Modern Principles of Economics 3rd Edition Cowen Test Bank 1

Modern Principles of Economics 3rd
Edition Cowen Test Bank

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1. A price ceiling is a(n):

A) legally established minimum price that can be charged for a good.
B) illegally established minimum price that can be charged for a good.
C) legally established maximum price that can be charged for a good.
D) illegally established maximum price that can be charged for a good.
2. Price ceilings create five important effects:

A) shortages, reductions in product quality, wasteful lineups, a loss from gains to
trade, and a misallocation of resources.
B) surpluses, increases in product quality, search costs, gains from trade, and resource
attrition.
C) excess demand, long lines, poor service, efficiency, and arbitrage.
D) shortages, reduced time costs, low vacancy rates, blat, and deadweight loss.
3. A legal maximum price at which a good can be sold is a price:

A) stabilization.
B) ceiling.
C) support.
D) floor.
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4. A price ceiling creates a ________ when it is set ________.
A) surplus; below the equilibrium price
B) surplus; above the equilibrium price
C) shortage; below the equilibrium price
D) shortage; above the equilibrium price
Use the following to answer questions 5-7:
Figure: Price Ceiling
5. (Figure: Price Ceiling) Refer to the figure. When a price ceiling of $10 is instituted by
the government, consumers are able to buy how many units of the product?
A) 290 units
B) 310 units
C) 270 units
D) 40 units
6. (Figure: Price Ceiling) Refer to the figure. A price ceiling of $10 results in a:
A) shortage of 270 units.
B) shortage of 40 units.
C) surplus of 270 units.
D) surplus of 40 units.
7. (Figure: Price Ceiling) Refer to the figure. If a price ceiling were set at $12, there would
be a:
A) shortage of 50 units.
B) surplus of 40 units.
C) shortage of 0 units.
D) surplus of 20 units.
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8. Which statement is NOT an effect of a price ceiling?
A) surpluses
B) misallocation of resources
C) loss of gains from trade
D) wasteful lineups
9. When the maximum legal price is below the market price we say that there is a price:
A) floor.
B) stabilization.
C) support.
D) ceiling.
10. Economists call the maximum legal price a price ceiling because the price:
A) cannot legally go lower than the ceiling.
B) cannot legally go higher than the ceiling.
C) must match the legally established ceiling price.
D) All of these answers are correct.
11. Price ceilings would create all of the following effects EXCEPT:
A) shortages.
B) reductions in product quality.
C) a misallocation of resources.
D) maximum gains from trade.
Figure: Price Controls
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12. (Figure: Price Controls) Refer to the figure. Which price control would cause a shortage
of 20 units of the good?
A) a price ceiling of $10
B) a price floor of $10
C) a price ceiling of $6
D) a price floor of $6
13. (Figure: Price Controls) Refer to the figure. If the government imposes a price ceiling in
this market at a price of $6, the result would be a:
A) surplus of 20 units.
B) surplus of 10 units.
C) shortage of 20 units.
D) shortage of 10 units.
14. A price ceiling:

A) is a maximum price allowed by law.
B) is a minimum price allowed by law.
C) has an effect only when it is set above the market price.
D) has little effect on market activity.
15. When the maximum legal price is set below the market price then:
I. a price floor is in effect.
II. a shortage will develop.
III. there will be lost gains from trade.
IV. there will be no impact on the quantity demanded or supplied.
A) I and II only
B) I, II, and III only
C) II and III only
D) IV only
16. Price ceilings do not have much effect:

A) in times of high inflation.
B) ever.
C) when market prices are at or below the ceiling.
D) in nonmarket economies.
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17. When a price ceiling is in effect:
A) suppliers get too strong a signal from demanders about their needs.
B) demanders have no incentive to signal their needs to suppliers.
C) all of demanders' needs are met at the lower price, so there is no need to signal
anything to suppliers.
D) demanders cannot signal their needs to suppliers.
18. In Ancient Egypt, the “Bronze Law” set maximum prices for wages, preventing them
from rising above what rulers perceived as the minimum needed to survive. If this was
10¢ a day for a porter (someone who carries things short distances) and the market wage
was 8¢ a day, which of the following would be a plausible consequence of this law?
A) Porters would travel less quickly than they otherwise would.
B) Porters would transport items they normally would not.
C) Unemployment for porters would decrease.
D) Nothing unusual would happen.
19. In the case of a binding price ceiling, the price paid in the market will be:
A) more than the free market equilibrium price.
B) less than the free market equilibrium price.
C) equal to the free market equilibrium price.
D) unable to be compared with the free market equilibrium price.
20. In the case of a nonbinding price ceiling, the price paid in the market will be:
A) more than free market equilibrium price.
B) less than free market equilibrium price.
C) equal to free market equilibrium price.
D) unable to be compared with free market equilibrium price.
21. A binding price ceiling leads to a(n):

A) shortage.
B) surplus.
C) equilibrium quantity.
D) quantity of zero units.
22. A nonbinding price ceiling leads to a(n):

A) shortage.
B) surplus.
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23. Under a binding price ceiling, one expects the quality of a good to:
A) rise.
B) remain the same.
C) fall.
D) change in an indeterminate direction.
24. When a price ceiling is in effect, quantity ______ will be greater than quantity ______,
creating a ______.
A) supplied; demanded; surplus
B) demanded; supplied; shortage
C) supplied; demanded; shortage
D) demanded; supplied; surplus
25. The quantity exchanged of a good ______ under a binding price ceiling.
A) rises
B) remains the same
C) falls
D) changes in an indeterminate direction
26. If quantity supplied equals 40 units and quantity demanded equals 50 units under a price
control, then it is a:
A) binding price ceiling.
B) binding price floor.
C) nonbinding price ceiling.
D) nonbinding price floor.
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Figure: Government Price Controls
29. (Figure: Government Price Controls) Refer to the figure. The government enacts a price
control causing a shortage of 15 units of the good. Therefore, the ________ is set at
________.
A) price floor; $31
B) price floor; $17
C) price ceiling; $10
D) price ceiling; $17
30. (Figure: Government Price Controls) Refer to the figure. If the government sets the
price ceiling at $31, there will be:
A) a shortage of 15 units.
B) a surplus of 15 units.
C) a supply of 20 units.
D) no effect on the market.
31. At a price ceiling of $6 per sheet of drywall, quantity demanded is 100 and quantity
supplied is 75. What will happen in the drywall market if there is an increased demand
for drywall in the construction industry?
A) Equilibrium will be restored.
B) The shortage of drywall will fall below 25 units.
C) The shortage of drywall will increase above 25 units.
D) The surplus of drywall will increase above 25 units.
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32. The lower the price ceiling is relative to the market equilibrium price, the:
A) larger the surplus.
B) smaller the surplus.
C) smaller the shortage.
D) larger the shortage.
33. A shortage results when:

A) a price floor is imposed.
B) a price ceiling is imposed.
C) there is excess supply without any price controls.
D) a price floor is imposed but it is not binding.
34. Shortages occur when prices are held below the market price, causing the quantity
demanded to exceed the quantity supplied. This is a result of price:
A) floors.
B) ceilings.
C) gouging.
D) competition.
35. Setting the maximum legal price above the market price will cause
A) a shortage to develop.
B) the market to reach an equilibrium outcome.
C) quantity supplied to exceed quantity demanded.
D) market inefficiencies.
36. Price controls instituted by President Nixon in 1971:

A) generated shortages in the markets for construction, wool, oil, steel bars, toilets,
jeans, and others.
B) generated shortages, confined mostly to just the markets for gasoline and oil.
C) were successfully able to control inflation by 1973.
D) were set above the equilibrium prices and made little impact as a result.
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Figure: Labor Market 1
37. (Figure: Labor Market 1) Refer to the figure. If there is a price ceiling set at $6, how
much shortage or surplus, if any, is there?
A) 60 million hours
B) 80 million hours
C) 120 million hours
D) There is no shortage and no surplus.
38. (Figure: Labor Market 1) If there is a price floor set at $9, how much deadweight loss is
created, if any?
A) $15 million
B) $30 million
C) $60 million
D) There is no deadweight loss.
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39. Mobile homes are housing units installed on a permanent foundation owned by a
landlord. Although a resident owns the home, she rents the foundation from the
landlord. In theory, owners of mobile homes can transfer their home to a different
foundation if the rent becomes too steep, but uninstalling, transporting, and reinstalling
the mobile home is usually prohibitively expensive. This “lock-in” effect encourages
state legislatures to create rent controls for mobile home foundations. Which statement
is a plausible, unintended consequence of these laws?
A) The price of mobile homes is artificially low.
B) There are few new mobile home foundations constructed.
C) The price of transporting mobile homes is artificially high.
D) There are few new buyers of mobile homes.
40. Figure: Supply and Demand 1
Refer to figure. If, in this figure, the government enacts a price ______ by setting the
good's price at $6, it will create a ______.
A) floor; surplus of 4 units
B) ceiling; shortage of 10 units
C) floor; surplus of 10 units
D) ceiling; shortage of 4 units
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41. Which of the following statements is TRUE?
A) A price ceiling is the minimum price allowed by law.
B) An increase in market demand does not lead to an increase in quantity supplied
under a price ceiling.
C) A shortage occurs whenever the price is set above the equilibrium price.
D) When quantity supplied exceeds quantity demanded, the market experiences a
shortage.
42. Because of government price controls, a business must now sell soft-serve ice cream at
half its original price. This business might respond by:
A) offering smaller servings of ice cream.
B) skimping on toppings of nuts, fudge sauce, and cherries.
C) reducing hours of operation.
D) All of the answers are correct.
43. The price controls of the early 1970s caused:

A) lead to be removed from gasoline.
B) the disappearance of the full-service gas station.
C) gas stations to stay open for more hours.
D) an excess supply of gasoline.
44. Why do you think full-service gas stations have largely disappeared across the United
States?
A) because the government has issued a ban on such gas stations
B) because of price controls on gasoline that were issued in 1973
C) because consumers demanded that they should be allowed to pump gas themselves
D) None of the answers are correct.
45. If a seller facing excess demand is unable to raise the price of the good due to a price
ceiling, a likely result will be:
A) an increase in the quantity supplied of the product.
B) an increase in the price of the product.
C) a decrease in the quality of the product.
D) a further decrease in the price of the product.
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46. If a seller facing excess demand is unable to raise the price of the good due to a price
ceiling, the seller might:
A) increase the quantity supplied of the product.
B) decrease the price of the product.
C) increase the quality of the product.
D) decrease the level of service for that product.
47. In situations of excess demand, sellers might lower quality when they are unable to raise
prices because they wish to:
A) reduce excess demand.
B) raise their profit levels.
C) decrease surpluses.
D) raise their sales.
48. In situations of excess demand, sellers might decrease service levels when they are
unable to raise prices because they wish to:
A) reduce excess demand.
B) decrease surpluses.
C) raise their profit levels.
D) raise their sales.
49. Price ceilings set by the government:

A) are desirable because they make markets more efficient.
B) can restore a market to equilibrium.
C) are generally believed to cause reductions in product quality.
D) are imposed to assist the poor without having adverse effects.
50. Price ceilings reduce quality because:

A) buyers are willing to accept a lower quality of goods with lower prices.
B) sellers facing excess demand cannot raise prices to increase profit.
C) the law would mandate the quality of goods to match the price of the goods.
51. Which observation would be consistent with the impact of price ceilings?
A) Books are printed on higher-quality paper.
B) Full-service gasoline stations stay open for 24 hours.
C) New automobiles are painted with more coats of paint.
D) Newspapers switch to a smaller font size in order to decrease bulk.
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52. Which would MOST LIKELY result after setting a price ceiling on automobiles?
A) a surplus of automobiles
B) more friendly automobile salesmen
C) fewer safety features
D) an increase in demand for automobiles
53. If prices are not allowed to rise because of a price ceiling, then:
A) suppliers have an incentive to provide a high level of customer service.
B) suppliers will compensate for the lower price by increasing the quality of their
goods.
C) prices do not provide the correct information about consumers' valuation of the
good.
D) a shortage will develop, but only temporarily until markets adjust to the lower
prices.

