Question 1

When a shortage of a good is present due to a price ceiling,

Accepted Answer

When a price ceiling is put in place, the quantity demanded exceeds the quantity supplied, leading to a shortage. Non-price factors like waiting in line or discrimination may play a greater role in the allocation of the good since the price cannot adjust to clear the market. Hence, option C is correct. A is not correct since the shortage is due to the quantity demanded exceeds the quantity supplied. B is likely untrue since suppliers may not have the incentive to improve quality when they cannot earn enough profit. D is incorrect because if the demand increases, the shortage will become more severe.

Question 2

If we observe long lines of people camping out to get tickets to a concert, this tells us

Accepted Answer

The answer of If we observe long lines of people...

Question 3

In a market economy, which of the following will most likely cause a prolonged milk shortage?

Accepted Answer

The answer of In a market economy, which of the...

Question 4

Which of the following would occur following the imposition of a price ceiling that sets the price of a good (for example, rental housing) below the market equilibrium?

Accepted Answer

If a price ceiling is set below the market equilibrium, it means that the price is artificially lowered. This would create excess demand because at the lower price, buyers would demand more of the good and suppliers would be incentivized to provide less. As a result, there would be a shortage of the good as demand outstrips supply.

Question 5

Because of price controls in the former Soviet Union, people often waited in long lines for food and other necessities. Modern economic theory would indicate that, relative to price rationing, waiting in line is

Accepted Answer

Waiting in line imposes an opportunity cost on the buyer in the form of lost time which does not generate revenue for the seller. This makes price rationing a more efficient and fair way of allocating goods and services.

Question 6

Which of the following will most likely result from rent controls that reduce monthly rental rates below market equilibrium?

Accepted Answer

When rent controls reduce rental rates below market equilibrium, it creates a situation where the quantity of rental housing demanded exceeds the quantity supplied. This results in shortages of rental housing, meaning that there are not enough rental units available to satisfy the demand. Landlords may also respond to rent controls by reducing the quantity or quality of housing supplied, or by converting rental units to other uses. This can lead to the development of black markets for rental housing, where landlords and tenants negotiate prices and terms that violate rent control laws.

Question 7

A law establishing a minimum legal price for a good or service (the minimum wage for example) is known as

Accepted Answer

A minimum legal price for a good or service is known as a price floor. It is a legal limit on how low the price of a good or service can be sold. Examples include minimum wage, agricultural price supports, and rent control.

Question 8

Which of the following is the most likely outcome of minimum wage laws?

Accepted Answer

When a minimum wage is set above the equilibrium wage, it creates a surplus of labor as the quantity of labor supplied by workers exceeds the quantity of labor demanded by firms. As a result, firms will reduce the quantity of labor demanded, leading to a decrease in employment. However, the minimum wage also incentivizes some unemployed individuals to enter the labor force, increasing the quantity of labor supplied. Thus, the most likely outcome of minimum wage laws is an increase in the quantity of labor supplied by workers and a decrease in the quantity of labor demanded by firms (option B).

Question 9

If a government imposed price ceiling legally sets the price of beef below market equilibrium, which of the following will most likely happen?

Accepted Answer

When the government imposes a price ceiling below the market equilibrium, this creates a situation where the price is lower than what the market demands. As a result, suppliers will not want to provide as much beef because they can't make as much money. However, consumers will want more beef because the price is lower. This results in an increase in the quantity demanded and a decrease in the quantity supplied. This creates a shortage of beef.

Question 10

Suppose the market equilibrium price of corn is $5 per bushel, and the government sets a price ceiling of $4 per bushel. What is the most likely result of this action?

Accepted Answer

When the government sets a price ceiling below the market equilibrium price, it creates an artificial shortage because the quantity demanded will increase while the quantity supplied will decrease. In this case, the quantity demanded at the price of $4 will be higher than the quantity supplied, leading to a shortage of corn. Farmers may not be willing to supply as much corn at the lower price, as it may not cover their costs of production. Consumers, on the other hand, will demand more corn at the lower price, leading to excess demand. As a result, some consumers will not be able to obtain the corn they want at the $4 price, and there may be a black market for corn priced higher than $4.

