Question 1

Explain the term "clearing the market."

Accepted Answer

When quantity demanded equals quantity supplied, all of the product produced for the market is sold
and consumed. Thus, no buyer willing to pay at least the equilibrium price goes without the good or any seller capable of producing at most at the equilibrium price goes without any product unsold. No product unsold or unbought results in a "clear" market. Hence, market forces of supply and demand work to establish that market-clearing price.

Question 2

Use the following table to answer the next questions.
 $$\begin{array} { l l c } 
\hline & \text { Market for Public Transportation } \
\hline \text { Price } & \text { Quantity Demanded } & \text { Quantity Supplied } \
\hline \$ 0.75 & 100,000 & 65,000 \
\$ 1.00 & 92,000 & 80,000 \
\$ 1.25 & 86,000 & 86,000 \
\$ 1.50 & 80,000 & 100,000 \
\$ 1.75 & 75,000 & 115,000 \
\$ 2.00 & 68,000 & 116,000 \
\hline
\end{array}$$
-What is the surplus when the price floor is $0.75 in the market for public transportation?

Accepted Answer

A)  100,000 
B)  86,000 
C)  75,000 
D)  116,000 
E)  0 zero) 
A)  100,000 
B)  86,000 
C)  75,000 
D)  116,000 
E)  0 zero) E

Question 3

Government officials who impose price controls

Accepted Answer

A)  understand that their action causes a trade-off: giving up fairness to get efficiency. 
B)  understand that their action will induce a better achievement of the gains from trade. 
C)  understand that their action is supported by most economists, and hence best for society. 
D)  might not understand that their action causes confusion in the price signaling mechanism that directs the allocation of resources. 
E)  might not understand that their action will not get them the votes they seek. 
A)  understand that their action causes a trade-off: giving up fairness to get efficiency. 
B)  understand that their action will induce a better achievement of the gains from trade. 
C)  understand that their action is supported by most economists, and hence best for society. 
D)  might not understand that their action causes confusion in the price signaling mechanism that directs the allocation of resources. 
E)  might not understand that their action will not get them the votes they seek. D

Question 4

What will happen in a market where a nonbinding price floor is removed?

Accepted Answer

A)  The products sold will become more plentiful. 
B)  The price or quantity of the product sold on the legal market will not change. 
C)  There will be upward pressure on the prices. 
D)  There will be downward pressure on the prices. 
E)  There will be increased pressure to buy and sell the good on the black market. 
A)  The products sold will become more plentiful. 
B)  The price or quantity of the product sold on the legal market will not change. 
C)  There will be upward pressure on the prices. 
D)  There will be downward pressure on the prices. 
E)  There will be increased pressure to buy and sell the good on the black market.

Question 5

Refer to the accompanying table to answer the next questions
$$\begin{array} { l l c } 
\hline \text { Monthly Rent } & \begin{array} { l } 
\text { Quantity of Apartments } \
\text { Demanded }
\end{array} & \begin{array} { l } 
\text { Quantity of Apartments } \
\text { Supplied }
\end{array} \
\hline \$ 1,500 & 136,500 & 78,100 \
\$ 1,550 & 112,750 & 83,760 \
\$ 1,600 & 107,000 & 87,900 \
\$ 1,650 & 100,100 & 94,250 \
\$ 1,700 & 98,450 & 98,450 \
\$ 1,750 & 95,000 & 118,500 \
\$ 1,800 & 92,800 & 125,600 \
\hline
\end{array}$$
-At what price level does the apartment market reach equilibrium?

Accepted Answer

A)  $1,500 
B)  $1,550 
C)  $1,600 
D)  $1,650 
E)  $1,700 
A)  $1,500 
B)  $1,550 
C)  $1,600 
D)  $1,650 
E)  $1,700

Question 6

A market where exchanges occur despite price regulations is called a(n) ______market.

Accepted Answer

A)  hidden 
B)  noncompetitive 
C)  black 
D)  prohibited 
E)  outlaw 
A)  hidden 
B)  noncompetitive 
C)  black 
D)  prohibited 
E)  outlaw

Question 7

The government has imposed a price control for many agricultural products in an effort to support farmers. In the case of price floor P2 in the accompanying figure, how much of a disequilibrium in quantity exists?

Accepted Answer

A)  a shortage of 30,000 units 
B)  a surplus of 120,000 units 
C)  30,000 units 
D)  a surplus of 30,000 units 
E)  an excess of $3 
A)  a shortage of 30,000 units 
B)  a surplus of 120,000 units 
C)  30,000 units 
D)  a surplus of 30,000 units 
E)  an excess of $3

Question 8

Refer to the accompanying figure for the next questions
 
-The accompanying figure describes the market for gasoline in a local community. If the government were to place a price floor at P1, predict the resulting surplus or shortage.