A) there is no competition for goods.
B) suppliers have an incentive to provide really good customer service.
C) demanders compete for goods in short supply by accepting reductions in quality.
D) suppliers compete for customers by inefficiently raising quality levels.
55. The Edict on Maximum Prices, established by the Roman Emperor Diocletian, created
price ceilings on various jobs and goods in a failed effort to curb inflation. For example,
legal pay for a farm laborer could be no more than 10.8¢ a day (payment set in modern
currency). If the market rate of farm labor was 12¢ a day, which would be a plausible
consequence of this law?
A) farms would produce more food than they otherwise would
B) nothing unusual
C) a laborer would work less hard than he otherwise would
D) an increase in unemployment for farm hands
56. Typical of price ceilings, the ancient Indian political philosopher known as Kautilya
advocated controls to protect against merchant greed, fixing a profit of 5% over the
fixed price of local commodities, including textiles. If severe weather were to render the
textile market more uncertain (for example, if transportation routes were damaged),
what would reasonably happen?
A) There would be no effect.
B) Textile quality would wastefully increase.
C) Fewer merchants would be willing to supply textiles.
D) Deadweight loss would fall.
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57. How can sellers increase profits when they face a price ceiling?
A) charge a higher price for the good
B) charge a lower price for the good to undercut rival sellers
C) produce and sell more output
D) reduce the quality of the product and provide less customer service
Figure: Effects of Price Ceilings
58. (Figure: Effects of Price Ceilings) Refer to the figure. At a price ceiling of $2 per unit,
consumers are willing to pay a maximum of:
A) $2.00.
B) $2.50.
C) $3.00.
D) $4.00.
59. (Figure: Effects of Price Ceilings) Refer to the figure. At a price ceiling of $2:
A) bribes of $1 per unit may be common.
B) seller discounts of $1 may be common.
C) bribes of $3 per unit may be common.
D) seller discounts of $3 per unit may be common.
60. (Figure: Effects of Price Ceilings) Refer to the figure. Suppose that the data represent
the retail gasoline market. At a price ceiling of $2, the total value of wasted time from
waiting in line is:
A) $5.
B) $10.
C) $15.
D) $20.
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61. Table: Gasoline Market
Free Market Price Ceiling

Price per gallon of gas $4.00 $3.00
Value of time $20/hour $20/hour
Waiting time to buy
20 gallons of gas 0 1.5 hours
Use the table. The total cost of purchasing 20 gallons of gas at the free market price and
the price ceiling are ________ and ________, respectively.
A) $100; $80
B) $80; $90
C) $60; $75
D) $40; $60
62. Which statement(s) about price ceilings are TRUE?

I. Price ceilings cause quantity demanded to exceed quantity supplied.
II. When including time costs and bribes, consumers pay a total price in excess of the
price ceiling.
III. All else equal, it is more wasteful to allocate goods based on bribes than on waiting
time costs.
A) I only
B) II and III only
C) I and II only
D) I, II, and III
Figure: Costs of Price Ceilings
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63. (Figure: Costs of Price Ceilings) Refer to the figure. What is the dollar amount of the
value of wasted time if a price ceiling of $4 is implemented?
A) $160
B) $180
C) $320
D) $220
64. (Figure: Costs of Price Ceilings) Refer to the figure. What is the dollar amount of lost
consumer surplus if a price ceiling of $4 is implemented?
A) $20
B) $10
C) $90
D) $80
65. Allocating products with long lines, using a first-come, first-served system, is:
A) the only way scarce goods can be allocated.
B) necessary when waiting is a costless exercise.
C) efficient, since people who are willing to wait the longest get the products.
D) inefficient, because waiting wastes time.
66. Which would be the least likely result of a price ceiling imposed in the market for
gasoline?
A) Buyers line up to buy gasoline.
B) Buyers bribe station attendants to fill up their tanks.
C) Some buyers will get less gasoline than they want.
D) Competition in the market will be eliminated.
Figure: Price Ceiling of Ps
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67. (Figure: Price Ceiling of Ps) Refer to the figure. Suppose a price ceiling of Ps is
imposed. As a result:
A) The quantity supplied in the market is Qs.
B) Buyers' willingness to pay for the good is Pd.
C) The quantity demanded in the market is Qd.
68. (Figure: Price Ceiling of Ps) Refer to the figure. Suppose a price ceiling of Ps is
imposed. The shaded area may likely represent all of the following EXCEPT:
A) value of wasted time.
B) the amount that buyers bribe sellers.
C) the amount of corruption.
D) consumer surplus.
69. If a price ceiling on gasoline is imposed, the total price of gasoline a buyer pays is likely
to equal the legal price:
A) minus the value of wasted time.
B) minus the value of bribery.
C) plus the value of consumer surplus.
D) plus the value of corruption.
70. Shortages in economic markets are inefficient because:

A) time spent waiting in line is wasted time, and hence a wasted resource.
B) demanders are willing to pay more for the good, but suppliers are unwilling to
supply any more of the good even at higher prices.
C) the willingness to pay by consumers is less than the controlled price.
D) they lead to increases in quality over and above what would be present in an
uncontrolled market.
71. What do price ceilings NOT cause?

A) waiting in line
B) speculation
C) bribes
D) search costs
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Figure: Supply and Demand 2
72. (Figure: Supply and Demand 2) If the government sets the price at $8 in this figure,
demanders are willing to pay ______ per unit for ______ units.
A) $8; 12
B) $8; 6
C) $14; 12
D) $14; 6
73. (Figure: Supply and Demand 2) If the government sets the price at $8 in this figure, the
total value of the wasted time is:
A) $36.
B) $48.
C) $64.
D) $8.
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74. A major hurricane damages many oil refineries, which increases the market price of
gasoline from $3.50 to $5 per gallon. The Attorney General threatens legal action
against gas station owners who raise prices above pre-hurricane levels, causing gas
station owners to reluctantly sell gas for $3.50 per gallon. At $3.50 per gallon, shortages
cause buyers to wait in line for 2 hours. If the average purchase is 15 gallons and buyers
value their time at $20 an hour, is the Attorney General helping?
A) No, paying $92.50 at $3.50 per gallon is more expensive than $75 at $5.00 per
gallon.
B) Yes, paying $52.50 at $3.50 is cheaper than $75 at $5.00 per gallon.
C) Yes, gas is cheaper at $3.50 per gallon because the waiting costs keep gas prices
low.
D) No, $5.00 per gallon would insure that buyers could always buy as much as they
want.
75. The statement that “price controls do not eliminate competition”:

A) is false because price controls prevent rich consumers from outbidding poor
consumers for goods and services.
B) is false because firms are no longer allowed to exploit consumers by charging
higher prices after hurricanes or major snowstorms.
C) reflects the idea that consumers will compete for price-controlled products by
waiting in line and offering bribes to sellers.
D) means that sellers will increase the quality of their product when they cannot
legally increase their prices.
Figure: Losses from Price Ceilings
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76. (Figure: Losses from Price Ceilings) Refer to the figure. A price ceiling of $1 causes
lost consumer surplus equal to area ________, and lost producer surplus equal to area
________.
A) c; e
B) bc; de
C) a; f
D) d; b
77. (Figure: Losses from Price Ceilings) Refer to the figure. At a price ceiling of $1, the
area representing the total value of wasted time is ________, and the area of the
deadweight loss is ________.
A) ab; de
B) bd; ce
C) abdf; ce
D) bc; de
78. At a price ceiling of $1 per loaf of bread, quantity supplied is 99 loaves, which is less
than quantity demanded. What must be true for the 100th loaf of bread?
A) Consumers do not value the 100th loaf of bread.
B) The cost of producing the 100th loaf of bread is less than $1.00.
C) Consumers value the 100th loaf of bread at less than $1.00.
D) Consumers value the 100th loaf of bread more than it costs producers to make it.
Figure: Costs of Price Ceilings 2
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79. (Figure: Costs of Price Ceilings 2) Refer to the figure. What is the dollar amount of lost
producer surplus after the price ceiling of $4 has been implemented?
A) $90
B) $10
C) $160
D) $80
80. (Figure: Costs of Price Ceilings 2) Refer to the figure. What is the dollar amount of the
deadweight loss after the price ceiling of $4 has been implemented?
A) $160
B) $180
C) $20
D) $10
81. Which statement about price ceilings is correct?

A) Whether a price ceiling is placed below or above the equilibrium price, it will
always cause deadweight loss.
B) A price ceiling will only cause deadweight loss if it is placed above the equilibrium
price.
C) A price ceiling will only cause deadweight loss if it is placed below the equilibrium
price.
D) Whether a price ceiling is placed below or above the equilibrium price, it will
always cause a shortage of the good.
82. Which statement is TRUE in a market with a price ceiling?

A) Buyers and sellers experience unexploited gains from trade.
B) Resources are allocated to their most efficient uses.
C) The supply of goods is sold by the sellers with the lowest costs.
D) The supply of goods is bought by the buyers with the highest willingness to pay.
83. A deadweight loss is the total of:

A) consumer and producer surplus when all mutually profitable gains from trade are
exploited.
B) consumer and producer surplus when all mutually profitable gains from trade are
not exploited.
C) lost consumer and producer surplus when all mutually profitable gains from trade
are exploited.
D) lost consumer and producer surplus when all mutually profitable gains from trade
are not exploited.
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84. A market with price ceilings fails to maximize all of the following EXCEPT:
A) the gains from trade.
B) consumer surplus.
C) excess supply.
D) producer surplus.
85. A free market maximizes the gains from trade, the sum of consumer and producer
surplus, meeting all of the following conditions EXCEPT:
A) all buyers who are willing to pay positive prices are able to receive goods from
trade.
B) the supply of goods is bought by the buyers with the highest willingness to pay.
C) the supply of goods is sold by the sellers with the lowest costs.
D) there are no unexploited gains from trade between buyers and sellers.
86. Which of these statements explains why price ceilings result in lost gains from trade?
A) Buyers and sellers want to trade, but the threat of fines or jail time prevents them
from doing so.
B) Sellers want to trade, but buyers prefer the lower prices.
C) Buyers want to trade, but sellers are indifferent at the lower prices.
D) Neither buyers nor sellers want to trade subject to a price ceiling resulting in lost
gains from trade.
87. Deadweight loss is:

A) necessary to ensure that resources are channeled to their highest-valued use.
B) the loss to the economy from firms going out of business due to competition.
C) usually offset by deadweight gains.
D) the total of lost consumer and producer surplus when not all mutually profitable
gains from trade are exploited.