Question 11

If a local government enacts rent control legislation that sets the price of rental housing below equilibrium, which of the following will most likely happen in the local rental housing market?

Accepted Answer

When the price of rental housing is set below equilibrium, it creates a situation of excess demand. This means that there are more people who want to rent housing than there are units available at that price. Landlords have no incentive to increase the supply of rental housing because they cannot charge a higher price to cover their costs. As a result, a shortage of rental housing will develop.

Question 12

When a price ceiling is imposed below the equilibrium price of a commodity,

Accepted Answer

When a price ceiling is imposed below the equilibrium price of a commodity, it creates a shortage of the good as quantity demanded exceeds quantity supplied at the lower price. Sellers may also reduce the quality of the good to cut costs in response to the lower price ceiling, worsening the shortage.

Question 13

When a price ceiling prevents a higher market price from rationing a good,

Accepted Answer

When a price ceiling prevents a higher market price from rationing a good, non-price factors such as waiting in line or favoritism may play a more important role in the rationing process. This can lead to inefficiencies and unfairness in the allocation of the good. A surplus may develop if the price ceiling is set below the natural equilibrium price, but scarcity may still exist if the price ceiling is set above the market clearing price. The future supply of the good is not directly affected by a price ceiling.

Question 14

When several hurricanes hit Florida in 2004, a number of local governments imposed price controls that prevented sellers from raising their prices for badly needed products like plywood and generators. In the areas where the controls were imposed, they resulted in

Accepted Answer

Price controls create artificial shortages by reducing the incentive for producers to supply the product and for consumers to conserve it. Therefore, the price controls resulted in a reduced availability of badly needed products like plywood and generators.

Question 15

When government imposes price controls in a market,

Accepted Answer

When price controls are imposed, the price of the good is prevented from reaching its equilibrium level. This results in either a shortage or surplus of the good. Since the demand for the good is still there, non-price factors such as waiting time or queue, may be used to ration the availability. This creates inefficiencies in the market as the allocation of the good is based on something other than price. Therefore, neither buyers nor sellers are better off under price controls.

Question 16

A law establishing a maximum legal price for a good or service (rent controls for example) is known as

Accepted Answer

A price ceiling is a legal maximum price established for a good or service. This is often used to help keep prices affordable for consumers, but can also create shortages and reduce the incentive for producers to supply the good or service. Rent controls are an example of a price ceiling, setting a maximum price that landlords can charge for rental units.

Question 17

A price floor that sets the price of a good above market equilibrium will cause

Accepted Answer

The answer of A price floor that sets the price...

Question 18

After a natural disaster, such as a hurricane, the increased demand for certain items (like lumber, electric generators, and chainsaws) causes their prices to rise. These higher prices

Accepted Answer

The higher prices help to direct the items toward their highest valued uses by incentivizing suppliers to prioritize the delivery of goods to those willing to pay the most. This ensures that resources are allocated efficiently in a time of high demand and limited supply. The other options are not entirely accurate as, in general, higher prices do not discourage the flow of goods into the affected area, nor do they necessarily encourage consumers to purchase items they do not plan to use.

Question 19

Whenever a shortage occurs (for example, in parking spaces), and the price does not rise or is not permitted to rise, some method of non-price rationing must occur (for example, driving around looking for a parking space). Which of the following is an advantage of price rationing relative to non-price rationing methods?

Accepted Answer

When prices are allowed to rise during a shortage, suppliers are incentivized to increase their output of the product, which will eventually bring the market back to equilibrium. As a result, price rationing leads to efficient allocation of goods. Non-price rationing methods can lead to inefficiencies and wastage of resources, such as when individuals drive around looking for parking spaces, leading to traffic congestion and increased pollution. Therefore, D is the correct answer. A, B, and C are incorrect because they do not accurately describe the advantage of price rationing over non-price rationing.

Question 20

A price ceiling that sets the price of a good below market equilibrium will cause

Accepted Answer

The answer of A price ceiling that sets the price...

Quiz 4: A: Supply and Demand: Applications and Extensions