Accepted Answer

A)  There would be a shortage of 75,000 units. 
B)  There would be a surplus of 75,000 units. 
C)  There would be neither a shortage nor a surplus. 
D)  There would be a shortage of 150,000 units. 
E)  There would be a surplus of 150,000 units. 
A)  There would be a shortage of 75,000 units. 
B)  There would be a surplus of 75,000 units. 
C)  There would be neither a shortage nor a surplus. 
D)  There would be a shortage of 150,000 units. 
E)  There would be a surplus of 150,000 units.

Question 9

Why do shortages develop under a binding price ceiling?

Accepted Answer

A)  It encourages sellers to produce more of the product. 
B)  It encourages buyers to purchase less of the product. 
C)  It makes the price so low that the quantity demanded exceeds the quantity supplied in the legal market. 
D)  It makes the price so low that the quantity demanded exceeds the quantity supplied on the black market. 
E)  It encourages sellers to increase the quality of the products they sell, which in turn increases the quantity demanded. 
A)  It encourages sellers to produce more of the product. 
B)  It encourages buyers to purchase less of the product. 
C)  It makes the price so low that the quantity demanded exceeds the quantity supplied in the legal market. 
D)  It makes the price so low that the quantity demanded exceeds the quantity supplied on the black market. 
E)  It encourages sellers to increase the quality of the products they sell, which in turn increases the quantity demanded.

Question 10

What is the incentive to create a black market when a binding price floor exists?

Accepted Answer

A)  A black market emerges because buyers are frustrated with shortages of the product. 
B)  A black market emerges because sellers have an incentive to charge a higher price on the illegal market. 
C)  A black market emerges because sellers want a market where they can sell higher-quality products. 
D)  A black market does not emerge; the price will eventually fall to the equilibrium price. 
E)  A black market emerges because sellers need a way to dispose of surplus product. 
A)  A black market emerges because buyers are frustrated with shortages of the product. 
B)  A black market emerges because sellers have an incentive to charge a higher price on the illegal market. 
C)  A black market emerges because sellers want a market where they can sell higher-quality products. 
D)  A black market does not emerge; the price will eventually fall to the equilibrium price. 
E)  A black market emerges because sellers need a way to dispose of surplus product.

Question 11

Refer to the accompanying figure to answer the next  questions
 
-The market is currently at market equilibrium. If a binding price ceiling of P1 is imposed, by how much would the quantity supplied change?

Accepted Answer

A)  It would increase by 32,000 units. 
B)  It would decrease by 18,000 units. 
C)  It would decrease by 30,500 units. 
D)  It would decrease by 30,000 units. 
E)  It would decrease by 32,000 units. 
A)  It would increase by 32,000 units. 
B)  It would decrease by 18,000 units. 
C)  It would decrease by 30,500 units. 
D)  It would decrease by 30,000 units. 
E)  It would decrease by 32,000 units.

Question 12

In some countries, a binding price ceiling is placed on prescription medicines. What would someone expect the prescription medicine market to be like in these countries?

Accepted Answer

A)  The legal maximum price would mean that all consumers are able to receive the medicines they need at prices they can afford. 
B)  The legal maximum price would mean that pharmaceutical companies face an incentive to sell more prescription medicines in that country. 
C)  The legal maximum price would mean that it is unlikely that an illegal and dangerous black market for prescription drugs will form in that country. 
D)  The legal maximum price would mean that pharmaceutical companies face an incentive to develop new prescription medicines. 
E)  The legal maximum price would mean that not all consumers will have access to prescription medicines. 
A)  The legal maximum price would mean that all consumers are able to receive the medicines they need at prices they can afford. 
B)  The legal maximum price would mean that pharmaceutical companies face an incentive to sell more prescription medicines in that country. 
C)  The legal maximum price would mean that it is unlikely that an illegal and dangerous black market for prescription drugs will form in that country. 
D)  The legal maximum price would mean that pharmaceutical companies face an incentive to develop new prescription medicines. 
E)  The legal maximum price would mean that not all consumers will have access to prescription medicines.

Question 13

What will happen in a market where a binding price floor is removed?

Accepted Answer

A)  The products sold will become scarcer. 
B)  There will be upward pressure on the prices. 
C)  There will be downward pressure on the prices. 
D)  The price or quantity of the product sold in the legal market will not change. 
E)  There will be increased pressure to buy and sell the good on the black market. 
A)  The products sold will become scarcer. 
B)  There will be upward pressure on the prices. 
C)  There will be downward pressure on the prices. 
D)  The price or quantity of the product sold in the legal market will not change. 
E)  There will be increased pressure to buy and sell the good on the black market.