A) some mutually beneficial trades between buyers and sellers do not occur.
B) no mutually beneficial trades between buyers and sellers occur.
C) all mutually beneficial trades between buyers and sellers occur.
D) it is impossible to say if any, some, or all beneficial trades between buyers or
sellers fail to occur.
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89. In the late 1500s, the city of Antwerp was under siege by the Duke of Parma. The siege
caused the price of food to rise so the government of Antwerp established a price ceiling
set at a value similar to that before the siege. (This bears a striking resemblance to
modern anti-gouging laws used in times of disaster.) Merchants, fearing the Duke's
ability to sink their ships, refused to ferry food into the city that they could only sell at a
normal price. Which important effect of a price control BEST describes this story?
A) reduction of product quality
B) wasteful lines
C) a loss in gains from trade
D) a misallocation of resources
90. The U.S. government establishes a price floor of $1,000 on personal computers. The
market price for netbooks (personal computers that specialize in Internet and other basic
computer functions) is about $500. How would this price control affect the netbook
market?
A) Consumers would have a harder time finding conventional netbooks since MOST
would be too powerful.
B) There would be long lines for netbooks.
C) Producers would leave the market for netbooks.
D) There would be no notable effect.
91. Deadweight loss occurs when:

A) consumer surplus transforms into producer surplus.
B) there is a shortage of a good or service.
C) consumer and/or producer surplus decrease without the surplus going to anyone.
D) the gains from trade are lowered due to shifts in the supply or demand curve.
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Figure: Water Market
92. (Figure: Water Market) Refer to the figure. If a price floor in the diagram gets set at $8 a
gallon, how big is the shortage or surplus?
A) 60,000 gallons in surplus
B) 120,000 gallons in surplus
C) 60,000 gallons in shortage
D) 12,000 gallons in shortage
93. (Figure: Water Market) Refer to the figure: If a price floor in the diagram gets set at $8 a
gallon, what is the deadweight loss?
A) $30,000
B) $60,000
C) $240,000
D) $480,000
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94. (Figure: Water Market) Refer to the figure. If a price floor in the diagram gets set at $8 a
gallon, what is the quality waste?
A) $90,000
B) $180,000
C) $480,000
D) $960,000
95. Price ceilings:

A) increase the gains from trade because lower prices encourage consumers to buy
more.
B) reduce the size of the market, shrinking both consumer and producer surplus.
C) help reduce the deadweight losses owing to taxation.
D) increase market output to the point where consumer surplus equals producer
surplus.
Use the following to answer question 96:
96. (Figure: Supply and Demand 3) Refer to the figure. If the government sets a price
ceiling at $8 in this figure, it will create a deadweight loss of:
A) $6.
B) $36.
C) $9.
D) $24.
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97. Do price ceilings misallocate resources?
A) Yes, because people who value the good the most are unable to bid it away from
low-valued uses.
B) Yes, because people who value the good the least are unable to afford the good.
C) No, because the good is still allocated based on willingness to pay.
D) No, because the rich and poor alike stand an equal chance of getting the good.
98. In 1972–1973, the swimming pools in California were heated but homes in New Jersey
were cold, is an example of a(n):
A) misallocation of resources caused by price controls.
B) market failure caused by speculators.
C) market inefficiency caused by monopoly oil companies.
D) excess supply of oil caused by the business cycle.
99. When an effective price ceiling causes a shortage, some of the buyers who value the
good the most may not be able to get the good. Why does this occur?
A) The highest-value users cannot outbid the lower-valued users and so the seller
cannot distinguish between them.
B) The highest-value users are eliminated from the market due to the price ceiling.
C) The price ceiling causes the price to rise so high that even the highest-value users
cannot afford the good.
D) The government purchases most of the goods.
100. When a price ceiling is binding, the goods that are on sale are allocated to buyers using
a method:
A) of random allocation.
B) whereby the highest bidder wins.
C) whereby the lowest bidder wins.
D) whereby buyers purchase lottery tickets to see who will be able to buy the product.
101. Price controls cause resources to be ________ not just geographically, but also across
different ________ of those resources.
A) overutilized; types
B) properly allocated; demands
C) cheaper; uses
D) misallocated; uses
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102. Price controls cause resources to be misallocated by:
A) distorting the signals of suppliers' willingness to supply and eliminating the
incentives for demanders to pay.
B) distorting the signals of demanders' willingness to pay and eliminating the
incentives for suppliers to supply.
C) distorting the incentives for suppliers to supply and eliminating the signals of
demanders' willingness to pay.
D) distorting the incentives for demanders to pay and eliminating the signals of
suppliers' willingness to supply.
103. Figure: Value of Uses
The sections labeled A, B, and C represent, respectively, the:

A) highest-valued uses, lower-valued uses, least-valued uses.
B) highest-valued uses, least-valued uses, lower- valued uses.
C) least-valued uses, lower-valued uses, highest-value uses
D) lower-valued uses, highest-valued uses, least-valued uses.
Figure: Price Ceilings and Consumer Surplus
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104. (Figure: Price Ceilings and Consumer Surplus) Refer to the figure. There is a price
ceiling of $20. What is the value of consumer surplus if all units of the good are
allocated to the highest valued uses?
A) $40
B) $120
C) $200
D) $210
105. (Figure: Price Ceilings and Consumer Surplus) Refer to the figure. There is a price
ceiling of $20. What is the value of consumer surplus if all the goods are allocated
randomly?
A) $120
B) $180
C) $80
Figure: Price Ceilings and Valuation of Uses
106. (Figure: Price Ceilings and Valuation of Uses) Refer to the figure. The single highest
value a user is willing to pay is how many dollars for the product?
A) $15
B) $25
C) $45
D) $35
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107. (Figure: Price Ceilings and Valuation of Uses) Refer to the figure. Suppose a price
ceiling of $15 goes into effect. If the goods are allocated only to the highest-value uses,
the total consumer surplus in the market would be:
A) $3,000.
B) $500.
C) $2,500.
D) $1,000.
108. (Figure: Price Ceilings and Valuation of Uses) Refer to the figure. Suppose a price
ceiling of $15 goes into effect. If the highest-value use and the lowest-value use are
equally likely to be satisfied, then the average value of the product is:
A) $45.
B) $30.
C) $25.
D) $35.
Figure: Price Ceilings and Consumer Valuation
109. (Figure: Price Ceilings and Consumer Valuation) Refer to the figure. Suppose a price
ceiling of $3 goes into effect. If the goods sold are allocated only to the highest-value
users, the total consumer surplus in the market would be:
A) $180.
B) $30.
C) $120.
D) $150.
Page 29
ceiling of $3 goes into effect. If the goods sold are allocated to buyers randomly, what is
the total consumer surplus in this market?
A) $90
B) $120
C) $30
D) $150
ceiling of $3 goes into effect. What is the loss of consumer surplus due to the random
allocation of price-controlled goods compared to the allocation only to the highest-value
users?
A) $90
B) $60
C) $150
D) $30
112. Figure: Price Ceilings and Lost Consumer Surplus
Refer to the figure. The figure measures the consumer surplus associated with a price
ceiling, assuming:
A) the worst-case scenario.
B) the best-case scenario.
C) random allocation of the product between highest-valued and lowest-valued users.
D) total consumer surplus is maximized in the market.
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Figure: Price Ceilings and Random Allocation
113. (Figure: Price Ceilings and Random Allocation) Refer to the figure. When a controlled
price is imposed and the quantity of goods is allocated randomly between the highest
valued uses and lowest valued uses, total consumer surplus under random allocation is
represented by area:
A) A.
B) B.
C) C.
D) D.
114. (Figure: Price Ceilings and Random Allocation) Refer to the figure. When a controlled
price is imposed and the quantity of goods is allocated randomly between the highest-
valued uses and lowest-valued uses, loss due to random allocation instead of allocation
to the highest-valued use is represented by area:
A) A.
B) B.
C) C.
D) D.
115. The effects of price ceilings:

A) are limited to the price-controlled market.
B) weaken over time.
C) extend beyond the price-controlled market.
D) encourage the entry of new firms.
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116. During the energy crisis of the 1970s, President Nixon ordered gas stations to close
between 9:00 PM Saturday and 12:01 AM Monday, in an attempt to prevent wasteful
and unnecessary Sunday driving. This policy:
A) proved effective in reducing the shortage of gasoline.
B) gave people the incentive to fill up their tanks earlier in the week.
C) indirectly caused many churches to close on Sunday.
117. Which of the following events occurred during the 1973–1974 oil crisis in the United
States?
A) Gas stations were ordered to be closed between 9 PM on Saturday and 12:01 AM
on Monday.
B) Daylight savings time was implemented.
C) There were shortages of steel drilling equipment.
118. Which events occurred during the 1973–1974 oil crisis in the United States?
I. Gas stations were ordered to be closed between 9 PM on Saturday and 12:01 AM on
Monday.
II. The government decided to allocate oil by command.
III. The 55 mph speed limit was repealed.
IV. Daylight savings time was implemented.
A) I and IV only
B) I, II, and III only
C) I, II, and IV only
D) I, III, and IV only
119. Economists blame the long lines at gasoline stations in the United States during the
1970s as well as the long delays in construction projects on:
A) consumers who bought gas too frequently.
B) the Organization of Petroleum Exporting Countries (OPEC).
C) major oil companies operating in the United States.
D) U.S. government regulation of gasoline prices.
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120. Which of the following best represents the misallocation of resources that would occur
under a price ceiling on bottled water following a major hurricane?
A) Bottles of water sit on the shelves because nobody can afford it.
B) A family in a distant state takes time off work to bring bottled water to the
hurricane-ravaged area.
C) A family in a distant state gives bottled water to its dog, but a family in the
hurricane area cannot find bottled water to drink.
D) Families in the hurricane area brush their teeth with bottled water but cannot find
enough to drink.
121. Flexible prices ensure that:

A) resources are allocated to their highest-valued uses.
B) suppliers will always profit from necessity goods.
C) self-interested individuals will not interfere with the efficiency of the market.
D) prices will always be minimized.
122. When a price ceiling is in effect, goods and services:

