Question 1

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

Accepted Answer

When a price ceiling causes a shortage, non-price factors such as discrimination or waiting in line are likely to become more prevalent in the allocation of the good. This is because there is excess demand for the good at the given price ceiling, and the market mechanism cannot allocate the good efficiently. Therefore, other methods are likely to be used, such as discriminating in favor of preferred customers or making people wait in line. The amount supplied will generally be less than the amount demanded, and the quality of the good may suffer because suppliers have less incentive to produce a high-quality product when they are not able to charge a higher price. The demand for the product may increase, but this would only eliminate the shortage if the price ceiling is lifted or if supply is able to increase.

Question 2

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

Accepted Answer

Rent controls that reduce rental rates below market equilibrium create a situation where the quantity of rental housing demanded exceeds the quantity of housing supplied, resulting in shortages. In turn, shortages incentivize black markets and illegal activity to obtain rental housing, ultimately leading to a decline in the quality of housing. The future supply of rental housing is unlikely to increase rapidly because landlords will be less willing to supply rental housing due to reduced profitability. Rent controls do not necessarily affect discrimination in the rental housing market.

Question 3

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...

Question 4

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 higher prices are used to resolve shortages, the higher prices will encourage suppliers to increase the quantity available. This leads to a more efficient allocation of goods as it encourages the suppliers to produce more of the good, which in turn satisfies the demand of consumers. Non-price rationing methods, on the other hand, do not incentivize producers to increase the quantity available, potentially leading to a perpetuation of the shortage.

Question 5

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

When a price ceiling is set below the market equilibrium, it creates a situation where the quantity demanded exceeds the quantity supplied, leading to a shortage. This means that there will be more people looking for rental housing than there are available units at the artificially low price. Thus, choice (C) is the correct answer. Choices (A) and (B) are unlikely outcomes of a price ceiling, as suppliers will have less of an incentive to invest in improvements or expand production if they are unable to charge higher prices. Choice (D) is also unlikely, as a surplus would only exist if the price were above the market equilibrium, not below it.

Question 6

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 means that the maximum price that can be charged for the good is lower than the price at which the market is naturally clearing. This creates a situation where the quantity demanded exceeds the quantity supplied, leading to a shortage of the good.

Question 7

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

Modern economic theory suggests that waiting in line (non-price rationing) is less efficient than price rationing because the time spent waiting imposes an opportunity cost on the buyer without generating revenue for the seller. Price rationing allows for market forces to determine the allocation of goods and resources, promoting efficiency and incentivizing producers to supply goods at a market-clearing price. Waiting in line, on the other hand, can result in unpredictable waiting times, increased transaction costs, and a lack of incentives for producers to increase supply.

Question 8

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

Accepted Answer

Imposition of a price ceiling below the equilibrium price of milk will most likely cause a prolonged milk shortage. This is because the price ceiling will prevent the price of milk from rising to the equilibrium level where supply and demand are balanced. As a result, suppliers will not have enough incentive to produce enough milk to meet the demand, leading to a shortage.

Question 9

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 10

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 result in shortages because sellers have no incentive to produce or supply more of the product. In this case, the controls prevented sellers from raising prices to respond to the increased demand, leading to reduced availability of badly needed products like plywood and generators.

Question 11

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, the quantity demanded by consumers will exceed the quantity supplied by producers, resulting in a shortage. This means that some consumers will not be able to purchase the amount of corn they desire, and some producers may be discouraged from producing as they may not be able to sell their corn at the government-mandated price.

Question 12

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

Higher prices help to allocate the items toward their highest valued uses by signaling to suppliers that more of those goods are needed in the affected area. It also encourages consumers to only purchase the items if they have a genuine need for them, which helps to prevent hoarding and ensures that the items are available to those who need them most. While higher prices may discourage some suppliers from shipping goods to the area, the overall effect is a more efficient allocation of resources.

Question 13

When government imposes price controls in a market,

Accepted Answer

When government imposes price controls, it disrupts the normal price mechanism and creates either a price ceiling or a price floor. In the case of a price ceiling, a maximum price is set below the equilibrium price, and this can lead to shortages as the quantity demanded exceeds the quantity supplied. In this situation, non-price factors such as waiting in line or rationing based on non-price attributes (e.g. first-come, first-served) become more important in determining who gets the good. Therefore, choice A is the best answer as it correctly identifies the impact of price controls on the rationing of goods. Choices B and C are incorrect as price controls typically lead to market inefficiencies and can create shortages or surpluses. Choice D is also incorrect as price controls tend to benefit one group (buyers or sellers) at the expense of the other, so it is unlikely that both will become better off in this situation.

Question 14

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

Accepted Answer

A law establishing a minimum legal price for a good or service is a price floor, which is meant to prevent prices from falling too low. The minimum wage is a perfect example of a price floor.

Question 15

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 lines, first-come-first-served basis, or favoritism become more important in the rationing process. This can lead to inefficiencies and disparities in the distribution of the good. A surplus is unlikely to develop because the price is artificially low and there is excess demand. Scarcity of the good can still exist if the supply is not sufficient to meet the demand at the price ceiling level. The future supply of the good is not directly influenced by the price ceiling.

Question 16

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

Accepted Answer

Minimum wage laws set a minimum price for labor, which is above the market equilibrium wage rate. This means that workers are willing to supply more labor at the higher wage, but firms are willing to hire fewer workers at the higher cost. Therefore, there is an increase in the quantity of labor supplied by workers (as they are incentivized to work more) and a decrease in the quantity of labor demanded by firms (as they are less willing to hire at the higher wage).

Question 17

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

Accepted Answer

A law establishing a maximum legal price for a good or service is known as a price ceiling. Rent controls, for example, are a form of price ceiling where the government sets a legal limit on the amount of rent that landlords can charge.

Question 18

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 rent control legislation sets the price of rental housing below equilibrium, it creates a shortage of rental housing. Landlords can no longer charge the market rate for rent, so they reduce the supply of rental housing available. This leads to a situation where there are more renters than available units, causing a shortage.

Question 19

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 price of beef is set below the market equilibrium through a price ceiling, the quantity demanded will increase since consumers would prefer to buy beef at the cheaper price. However, the quantity supplied will decrease, as producers will not be willing to supply as much beef at a lower price. This results in a shortage of beef, where demand exceeds supply.

Question 20

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...

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