Question 14

Refer to the accompanying table to answer the next questions
$$\begin{array} { l l c } 
\hline \text { Monthly Rent } & \begin{array} { l } 
\text { Quantity of Apartments } \
\text { Demanded }
\end{array} & \begin{array} { l } 
\text { Quantity of Apartments } \
\text { Supplied }
\end{array} \
\hline \$ 1,500 & 136,500 & 78,100 \
\$ 1,550 & 112,750 & 83,760 \
\$ 1,600 & 107,000 & 87,900 \
\$ 1,650 & 100,100 & 94,250 \
\$ 1,700 & 98,450 & 98,450 \
\$ 1,750 & 95,000 & 118,500 \
\$ 1,800 & 92,800 & 125,600 \
\hline
\end{array}$$
-At what price level does the apartment market experience its largest surplus?

Accepted Answer

A)  $1,500 
B)  $1,550 
C)  $1,700 
D)  $1,750 
E)  $1,800 
A)  $1,500 
B)  $1,550 
C)  $1,700 
D)  $1,750 
E)  $1,800

Question 15

Refer to the accompanying figure. At what price would there be the LEAST pressure to form a black market?

Accepted Answer

A)  $5 
B)  $8 
C)  $13 
D)  $15 
E)  $20 
A)  $5 
B)  $8 
C)  $13 
D)  $15 
E)  $20

Question 16

Why are binding price floor laws passed?

Accepted Answer

A)  They make goods less expensive. 
B)  They make goods available to the largest number of customers. 
C)  They encourage producers to produce goods in the most cost-efficient fashion. 
D)  They help producers receive higher prices for products sold in the legal market. 
E)  They discourage the formation of illegal black markets. 
A)  They make goods less expensive. 
B)  They make goods available to the largest number of customers. 
C)  They encourage producers to produce goods in the most cost-efficient fashion. 
D)  They help producers receive higher prices for products sold in the legal market. 
E)  They discourage the formation of illegal black markets.

Question 17

Why is it often difficult to remove a binding price floor after it exists?

Accepted Answer

A)  in general, because consumers benefit from the lower prices and would lobby their elected officials to keep the price control 
B)  in general, because consumers benefit from higher quality products and would lobby their elected officials to keep the price control 
C)  in general, because consumers benefit from larger products and would lobby their elected officials to keep the price control 
D)  in general, because sellers benefit from higher prices and would lobby their elected officials to keep the price control 
E)  in general, because it has little effect on the market price and people forget about it 
A)  in general, because consumers benefit from the lower prices and would lobby their elected officials to keep the price control 
B)  in general, because consumers benefit from higher quality products and would lobby their elected officials to keep the price control 
C)  in general, because consumers benefit from larger products and would lobby their elected officials to keep the price control 
D)  in general, because sellers benefit from higher prices and would lobby their elected officials to keep the price control 
E)  in general, because it has little effect on the market price and people forget about it

Question 18

What is the long-run consequence of a price floor law?

Accepted Answer

A)  A surplus will continue to exist and will grow larger over time. 
B)  A surplus will continue to exist and will grow smaller over time. 
C)  A shortage will continue to exist and will grow larger over time. 
D)  A shortage will continue to exist and will grow smaller over time. 
E)  The amount of the surplus will not change. 
A)  A surplus will continue to exist and will grow larger over time. 
B)  A surplus will continue to exist and will grow smaller over time. 
C)  A shortage will continue to exist and will grow larger over time. 
D)  A shortage will continue to exist and will grow smaller over time. 
E)  The amount of the surplus will not change.

Question 19

What will be the amount of government expenditure required if a price floor for corn is set at $4.50 and the government agrees to purchase the amount of disequilibrium?

Accepted Answer

A)  $202,500 
B)  $45,000 
C)  no government payment required 
D)  $10,000 
E)  $900,000 
A)  $202,500 
B)  $45,000 
C)  no government payment required 
D)  $10,000 
E)  $900,000

Question 20

Katherine is the president of the United States. In an attempt to make gasoline prices cheaper, she has imposed a binding price ceiling on gas. What would she expect her critics to say?

Accepted Answer

A)  The binding price ceiling will encourage oil companies to deplete the resource too quickly. 
B)  The binding price ceiling will discourage individuals from using their personal automobiles to commute to work or school. 
C)  The binding price ceiling will cause firms to minimize their spending on the research and development of alternatives to gasoline. 
D)  The binding price ceiling will increase the likelihood that customers obtain needed gasoline on the black market. 
E)  The binding price ceiling will cause firms to produce only gasoline of the highest quality. 
A)  The binding price ceiling will encourage oil companies to deplete the resource too quickly. 
B)  The binding price ceiling will discourage individuals from using their personal automobiles to commute to work or school. 
C)  The binding price ceiling will cause firms to minimize their spending on the research and development of alternatives to gasoline. 
D)  The binding price ceiling will increase the likelihood that customers obtain needed gasoline on the black market. 
E)  The binding price ceiling will cause firms to produce only gasoline of the highest quality.