A) are still allocated efficiently.
B) are not necessarily supplied by their lowest-cost producer.
C) do not necessarily flow to their highest-valued use.
D) are neither necessarily supplied by their lowest-cost producer nor do they flow to
their highest-valued use.
123. If a price ceiling on gasoline results in long lines at the gas station and a rich
businessman and an elderly retiree both need gasoline, who would have the higher-
valued use for gasoline, and who would have the lower opportunity cost of waiting in
line?
A) The businessman would have the higher-valued use and the lower opportunity cost.
B) The businessman would have the higher-valued use and the retiree would have the
lower opportunity cost.
C) The retiree would have the higher-valued use and the lower opportunity cost.
D) The retiree would have the higher-valued use and the businessman would have the
lower opportunity cost.
124. If there are 100 tickets to a concert and 200 fans who would like to go to the concert,
each placing a slightly different value on the tickets, is it more efficient to hold an
auction for the tickets or to hold a random drawing for the tickets?
A) hold an auction
B) hold a random drawing
C) Both are equally efficient.
D) It is impossible to say which is more efficient.
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125. Universal price controls in the Soviet Union:
A) led to widespread prosperity.
B) harmed powerful interests in the short run.
C) caused never-ending shortages and misallocations.
D) meant no one ever had to wait in line.
126. Price ceilings:

A) improve the allocation of resources because consumers with the greatest need for
the product are more likely to afford the product.
B) misallocate resources because consumers who buy the product may not be the ones
who value it the most.
C) misallocate resources because they allow consumers to compete against one
another by offering sellers higher prices.
D) improve the allocation of resources because consumers are prevented from bidding
up the price of products.
127. Impeding price signals by imposing price ceilings can have serious consequences.
Which of the following is such a consequence?
A) improved product quality
B) gains from trade
C) surpluses
D) misallocation of resources
128. For a given demand curve, the high-valued uses are at the _____, and the low-valued
uses are at the _____.
A) top; bottom
B) bottom; top
C) top; top
D) bottom; bottom
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129. (Figure: Supply and Demand 4) Refer to the figure. If the good is purchased by those
with the highest willingness to pay, what is the value of consumer surplus in the figure
at the price ceiling of $8?
A) $54
B) $136
C) $36
D) $45
130. (Figure: Supply and Demand 4) Refer to the figure. If the good is randomly allocated
between those with the highest and lowest willingness to pay, what is the value of
consumer surplus at the price ceiling of $8?
A) $54
B) $136
C) $36
D) $45
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131. Figure: Price Ceiling in a Generic Market
Refer to the figure. If the government imposes a price ceiling at the price of $4.00, the
result would be a:
A) surplus of 40 units.
B) shortage of 40 units
C) surplus of 20 units.
D) shortage of 20 units.
132. Which President ended the price controls on oil?

A) Richard Nixon
B) Gerald Ford
C) Jimmy Carter
D) Ronald Reagan
133. What happened as a result of the elimination of price controls on oil and gasoline in
1981?
A) The supply of gas and oil declined.
B) The shortage of gasoline was eliminated nearly overnight.
C) The price of oil increased dramatically, and stayed high until the early 1990s.
D) The shortage of gasoline was eliminated, but it took several years.
134. After President Reagan repealed the price controls on gasoline:

A) the supply of gasoline fell dramatically.
B) the market experienced a period of vast surpluses as a result of the lack of
regulation.
C) prices rose a little at first, but supply quickly began to increase and prices fell.
D) prices rose dramatically as a result of the repealed legislation.
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135. Ultimately, repealing the price controls on gasoline and oil:
A) led to permanently higher gasoline prices.
B) led to a higher supply of gasoline and lower prices.
C) was disastrous since the market collapsed due to a lack of government regulation.
D) was not able to eliminate the shortages of gasoline in the United States.
136. When the price ceilings on oil and gas were lifted in January 1981:
I. the price of oil rose immediately.
II. the price of oil continued to rise more than 2 years after the controls were eliminated.
III. higher prices gave an incentive to suppliers to increase supply, thus leading
eventually to lower prices.
A) I only
B) I and II only
C) I and III only
D) I, II, and III
137. The shortage of oil ended when:

A) Ronald Reagan eliminated price controls on oil in January 1981.
B) the government instituted minimum miles-per-gallon requirements for cars.
C) Congress passed the Energy Saver Act of 1985.
D) the U.S. Senate began regulating oil industry profits.
138. Which statement about price controls is most correct?

A) Price controls often hurt the people they are designed to help.
B) Price controls always help the people they are designed to help.
C) Price controls have minimal adverse effects.
D) Price controls make economic sense even if they have adverse effects.
139. Rent controls are:

A) an efficient and equitable way to help the poor.
B) inefficient, but a pretty good way to solve a serious social problem.
C) an inefficient way to help the poor in raising their standard of living.
D) an efficient way to allocate housing.
140. A rent control is a regulation that:

A) ensures that there are apartments available for rent.
B) controls rents at constant levels.
C) upholds rents to above equilibrium levels.
D) prevents rents from rising to equilibrium levels.
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141. Rent controls are:
A) price floors on rental housing.
B) price ceilings on rental housing.
C) quality freezes on rental housing.
D) quantity freezes on rental housing.
142. Which is the MOST correct statement about the impact of rent controls?
A) The short-run supply curve for apartments is inelastic, so rent controls create larger
shortages in the short run than in the long run.
B) The short-run supply curve for apartments is inelastic, so rent controls create
smaller shortages in the short run than in the long run.
C) The long-run supply curve for apartments is inelastic, so rent controls create larger
shortages in the long run than in the short run.
D) The long-run supply curve for apartments is inelastic, so rent controls create
smaller shortages in the long run than in the short run.
143. Over time, housing shortages caused by rent control ______ because the supply of
housing is ______ elastic in the long run.
A) increase; less
B) increase; more
C) decrease; less
D) decrease; more
144. Figure: Short and Long Run Shortages
Use the figure. At a rent-controlled price of $800, the short-run shortage of apartments
is ________ and the long-run shortage is ________.
A) 12,000; 4,000
B) 4,000; 12,000
C) 8,000; 4,000
D) 8,000; 12,000
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145. Why is the long-run supply curve of rent-controlled apartments typically more elastic
than the short-run supply curve?
A) In the long run, fewer new apartments are built, and older apartments are torn down
or turned into condominiums.
B) In the long run, many more new apartments are built and this increases the supply
of rent-controlled apartments.
C) In the long run, rent controls are always removed.
D) In the long run, the shortage of rent-controlled apartments becomes significantly
less.
146. How did economists try to prove that reductions in new apartment building in Ontario,
Canada, during the 1970–1975 period were a result of debates on rent control?
A) They showed that the economy was declining during this period.
B) They pointed to the fact that the OPEC oil crisis occurred at this time.
C) They contrasted the fact that apartment building was declining while new house
building was rising, in the same state of the economy.
D) They pointed to the fact that rent controls had not been implemented during the
OPEC oil crisis.
147. A rent control is a price:

A) floor on car rentals.
B) ceiling on car rentals.
C) floor on rental housing.
D) ceiling on rental housing.
148. Rent controls create all of the following EXCEPT:

A) shortages.
B) search costs.
C) wasteful quality increases.
D) resource misallocations.
149. New housing takes some time to build, so rent control creates larger shortages in the:
A) long run than in the short run because short-run supply is more elastic.
B) long run than in the short run because long-run supply is more elastic.
C) short run than in the long run because short-run supply is more elastic.
D) short run than in the long run because long-run supply is more elastic.
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150. Some economists compare the destructiveness of rent control to that of aerial
bombardment because it causes:
A) landlords to neglect their buildings, allowing them to deteriorate over time.
B) high search costs in apartment hunting.
C) there to be unexploited gains from trade.
D) apartments to go to renters who do not have the highest-valued use of the
apartments.
151. In your city, it is illegal to charge more than a certain amount of money for an
apartment. People have been signing leases for the highest legal amount, but also
agreeing to pay a monthly bribe “on the side” to their landlord in order to get the
apartment in the first place and to get timely maintenance. What is the effect of the
bribes?
A) The bribes make it harder to find an apartment.
B) The bribes cause there to be unexploited gains from trade.
C) The bribes cause apartments to be allocated to renters who do not have the highest-
valued use of the apartments.
D) The bribes minimize the damage from the rent control.
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152. (Figure: Supply and Demand 5) Refer to the figure. In the figure, representing a market
for apartments, a rent-controlled price of $800 will cause:
A) a short-run shortage of 6,000 apartments.
B) a short-run shortage of 8,000 apartments.
C) a short-run shortage of 3,000 apartments.
D) a short-run surplus of 14,000 apartments.
153. (Figure: Supply and Demand 5) Refer to the figure. In the figure, representing a market
for apartments, with a rent-controlled price of $800, the long-run supply curve will be
______ elastic than the short-run supply curve, causing the _____.
A) more; shortage to increase to 6,000 apartments
B) more; shortage to decrease to 3,000 apartments
C) less; shortage to increase to 6,000 apartments
D) less; surplus to decrease to 8,000 apartments
154. Which statement(s) is TRUE?

I. In the long run, rent-control laws create incentives to turn apartments into hotels or
parking garages.
II. Apartment owners are less likely to do routine maintenance when the government
controls apartment rents.
III. Rent-controlled apartments are more likely to be allocated by discrimination than
non–rent-controlled apartments.
A) I, II, and III
B) I and II
C) I only
D) II only
155. Under a policy of rent control, the short-run shortage ______ the long-run shortage.
A) is smaller than
B) is larger than
C) is equal to
D) overshadows
156. Rent control is an example of a:

A) price ceiling
B) price floor
C) tax
D) quota
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157. Vietnam's foreign minister said, “The Americans couldn't destroy Hanoi, but we have
destroyed our city by very low rents.” He was referring to the fact that:
A) very low rents provided very little income for carrying out warfare.
B) very low rents turned portions of city housing into a state of disrepair and slum-like
conditions.
C) the Americans did not install proper city housing codes in Hanoi.
D) bombing a city is always worse than rent control.
158. Under rent control, tenants can expect:

A) lower rent and higher-quality housing.
B) lower rent and lower-quality housing.
C) higher rent and a shortage of housing.
D) higher rent and a surplus of housing.
159. Which is NOT a result of rent control?

