplus?

Accepted Answer

The answer of Figure: Allocating Goods under Price Ceilings ...

Quiz 8: Price Ceilings and Floors