Explain the term "clearing the market."

Government officials who impose price controls

What will happen in a market where a nonbinding price floor is removed?

A market where exchanges occur despite price regulations is called a(n) ______market.

The government has imposed a price control for many agricultural products in an effort to support farmers. In the case of price floor P₂ in the accompanying figure, how much of a disequilibrium in quantity exists?

Refer to the accompanying figure for the next questions -The accompanying figure describes the market for gasoline in a local community. If the government were to place a price floor at P₁, predict the resulting surplus or shortage.

Why do shortages develop under a binding price ceiling?

What is the incentive to create a black market when a binding price floor exists?

Refer to the accompanying figure to answer the next questions -The market is currently at market equilibrium. If a binding price ceiling of P₁ is imposed, by how much would the quantity supplied change?

In some countries, a binding price ceiling is placed on prescription medicines. What would someone expect the prescription medicine market to be like in these countries?

What will happen in a market where a binding price floor is removed?

Refer to the accompanying figure. At what price would there be the LEAST pressure to form a black market?

Why are binding price floor laws passed?

Why is it often difficult to remove a binding price floor after it exists?

What is the long-run consequence of a price floor law?

What will be the amount of government expenditure required if a price floor for corn is set at $4.50 and the government agrees to purchase the amount of disequilibrium?

Katherine is the president of the United States. In an attempt to make gasoline prices cheaper, she has imposed a binding price ceiling on gas. What would she expect her critics to say?

Five Foundations of Economics

Model Building and Gains From Trade

The Market at Work: Supply and Demand Y

Market Outcomes and Tax Incidence

Introduction to Macroeconomics and Gross Domestic Product

Unemployment

The Price Level and Inflation

Savings, Interest Rates, and the Market for Loanable Funds

Financial Markets and Securities

Economic Growth and the Wealth of Nations

Growth Theory

The Aggregate Demandaggregate Supply Model

Recessions, Expansions, and the Debate Over How to Manage Them

Federal Budgets: the Tools of Fiscal Policy

Fiscal Policy

Money and the Federal Reserve

Monetary Policy

International Trade

International Finance

Filters

Exam 5: Price Controls

Explain the term "clearing the market."

Government officials who impose price controls

What will happen in a market where a nonbinding price floor is removed?

A market where exchanges occur despite price regulations is called a(n) ______market.

The government has imposed a price control for many agricultural products in an effort to support farmers. In the case of price floor P2 in the accompanying figure, how much of a disequilibrium in quantity exists?

Refer to the accompanying figure for the next questions -The accompanying figure describes the market for gasoline in a local community. If the government were to place a price floor at P1, predict the resulting surplus or shortage.

Why do shortages develop under a binding price ceiling?

What is the incentive to create a black market when a binding price floor exists?

Refer to the accompanying figure to answer the next questions -The market is currently at market equilibrium. If a binding price ceiling of P1 is imposed, by how much would the quantity supplied change?

In some countries, a binding price ceiling is placed on prescription medicines. What would someone expect the prescription medicine market to be like in these countries?

What will happen in a market where a binding price floor is removed?

Refer to the accompanying figure. At what price would there be the LEAST pressure to form a black market?

Why are binding price floor laws passed?

Why is it often difficult to remove a binding price floor after it exists?

What is the long-run consequence of a price floor law?

What will be the amount of government expenditure required if a price floor for corn is set at $4.50 and the government agrees to purchase the amount of disequilibrium?

Katherine is the president of the United States. In an attempt to make gasoline prices cheaper, she has imposed a binding price ceiling on gas. What would she expect her critics to say?

Five Foundations of Economics

Model Building and Gains From Trade

The Market at Work: Supply and Demand Y

Market Outcomes and Tax Incidence

Introduction to Macroeconomics and Gross Domestic Product

Unemployment

The Price Level and Inflation

Savings, Interest Rates, and the Market for Loanable Funds

Financial Markets and Securities

Economic Growth and the Wealth of Nations

Growth Theory

The Aggregate Demandaggregate Supply Model

Recessions, Expansions, and the Debate Over How to Manage Them

Federal Budgets: the Tools of Fiscal Policy

Fiscal Policy

Money and the Federal Reserve

Monetary Policy

International Trade

International Finance

Filters

The government has imposed a price control for many agricultural products in an effort to support farmers. In the case of price floor P₂ in the accompanying figure, how much of a disequilibrium in quantity exists?

Refer to the accompanying figure for the next questions -The accompanying figure describes the market for gasoline in a local community. If the government were to place a price floor at P₁, predict the resulting surplus or shortage.

Refer to the accompanying figure to answer the next questions -The market is currently at market equilibrium. If a binding price ceiling of P₁ is imposed, by how much would the quantity supplied change?