A) higher-quality housing
B) bribery
C) fewer new apartments offered for rent
D) less maintenance provided by landlords
160. Which would be the least likely result of a price ceiling imposed in the market for rental
cars?
A) slow replacement of old rental cars with new ones
B) poor maintenance of the rental cars
C) dirtier exteriors and interiors of rental cars
D) free gasoline given to people as an incentive to rent a car
161. Because rent controls on apartments reduce profits:

A) developers build and rent more apartments to make up for lost profit.
B) condominiums are converted into apartments.
C) landlords are less likely to discriminate against minorities in renting out
apartments.
D) apartment managers will give less consideration to renters' complaints.
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162. Under rent control, bribery is used to:
A) allocate housing to the most deserving tenants.
B) make the total price of a rental property (including the bribe) less than the market
price that would prevail without rent controls.
C) make the total price of a rental property (including the bribe) closer to the market
price that would prevail without rent controls.
D) allocate the housing to the poorest individuals in the market.
163. Rent control in New York City has resulted in:

A) people living in luxury apartments and paying low rents.
B) people having to bribe landlords to get apartments.
C) people having difficulty finding apartments.
164. From an efficiency standpoint, rent controls:

A) increase efficiency by allowing those households who could not afford high rents
before to be able to purchase housing.
B) increase efficiency by increasing consumer surplus.
C) decrease efficiency because both buyers and sellers would be better off if the price
of rents were allowed to rise.
D) decrease efficiency because they make it illegal to trade.
165. Under rent controls:

A) some mutually profitable trades are illegal and therefore the benefits are never
realized.
B) producer surplus is zero.
C) the quantity demanded of apartments is typically less than the quantity supplied.
D) buyers are better off at the expense of sellers.
166. Which statement would be the least likely result of rent controls?
A) Landlords are more selective with respect to the people they rent apartments to.
B) Landlords provide less maintenance on the apartments.
C) More new apartments are available for rent.
D) More people look for apartments for rent than the number of apartments available.
Page 43
I. Rent controls prevent apartments from being allocated to people who value them the
most.
II. With a system of rent controls, landlords are more likely to make needed repairs to
their properties as a way of attracting renters.
III. Although inefficient, rent controls are the best way to help the poor afford housing.
A) I only
B) I and III only
C) I, II, and III
D) II and III only
168. An alternative to rent control that has been used in some cities since the 1990s is:
A) confiscation of property from landlords.
B) policies that prevent evictions.
C) rent regulation that limits the rate of increase in rent.
D) higher taxes on rental income of landlords.

I. Regulations that limit the rate of increase in rents are equally as inefficient as rent
controls.
II. Rent regulations reduce the incentive for landlords to cut back on maintenance.
III. Regulations that limit the rate of increase in rents allow the price of rental housing to
respond to market forces.
A) I only
B) I and III only
C) I, II, and III
D) II and III only
170. The BEST way to help the poor afford housing is by:
A) using rent control.
B) raising the minimum wage.
C) issuing housing vouchers.
D) raising payroll taxes.
171. Housing vouchers are a better option than rent controls when a government is
attempting to make housing affordable for the poor. The reason is that the housing
voucher entitles the tenant to:
A) live in a rent-controlled apartment.
B) free maintenance of their apartment.
C) a certain dollar amount off the rent of any apartment they choose.
D) live in a luxury apartment of their choice.
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172. An alternative to rent controls that increases the quantity of housing and targets
consumers that need low-cost rental property is:
A) tax credits.
B) vouchers.
C) subsidies to landlords
D) not available.
173. If affordable housing is a concern, then a better policy than rent controls may be for the
government to provide:
A) subsidized housing.
B) additional jobs.
C) housing vouchers.
D) mortgage discounts.
174. Which statement is FALSE?

A) A frost that destroys half the orange crop will create a surplus of oranges.
B) It is possible to have a shortage of a good even if its supplies are abundant.
C) Politicians often blame speculators and profiteers for rising prices rather than
changes in supply and demand.
D) To eliminate a shortage, prices must rise.
175. If price controls are so harmful, why would a country ever impose them?
A) No one really knows.
B) Price controls are usually thought to be beneficial.
C) Politicians have strong incentives to respond to public opinion with price controls
when prices increase sharply.
D) People usually see the consequences of price controls but think they will be a good
policy.
176. Price controls are usually imposed in response to an:

A) expected increase in prices.
B) expected decrease in prices.
C) unexpected increase in prices.
D) unexpected decrease in prices.
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177. The shortages that result from imposing price controls:
A) are rarely recognized by the public as a result of the price controls themselves.
B) typically lead the public to lobby politicians to repeal the price controls.
C) only last for a short while until markets can adjust to the new lower prices.
D) create higher prices.
178. Dramatic price increases, such as those seen in the markets for gas and oil in the 1970s,
are typically the result of:
A) price gouging by big businesses.
B) shortages.
C) reductions in supply.
D) foreign intervention in markets.
179. Why do many consumers and politicians advocate for price controls?
A) Price controls are the only way for the poor to obtain certain goods when prices
rise.
B) Most consumers and politicians do not advocate for price controls, because they
understand their negative consequences.
C) Price controls appear to be a straightforward response to the problem of price
increases.
D) The gains in consumer surplus typically outweigh the loss in producer profits.
180. Ancient Athens had strict controls on the price of wheat, and punishment for violation
of the price control was death. The speech by a politician imploring a jury to convict an
alleged violator of the law survives to this day: “And consider that in consequence of
this vocation, very many have already stood trial for their lives; and so great the
[earnings] which they are able to derive from it that they prefer to risk their life every
day, rather than cease to draw from, the public, their improper profits.” Which of the
following is the most likely reason why merchants were willing to risk their lives to
charge more than the legal price?
A) Merchants were irrationally blinded by greed.
B) Merchants were not aware of the law, since it was not publically declared.
C) Merchants could not stay in business if they didn't raise prices.
D) Merchants did not like the general public, who approved of these laws, and this is
how some chose their revenge.
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181. After a hurricane, the prices of many items rise. How BEST might the government help
poor people be able to afford to buy goods and services?
A) institute price controls at pre-hurricane prices
B) set prices at zero, so consumers can buy what they need without financial distress
C) give poor people debit cards for use in purchasing essential items, while leaving
prices unregulated
D) institute a wage freeze to keep the costs of production from rising too rapidly
182. An economy with permanent, universal price controls is in essence a:

A) market economy.
B) social economy.
C) free economy.
D) command economy.
183. The blat economy described in the text results when price controls are:
A) extensive and cause chronic shortages in the economy.
B) extensive but the causes of shortages in the economy are only temporary.
C) short-lasting but cause chronic shortages in the economy.
D) short-lasting and cause only temporary shortages in the economy.
184. What does the Russian word blat refer to?

A) a Russian brand of vodka
B) having connections that enable one to obtain favors
C) the amount of time people spend waiting in lines to buy
D) things There is no such word.
185. To what does the Russian concept of blat refer?

A) the barter system that developed in Russia as a result of the shortages of goods
B) the command economy system that was instituted in Russia
C) the act of standing in lines to buy goods
D) having connections that one can use to get favors
186. Which scenario shows how the Russian concept of blat works during a beef shortage?
A) a politician acquires some steak through his friendship with the owner of the beef
factory
B) a beef factory owner hoards some steak at his own house
C) a beef factory owner realizes that there is a surplus of plastic wrapping
D) more people than usual stand in line to try to buy steak
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187. The chronic shortages of goods in the Soviet Union were:
A) caused by the CIA's manipulation of the Soviet currency.
B) limited to luxury items, like yachts and airplanes.
C) the result of too much defense spending that hoarded resources away from the
production of consumer goods.
D) beneficial to the party elite who traded scarce goods for favors and other scarce
goods.
188. What is blat?

A) a long line
B) the time costs associated with buying price-controlled goods
C) the use of political connections to get favors
D) a dilapidated rent-controlled apartment.
189. Likely the most significant example of federal price controls in the United States, in
terms of value of regulated market, came in the market for:
A) coal.
B) housing.
C) automobiles.
D) oil.
190. Which is NOT a cost of binding price controls?

A) misallocation
B) deadweight loss
C) search costs
D) equity costs
191. Likely the most significant example of federal price controls in the United States, in
terms of value of regulated market, came under President:
A) Barack Obama.
B) Richard Nixon.
C) Bill Clinton.
D) Ronald Reagan.
192. Airlines in the United States were subject to ______ regulation from 1938 to 1978.
A) binding price ceiling
B) binding price floor
C) nonbinding price ceiling
D) nonbinding price floor
Page 48
193. Which statement(s) is TRUE? Price floors set above the equilibrium price cause:
I. shortages.
II. surpluses.
III. deadweight losses.
A) I and III only
B) II and III only
C) III only
D) I is true if demand is elastic; however, II is true if demand is inelastic.
194. The presence of price floors in a market usually is an indication that:

A) there is an insufficient quantity of a good or service being produced.
B) the forces of supply and demand are unable to establish an equilibrium price.
C) sellers of the good or service outnumber the buyers.
D) policymakers believe the price floor does not involve inequities.
195. A price floor is:

A) a maximum price allowed by law.
B) a minimum price allowed by law.
C) able to produce an efficient outcome.
D) a tool used to increase government revenues.
196. The most common example of a price being controlled above market levels involves a
good for which the:
A) sellers outnumber the buyers.
B) buyers outnumber the sellers.
C) market is controlled by a monopolist.
D) market is controlled by the government.
197. When the minimum price that can be legally charged is above the market price, we say
there is a price:
A) support.
B) stability.
C) ceiling.
D) floor.
198. Price floors would create all of the following effects EXCEPT:
A) surpluses.
B) deadweight loss.
C) wasteful decreases in product quality.
D) misallocation of resources.
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199. A price floor:
A) is a maximum price allowed by law.
B) is a minimum price allowed by law.
C) has an effect only when it is set below the market price.
D) has little effect on market activity.
200. Which would NOT happen as the result of a price floor?

A) a surplus of the good
B) lost gains from trade
C) misallocation of resources
D) decreases in product quality
201. Raising the minimum wage is not an effective way to eliminate poverty because
increases in the minimum wage:
A) do not increase incomes.
B) create incentives for workers to exit the labor force.
C) create higher unemployment.
D) tend to simply increase birth rates among low-income households.

I. Price floors are legally established minimum prices for goods and services.
II. Price floors create surpluses, whereas price ceilings create shortages.
III. Price floors reduce quality of goods and services.
A) I and II only
B) II only
C) I, II, and III
D) I only
203. In the case of a binding price floor, the price paid in the market will be:
A) greater than the free market equilibrium price.
B) less than the free market equilibrium price.
C) equal to the free market equilibrium price.
D) unable to be compared with the free market equilibrium price.
204. In the case of a nonbinding price floor, the price paid in the market will be:
A) more than a free market equilibrium price.
B) less than a free market equilibrium price.
C) equal to a free market equilibrium price.
D) unable to be compared with a free market equilibrium price.
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205. A binding price floor leads to a(n):
A) shortage.
B) surplus.
206. A nonbinding price floor leads to a(n):

A) shortage.
B) surplus.
207. The quantity exchanged of a good ______ under a binding price floor.
A) rises
B) remains the same
C) falls
D) changes in an indeterminate direction
208. When a price floor is in effect:

A) demanders get too strong of a signal from suppliers about product availability.
B) suppliers have no incentive to signal product availability to demanders.
C) all of the suppliers' product is purchased at the lower price, so there is no need to
signal anything to demanders.
D) suppliers cannot signal their product availability to demanders.
209. If an American teenager will work for $5 an hour and an employer is willing to pay that
wage, but the minimum wage is $7.25 an hour and the employer is not willing to pay
that much, the teenager goes unemployed and the market experiences:
A) lost gains from trade.
B) wasteful increases in quality.
C) resource misallocations.
D) reductions in product quality.
210. In Puerto Rico in 1938, the market wage was 3¢ to 4¢ per hour when Congress passed a
law raising it to 25¢ per hour. Workers in Puerto Rico were:
A) happy with their raise.
B) hoping for a higher minimum wage.
C) devastated.
D) indifferent.
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211. Which statement(s) is NOT true?
I. The increase in the minimum wage in Puerto Rico in 1938 did not affect Puerto Rico's
unemployment rate.
II. About 15% of all hourly workers in the United States earn the minimum wage.
III. Raising the minimum wage is an effective method to combat poverty.
IV. Raising the minimum wage decreases employment of low-skilled workers.
A) I and II only
B) II and III only
C) I and IV only
D) IV only
Figure: Minimum Wage
212. (Figure: Minimum Wage) Refer to the figure. At a minimum wage of $8, firms are
willing to hire ________ workers.
A) 45
B) 25
C) 35
D) more than 45
213. (Figure: Minimum Wage) Refer to the figure. How many workers are unemployed at a
minimum wage of $8?
A) 10
B) 20
C) 25
D) 35
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214. Figure: Unskilled Labor Market
Based on the figure, what is the number of unemployed workers if a minimum wage of
$6 is set in this market for unskilled labor?
A) 40
B) 55
C) 20
D) 95
215. The Federal minimum wage causes unemployment MOSTLY among:

A) middle-class workers.
B) young unskilled workers.
C) college graduates.
D) highly skilled workers.
216. For a price floor to prevent market forces from finding the equilibrium price, it must be
set:
A) above the equilibrium price, causing a market shortage.
B) below the equilibrium price, causing a market shortage.
C) below the equilibrium price, causing a market surplus.
D) above the equilibrium price, causing a market surplus.
217. A price floor causes:

A) excess demand.
B) a shortage.
C) a surplus.
D) quantity demanded to exceed quantity supplied.
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218. The minimum wage is an example of a(n):
A) price ceiling.
B) price floor.
C) wage subsidy.
D) efficient policy.
219. Figure: Labor Market
Refer to the figure. Which statement is correct?

A) A price floor set at W1 would cause a labor surplus best labeled by A.
B) A price floor set at W1 would cause a labor surplus best labeled by B.
C) A price floor set at W2 would cause a labor surplus best labeled by A.
D) A price floor set at W2 would cause a labor surplus best labeled by B.
220. If a minimum wage is posted in the labor market:

A) the demand for labor would increase.
B) the supply of labor would decrease.
C) a surplus of labor would develop.
221. An increase in the minimum wage would likely increase unemployment among which
group of workers?
A) college graduates
B) unskilled workers
C) female workers
D) older workers
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222. Figure: Labor Market 2
Refer to the figure. In the figure, there will be 6 unemployed workers at a minimum
wage of:
A) $4.
B) $6.
C) $8.
D) $7.
223. The higher the minimum wage is above the equilibrium wage, the:
A) greater is the number of low-skilled unemployed workers.
B) smaller is the labor surplus among teenagers.
C) smaller is the number of low-skilled unemployed workers.
D) more likely it is for students to stay in high school and receive their diploma.
224. Minimum wage laws cause ______ low-skilled employment.

A) an increase in
B) a decrease in
C) no change in
D) an indeterminate change in
225. In the case of a binding price floor, economists expect the quality level of a good to:
A) rise.
B) remain the same.
C) fall.
D) change in an indeterminate direction.
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226. We commonly associate ______ with agricultural products.
A) price ceilings
B) price floors
C) unregulated markets
D) rent control
227. If, under price control, quantity supplied equals 50 units and quantity demanded equals
40 units, then the price control is a __________.
A) binding price ceiling
B) binding price floor
C) nonbinding price ceiling
D) nonbinding price floor
228. Figure: Minimum Wage for Country A
Refer to the figure. The deadweight loss from the $8 minimum wage is area:
A) bc.
B) ad.
C) ce.
D) bd.
229. Ben is willing to work for $4/hour and an employer is willing to hire Ben for $7/hour.
Which statements is TRUE?
A) A minimum wage of $7.50/hour would prevent this mutually beneficial exchange.
B) Minimum wages do not prevent mutually beneficial exchanges.
C) A minimum wage of $4.50/hour would prevent this mutually beneficial exchange.
D) A minimum wage of $3.50/hour would prevent this mutually beneficial exchange.
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Figure: Price Floor
230. (Figure: Price Floor) Refer to the figure. How much unemployment results from the
imposition of a price floor set at $10?
A) 100 units
B) 310 units
C) 50 units
D) 210 units
231. (Figure: Price Floor) Refer to the figure. What are the lost gains from trade as a result of
the imposition of the price floor?
A) Areas (B + C)
B) Area D
C) Areas (C + F)
D) Areas (B + E)
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232. Figure: Deadweight Loss
Refer to the figure. What areas represent the deadweight losses in the labor market as a
result of the imposition of a minimum wage at $4?
A) Areas (C + F)
B) Areas (B + C)
C) Area D
D) There is no deadweight loss in this market as a result of the $4 minimum wage.
233. The U.S. Congress first instituted the minimum wage in:
A) 1914.
B) 1974.
C) 1938.
D) 1925.
234. If the minimum wage is lowered and closer to the market level, the:
A) gains from trade would decrease, compared to a higher minimum wage.
B) gains from trade would increase, compared to a higher minimum wage.
C) lost gains from trade would increase, compared to a higher minimum wage.
D) deadweight loss would increase, compared to a higher minimum wage.
235. The influence of the minimum wage in the American economy is very small because
MOST workers earn:
A) more than the minimum wage.
B) less than the minimum wage.
C) more or less than the minimum wage.
D) near the minimum wage.
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236. Which of these cases would likely result from an increase in minimum wage?
A) an increase in the price of hamburgers
B) an increase in unemployment among teenagers
C) incomes increase for those who keep minimum-wage jobs
237. Figure: Labor Market 3
Refer to the figure. In the diagram, a minimum wage of $7 causes a deadweight loss of:
A) W + X.
B) X + Z.
C) V + Y.
D) Y + W.
238. Puerto Rico's minimum wage increased dramatically as result of the 1938 Fair Labor
Standards Act. This legislation:
A) caused many Puerto Rican firms to go bankrupt, sending unemployment soaring.
B) is a case in point that minimum wage increases have different effects in non-
capitalist countries.
C) provided a counterexample to the claim that minimum wage increases cause
unemployment.
D) had little effect on Puerto Rican labor markets because the minimum wage increase
was quite modest.
239. Price floors encourage firms to provide ________ quality.

A) too little
B) too much
C) the right amount of
D) no
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240. The deregulation of the airline industry caused:
A) lower prices and more flights.
B) higher prices and fewer flights.
C) higher prices and more flights.
D) lower prices and fewer flights.
241. The price floor regulation of the airline industry:

A) was the leading factor in the development of low-cost airlines.
B) led to a misallocation of resources by preventing the entry of innovative airlines.
C) allowed the middle class the opportunity to fly at reduced rates.
D) was based on the principle of low prices and low quality.
242. What would be the LEAST likely result of a price floor in the market for airline travel?
A) rapid replacement of old airliners with new aircraft
B) narrow seats and basic meals like peanuts or chips with a coffee or soda
C) special incentives like airline mileage clubs to attract customers
D) excellent engine maintenance
243. Deregulation of the airline markets reduced waste, increased efficiency, and:
A) eliminated competition.
B) improved allocation of resources.
C) raised prices.
D) caused an increase in costs.
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244. Figure: Airline Industry
Refer to the figure. Suppose that airlines are regulated and prices are kept above the
market level. According to the figure, the areas A and B represent, respectively, the:
A) deadweight loss and quality waste.
B) deadweight loss and consumer surplus.
C) quality waste and deadweight loss.
D) quality waste and consumer surplus.
245. Price floors make it illegal to compete for more customers by lowering prices, so firms
compete by offering customers:
A) various options.
B) more quantity.
C) more discount.
D) higher quality.
246. If firms are unable to lower prices because of a legally mandated price floor, then:
A) firms are better off (higher profits) at the expense of consumers.
B) firms will often compete by offering higher-quality goods than consumers are
willing to pay for.
C) consumers will decrease their demand due to the high prices.
D) quantity supplied will be less than quantity demanded.
247. An employer has work that can be done in the same time by one high-skilled worker
paid $50 an hour or by eight low-skilled workers paid $5 an hour each and the minimum
wage is $7.25 an hour. In this scenario, who benefits from the minimum wage, the high-
skilled worker or the low-skilled workers? (Hint: Who would you hire for the job?)
A) the high-skilled worker
B) the low-skilled workers
C) both benefit equally
D) It is impossible to say who benefits more.
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248. Price floors on airlines:
A) kept ticket prices much lower than unregulated ticket prices.
B) caused airlines to compete by offering customers higher-quality services, such as
better meals and wider seats.
C) reduced the quality of airline services (for example, less frequent flights, peanuts
instead of meals).
D) gave airlines an incentive to lower ticket prices to increase ticket sales.
249. A “quality waste” refers to:

A) an increase in quality under a price ceiling.
B) an increase in quality under a price floor.
C) a decrease in quality under a price ceiling.
D) a decrease in quality under a price floor.
250. In 1974, there were ________ airline firms operating in the United States.
A) 10
B) 79
C) 38
D) 16
251. Southwest Airlines was able to enter the national market in 1978 as a result of:
A) winning a series of lawsuits.
B) accumulating market share.
C) airline deregulation.
D) establishment of new price controls.
252. Which is not an effect of a price floor?

A) misallocation of resources
B) deregulation
C) surpluses
D) wasteful increases in quality
253. One of the virtues of the market process is that it is open to new ideas, innovations, and:
A) reallocation of property.
B) central planning by government.
C) profits.
D) experiments.
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254. Deregulation of the airline industry has led to:
A) an increase in the quality and safety of air travel.
B) increases in the costs of production in air travel.
C) more firms providing air travel services.
D) fewer firms providing air travel services.
255. Which statement is correct regarding the restrictions on entry into the airline industry?
A) Resources were equally allocated because new airlines were kept out of the
industry.
B) Resources were misallocated because low-cost airlines were kept out of the
industry.
C) Resources were efficiently allocated because high-cost airlines were kept out of the
industry.
D) Resources were reallocated because only low-cost airlines were allowed to enter
the industry.
256. Deregulation improves the allocation of resources by:

A) allocating more resources to the firms.
B) decreasing the number of firms in the market.
C) allowing low-cost, innovative firms to enter the market.
D) creating more market opportunities to the firms.
257. Airline regulation from 1938 to 1978 was successful in keeping prices high because:
A) it controlled price, but not entry into the airline market.
B) it controlled both price and entry into the airline market.
C) it listened to the requests of suppliers during this time at the expense of consumers.
D) of declining production costs.
258. Labor unions are composed of high-skilled workers, but generally support minimum
wage laws that typically affect only low-skilled workers. Their support makes more
sense by considering that low-skilled labor is a ______ for high-skilled labor, and
minimum wages ______ the quantity demanded of low-skilled labor.
A) complement; increase
B) complement; decrease
C) substitute; increase
D) substitute; decrease
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259. When price floors are in effect, goods and services:
A) are still allocated efficiently.
B) are not necessarily supplied by their lowest-cost producer.
C) do not necessarily flow to their highest-valued use.
D) are neither necessarily supplied by their lowest-cost producer nor do they flow to
their highest-valued use.
260. Regulation of airline fares under the Civil Aeronautics Board:

A) meant the government prevented the entry of new competitors to maintain high
ticket prices.
B) led to greater innovation in the airline industry at the cost of higher ticket prices.
C) created incentives for optimal resource allocation.
D) made it possible for lower-income Americans to afford air travel for the first time.
261. In a market the equilibrium price is $20. A price ceiling of $15 creates a bigger shortage
than a price ceiling of $10.
A) True
B) False
262. A price ceiling is a legal maximum on the price of the good or service.
A) True
B) False
263. Most economists favor price controls as a way of allocating resources.

A) True
B) False
264. A price ceiling is a minimum price below the market price that can be legally charged.
A) True
B) False
265. A price ceiling set below the equilibrium price always results in a shortage.
A) True
B) False
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266. If a price ceiling is below equilibrium price, the willingness to pay for the quantity
provided will be above equilibrium price.
A) True
B) False
267. President Richard Nixon froze all prices and wages in 1971, which led to shortages of
goods throughout the economy.
A) True
B) False
268. Businesses may respond to price ceilings by closing down, reducing product quality,
and by accepting bribes to sell their product.
A) True
B) False
269. Rent control laws are most commonly a form of price ceiling.
A) True
B) False
270. Minimum wage laws are an example of price ceilings.

A) True
B) False
271. Minimum wage laws are sometimes a price floor and sometimes a price ceiling.
A) True
B) False
272. Price ceilings are always good for consumer welfare.

A) True
B) False
273. Suppose that supply is fixed at 100 units and demand is Q = 500 – P. A price ceiling of
$100 creates a shortage of 400 units.
A) True
B) False
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274. Price ceilings cause the quantity demanded to be less than the quantity supplied.
A) True
B) False
275. Even though shortages typically result from the imposition of price ceilings, the overall
gains in economic efficiency outweigh the costs.
A) True
B) False
276. Price controls such as those instituted by President Richard Nixon in 1971 led to severe
shortages in many markets across the United States.
A) True
B) False
277. When he was president, Richard Nixon froze all prices and wages in the United States.
A) True
B) False
278. If price ceilings do not allow prices to rise, then demanders will be unable to signal their
needs to suppliers.
A) True
B) False
279. Once one accounts for time costs and bribes, it may be more expensive to make
purchases at the government-controlled price than at the free-market price.
A) True
B) False
280. Suppose a $3 per gallon price ceiling is imposed on gasoline, and the equilibrium price
of gasoline is $2 per gallon. Such a price ceiling would lead to long lines at gas stations.
A) True
B) False
281. One benefit of shortages is that they eliminate competition since buyers cannot compete
for goods by paying higher prices.
A) True
B) False
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282. Once search and waiting costs are taken into account, price ceilings can cause
consumers to spend more for a good than if prices were unregulated.
A) True
B) False
283. The producer and consumer surplus lost as a result of price ceilings is often referred to
as deadweight loss.
A) True
B) False
284. The minimum wage causes unemployment mainly among poor, unskilled workers.
A) True
B) False
285. The quantity traded with a binding price ceiling is lower than the quantity traded
without a price ceiling, which means that price ceilings create lost gains from trade.
A) True
B) False
286. If price controls are imposed, gains from trade, including consumer and producer
surplus, are likely to increase.
A) True
B) False
287. When prices are not allowed to rise, there is no incentive for suppliers to ship resources
to where they are needed most.
A) True
B) False
288. Under airline regulation, within-state flights were cheaper than interstate flights of
comparable length.
A) True
B) False
289. Prices ceilings misallocate resources because with them resources are not necessarily
allocated to their highest-valued use.
A) True
B) False
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290. When price ceilings are effective, gains from trade are usually lower than if the
available goods are allocated to the highest value uses.
A) True
B) False
291. Effective price ceilings cause misallocation of resources because scarce resources are
usually not allocated to their highest-value uses.
A) True
B) False
292. Housing shortages caused by rent controls are larger in the long run because the supply
of housing is more elastic in the long run.
A) True
B) False
293. When a crisis in the Middle East reduces the supply of oil, the price system rationally
responds by reallocating oil from highest-value uses to lower-valued uses.
A) True
B) False
294. During the 1970s, the 11-tier oil production definitions came into play because of firms'
attempts to bypass regulations and produce decontrolled oil.
A) True
B) False
295. Rent controls create large shortages in the long run rather than the short run because the
long-run supply curve for apartments is inelastic.
A) True
B) False
296. The long-run supply curve for rent-controlled apartments is generally more inelastic
than the short-run supply curve.
A) True
B) False
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297. The poor state of the economy was the dominant factor that caused the fall in the
number of new apartments built in Ontario, Canada, during the first half of the 1970s.
A) True
B) False
298. People typically blame price controls for the problems caused by price controls.
A) True
B) False
299. The Soviet Union's experience with price controls demonstrated that, with careful
planning, shortages and surpluses were a rare event.
A) True
B) False
300. When the maximum price that can be legally charged is above the market price we say
that there is a price floor.
A) True
B) False
301. A price floor is a legal maximum on the price of a good or service.

A) True
B) False
302. If a price floor is above the equilibrium price it will have no effect in the market.
A) True
B) False
303. If a price floor is below the equilibrium price, a shortage will result.
A) True
B) False
304. The minimum wage is an example of a price floor in the labor market.
A) True
B) False
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305. A minimum wage mostly creates unemployment among older workers.
A) True
B) False
306. Although a minimum wage increases unemployment, it doesn't create a deadweight loss.
A) True
B) False
307. 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.
A) True
B) False
308. 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.
A) True
B) False
309. Price floors and price ceilings both result in lost gains from trade and decreases in the
quality of the product.
A) True
B) False
310. Regulation of entry in the airline industry increased costs and reduced innovation.
A) True
B) False
311. Price floors set above equilibrium encourage quality waste and wasteful lines.
A) True
B) False
312. If the equilibrium wage is $10 an hour and the government sets a minimum wage of $8,
there will be a shortage of labor.
A) True
B) False
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313. Minimum wage laws are an example of price floors.
A) True
B) False
314. 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.
A) True
B) False
315. 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?
316. Assume that a market is defined by two equations: the demand equation is Qd = 60 – 5P,
and the supply equation is Qs = 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?
317. Illustrate on a supply and demand diagram how price ceilings may distort the market
outcome and specify what secondary effects price ceilings can create.
318. A market's demand and supply curves are given by:

Qd = 400 – 3P
Qs = 100 + 2P
where Qd is quantity demanded, Qs 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 Qs = 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?
319. 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.
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320. Using a supply and demand diagram as a reference, discuss the way a price ceiling
causes a reduction in gains from trade.
321. 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.
322. 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?
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323. 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?
324. Rent controls are typically implemented as a means of helping low-income families
afford housing. Is this a good way to help poor families in general? Explain why or why
not.
325. Do shortages caused by rent controls tend to be larger in the short run or the long run?
Use a supply and demand diagram to help illustrate your answer.
326. Rent controls have five important effects on the market for apartments. Please list and
provide an example of each effect.
327. Specify the argument in favor of rent controls and the arguments against rent controls.
Explain what other possible policies can create affordable housing.
328. Would you expect shortages due to rent controls to be more or less severe in the short
run or in the long run? Does the elasticity of supply have a role to play?
329. Illustrate on a demand and supply diagram how the existence of a price floor would
distort the market outcome, and specify what effect (i.e., shortage or surplus) the price
floor may create.
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330. The demand and supply of labor are given by:
Qd = 1,000 – 10W
Qs = 800 + 40W
where Qd is the quantity demanded of labor, Qs is the quantity supplied of labor, and W
is the hourly wage.
a. What is the equilibrium wage and level of employment?
b. Suppose the government mandates a minimum wage of $7. How many workers will
firms employ?
c. How many workers are unemployed because of the minimum wage of $7?
331. Currently, the federal minimum wage is set at $7.25 per hour. A survey conducted by
Newsweek magazine (June 27, 2011) indicated that many Americans would be willing
to work for far less than the minimum wage—some as low as 25¢ per hour! What would
happen if the U.S. government eliminated the minimum wage, and instead let wages be
set by the marketplace?
332. Graphically illustrate supply and demand in a market where a price floor has been
instituted above the equilibrium price. Is there a shortage or a surplus of this good
because of the price floor? On your graph, shade in the area of lost gains from trade and
explain why this results in market inefficiency.
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Answer Key
1. C
2. A
3. B
4. C
5. C
6. B
7. C
8. A
9. D
10. B
11. D
12. C
13. C
14. A
15. C
16. C
17. D
18. D
19. B
20. C
21. A
22. C
23. C
24. B
25. C
26. A
27. A
28. B
29. C
30. D
31. C
32. D
33. B
34. B
35. B
36. A
37. A
38. B
39. B
40. B
41. B
42. D
43. B
44. B
Page 75
45. C
46. D
47. B
48. C
49. C
50. B
51. D
52. C
53. C
54. C
55. C
56. C
57. D
58. C
59. A
60. B
61. B
62. C
63. A
64. B
65. D
66. D
67. D
68. D
69. D
70. A
71. B
72. D
73. A
74. A
75. C
76. A
77. B
78. D
79. B
80. C
81. C
82. A
83. D
84. C
85. A
86. A
87. D
88. A
89. C
90. A
Page 76
91. C
92. A
93. A
94. B
95. B
96. C
97. A
98. A
99. A
100. A
101. D
102. B
103. A
104. C
105. A
106. C
107. C
108. B
109. D
110. A
111. B
112. B
113. B
114. A
115. C
116. B
117. D
118. C
119. D
120. C
121. A
122. C
123. B
124. A
125. C
126. B
127. D
128. A
129. A
130. C
131. B
132. D
133. B
134. C
135. B
136. C
Page 77
137. C
138. A
139. C
140. D
141. B
142. B
143. B
144. B
145. A
146. C
147. D
148. C
149. B
150. A
151. D
152. C
153. A
154. A
155. A
156. A
157. B
158. B
159. A
160. D
161. D
162. C
163. D
164. C
165. A
166. C
167. A
168. C
169. D
170. C
171. C
172. B
173. C
174. A
175. C
176. C
177. A
178. C
179. C
180. C
181. C
182. D
Page 78
183. A
184. B
185. D
186. A
187. D
188. C
189. D
190. D
191. B
192. B
193. B
194. C
195. B
196. A
197. D
198. C
199. B
200. D
201. C
202. A
203. A
204. C
205. B
206. C
207. C
208. D
209. A
210. C
211. C
212. B
213. B
214. A
215. B
216. D
217. C
218. B
219. C
220. C
221. B
222. C
223. A
224. B
225. A
226. B
227. B
228. C
Page 79
229. A
230. A
231. C
232. D
233. C
234. B
235. A
236. D
237. B
238. A
239. B
240. A
241. B
242. B
243. B
244. C
245. D
246. B
247. A
248. B
249. B
250. A
251. C
252. B
253. D
254. C
255. B
256. C
257. B
258. D
259. B
260. A
261. B
262. A
263. B
264. B
265. A
266. A
267. A
268. A
269. A
270. B
271. B
272. B
273. B
274. B
Page 80
275. B
276. A
277. A
278. A
279. A
280. B
281. B
282. A
283. A
284. A
285. A
286. B
287. A
288. A
289. A
290. A
291. A
292. A
293. B
294. A
295. B
296. B
297. B
298. B
299. B
300. B
301. B
302. B
303. B
304. A
305. B
306. B
307. A
308. A
309. B
310. A
311. B
312. B
313. A
314. B
Page 81
315. In August 1971, President Richard Nixon froze all wages and prices. Shortages began
to appear soon after in industries like lumber, steel, aluminum, paper, clothing, etc.
Since prices could not be raised, sellers began to lower the quality of products and
service. For example, the full service gas station disappeared during this time. The most
serious shortage was the shortage of oil. Goods are typically allocated randomly during
a shortage and gas was no exception. In 1974, Business Week reported that while
consumers waited three hours in line for gasoline in some states, consumers were
getting easy access to gas in other states. When the shortages grew worse, President
Nixon even ordered the closures of schools and factories. Daylight savings time and the
55 mph limit were instituted (this was repealed in the 1990s). Price controls for most
goods were lifted by 1974, but price controls on oil lingered to a certain extent.
Eventually President Ronald Reagan lifted all controls on oil prices when he took office
in 1981.
316. a. Equilibrium P = $6, and equilibrium Q = 30 units.
b. Qd = 60 – 5(3) = 45. Qs = 5(3) = 15. Shortage = 30 units.
c. The price associated with a Qd of 15 units can be found by substituting the quantity
back into the demand equation. 15 = 60 – 5P. P = $9. Therefore the total value of time
wasted standing in line is $6 × 15 = $90.
317.
When the maximum price that can be legally charged is below the market price we say
that there is a price ceiling. Price ceilings create five important effects: shortages,
reduction in product quality, wasteful lineups and other costs of search, a loss of gains
from trade, and a misallocation of resources.
318. a. Qd = 400 – 3(60) = 220; Qs = 100 + 2(60) = 220. The market is in equilibrium so
there is no shortage.
b. Qd = 400 – 3(60) = 220; Qs = 80 + 2(60) = 200. There is a shortage of 20 units. The
quantity transacted is 200. Willingness to pay for 200 units: 200 = 400 – 3P; 3P= 200;
P = 200/3 = $66.67.
319. No, this would not have decreased the total cost to consumers. Since the price ceiling on
gasoline would have caused a shortage of gasoline, consumers would have had to
expend additional time waiting in line or possibly even additional money on bribes, etc.
Price controls do not eliminate competition; they merely change the form of
competition. Therefore in the end, these price controls would not have been successful
in lowering costs to consumers.
Page 82
320.
The diagram is a copy of Figure 8.3 in the text. The student should identify the price
ceiling, the shortage, and the losses in consumer and producer surplus. The student
should identify these areas on the diagram indicating the loss in gains from trade.
321. For consumers who value these goods (like bottled water and generators) very highly,
this is not a good policy. The price controls create large shortages of these goods, and
many times these consumers are unable to (legally) obtain these goods since they are
unable to signal their high value by offering to pay more. In addition, with prices fixed
at artificially low levels, there is no incentive for suppliers of these goods to increase
supply. If prices were allowed to rise, this would entice new (or existing) suppliers to
enter this market and hence the supply of these goods would rise; price controls;
however, remove the incentive to respond rationally.
322. a. Consumer surplus, if the goods were allocated to only the highest-value uses, would
be the total area (A + B + C + D) = $1,560
b. $13 = (20 + 6)/2
c. Consumer surplus, if the goods were allocated randomly, would be the total area (C
+ D) = $840. Alternatively, consumer surplus is also (13 – 6)120 = $840
323. a. Consumer surplus, if the goods are allocated randomly, would be the total of areas C
+ D. This is $12,000.
b. A + B are lost if the goods are allocated randomly. This is $8,400.
324. No, this is not a good means of helping. In general, rent controls create shortages that
make it hard for poor families to even find suitable housing. In addition, it leads to
decreases in the quality of housing, as owners attempt to offset losses from the lower
prices by cutting their costs. With rent controls also come high search costs—these
search costs can be especially costly for the people that landlords think are not “ideal
renters” (unfortunately, many minorities or low-income households fall into this
category). In short, most of the time rent controls typically end up making poor families
worse off.
Page 83
325. Rent control creates larger shortages in the long run than in the short run. The short-
run shortage is small since the apartment units are already built. In the long run, fewer
new units are built and old apartments are converted into condominiums or torn down,
so the shortage grows over time.
326. 1) Shortage: Since the rent-controlled price is below the equilibrium price, the quantity
demanded of apartments will exceed the quantity supplied. The shortage will worsen
over time as apartments are converted into office space, parking garages, and
condominiums. Some apartments may even be abandoned or set on fire as a way to
collect insurance money.
2) Reductions in quality: Because rent control reduces profits, landlords cut back on
routine maintenance. Tenant complaints can more easily be ignored when there is a
long line of potential renters who are seeking apartments.
3) Wasteful lineups and search costs: People may have to wait months to find a suitable
apartment because of the shortage. When an apartment becomes available, landlords
might require tenants to spend thousands of dollars purchasing worthless furniture.
Some people may be discriminated against when trying to get an apartment. Landlords
might prefer tenants without children or tenants without foreign accents. When
resources are not allocated based on willingness to pay, they will frequently get
allocated based on other criteria, such as skin color, nationality, and so on.
4) Lost gains from trade: At the rent-controlled price, there are numerous people
willing to pay more for an apartment than the minimum required by a landlord, but
these trades will not take place because the price cannot be bid above the controlled
price.
5) Misallocation of resources: People living in rent-controlled apartments may prefer a

bigger or smaller apartment but are reluctant to move because of the difficulty in
finding available apartments. People with the highest willingness to pay may not be
those who are actually renting the apartments.
Page 84
327. Without rent controls some people may not be able to afford appropriate housing. If
rent controls are the only way to help the poor, then this would be an argument in favor
of price controls.
However, rent controls create shortages and lower the quality of apartments, which are
rarely the best way to help the poor. A better policy than rent controls is for the
government to provide housing vouchers, which would give qualifying consumers a
voucher that can be applied to any unit of housing. Unlike rent controls, which create
shortages, vouchers increase the supply of housing. Unlike rent controls, vouchers can
also be targeted to consumers who need them.
328. Since apartments cannot easily be moved, landlords are generally “stuck” and supply is
more inelastic in the short run. They cannot easily pick up their apartments or convert
them to other uses in the short run, so immediately after the institution of rent controls,
shortages are less severe. In the long run, however, fewer new buildings are built and
older buildings are either torn down or converted to condominiums, thereby increasing
the severity of the shortage in the long run and resulting in a more elastic long-run
supply.
329. When the minimum price that can be legally charged is above the market price, we say
that there is a price floor. Price floors create four important effects: surpluses, a loss of
gains from trade, wasteful increases in quality, and a misallocation of resources.
330. a. Qd = Qs, 1,000 – 10W = 800 + 40W, W = $4. The level of employment is 1,000 – 10
× 4 = 960.
b. Qd = 1,000 – 10 × 7 = 930.
c. Unemployed = Qs – Qd = (800 + 40 × 7) – (1,000 – 10 × 7) = 150.
331. Most likely the wage for low-skilled jobs/workers would fall immediately. Employment
would increase as the quantity of workers hired rose as a result of the lower wages. In
the long run, lower domestic wages may even entice more U.S. companies to locate
more factories in the United States as a result of the lower wages, ultimately increasing
demand for labor in the United States and raising wages.
Page 85
332. A price floor instituted above the equilibrium price will result in a surplus of the good.
This results in lost gains from trade and market inefficiency because there are some
suppliers of the good who would be willing to trade at a lower price (and, of course,
buyers willing to pay a lower price). But these mutually beneficial trades do not happen
because they are illegal.
Page 86

Modern Principles of Economics 3rd Edition Cowen Test Bank 1

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Modern Principles of Economics 3rd Edition Cowen Test Bank 1

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Modern Principles of Economics 3rd

Edition Cowen Test Bank

Test Bank: https://testbankpack.com/p/test-bank-for-modern-

Solution Manual: https://testbankpack.com/p/solution-manual-for-

1. A price ceiling is a(n):

2. Price ceilings create five important effects:

3. A legal maximum price at which a good can be sold is a price:

Use the following to answer questions 5-7:

Figure: Price Ceiling

Use the following to answer questions 12-13:

Figure: Price Controls

14. A price ceiling:

16. Price ceilings do not have much effect:

21. A binding price ceiling leads to a(n):

22. A nonbinding price ceiling leads to a(n):

Figure: Government Price Controls

33. A shortage results when:

36. Price controls instituted by President Nixon in 1971:

Figure: Labor Market 1

40. Figure: Supply and Demand 1

43. The price controls of the early 1970s caused:

49. Price ceilings set by the government:

50. Price ceilings reduce quality because:

54. When a price ceiling is in effect:

Use the following to answer questions 58-60:

Figure: Effects of Price Ceilings

Free Market Price Ceiling

62. Which statement(s) about price ceilings are TRUE?

Use the following to answer questions 63-64:

Figure: Costs of Price Ceilings

Use the following to answer questions 67-68:

Figure: Price Ceiling of Ps

70. Shortages in economic markets are inefficient because:

71. What do price ceilings NOT cause?

Figure: Supply and Demand 2

75. The statement that “price controls do not eliminate competition”:

Use the following to answer questions 76-77:

Figure: Losses from Price Ceilings

Use the following to answer questions 79-80:

Figure: Costs of Price Ceilings 2

81. Which statement about price ceilings is correct?

82. Which statement is TRUE in a market with a price ceiling?

83. A deadweight loss is the total of:

87. Deadweight loss is:

88. When a price ceiling is in effect:

91. Deadweight loss occurs when:

Figure: Water Market

95. Price ceilings:

Use the following to answer question 96:

Figure: Supply and Demand 3

103. Figure: Value of Uses

The sections labeled A, B, and C represent, respectively, the:

Use the following to answer questions 104-105:

Figure: Price Ceilings and Consumer Surplus

Use the following to answer questions 106-108:

Figure: Price Ceilings and Valuation of Uses

Use the following to answer questions 109-111:

Figure: Price Ceilings and Consumer Valuation

112. Figure: Price Ceilings and Lost Consumer Surplus

Figure: Price Ceilings and Random Allocation

115. The effects of price ceilings:

121. Flexible prices ensure that:

122. When a price ceiling is in effect, goods and services:

126. Price ceilings: