Deck 4: Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, and Elasticity

Question 1

Does a price ceiling result in a shortage or a surplus? Why?

Answer 1

A price ceiling results in a shortage because a price ceiling, to be worthwhile, must be set below the equilibrium price. In such a case, quantity demanded exceeds quantity supplied.

Question 2

A price ceiling is

A) a minimum price set by government. It causes a surplus if effective.
B) a maximum price set by government. It causes a shortage if effective.
C) the equilibrium price.
D) a maximum price set by government. It causes a surplus if effective.
E) a minimum price set by government. It causes a shortage if effective.

Answer 2

a maximum price set by government. It causes a shortage if effective.

Question 3

A price floor that is effective results in a surplus.

Answer 3

False

Question 4

In the case of a price floor, price is not allowed to increase above a certain level.

Question 5

One of the results of a price ceiling is a decline in the quality of the good sold.

Question 6

A price ceiling would result in a(n)

A) surplus.
B) shortage.
C) increase in equilibrium price.
D) decrease in equilibrium price.
E) increase in quantity supplied.

Question 7

A price floor would result in a(n)

A) surplus.
B) shortage.
C) increase in equilibrium price.
D) decrease in equilibrium price.
E) shift of the demand curve to the right.

Question 8

Rent control for apartments in New York City is an example of a

A) price floor.
B) price ceiling.
C) market equilibrium.
D) restriction on quantity.
E) price elasticity.

Question 9

A price floor is

A) a minimum price set by government. It causes a surplus if effective.
B) the equilibrium price.
C) a minimum price set by government. It causes a shortage if effective.
D) a maximum price set by government. It causes a shortage if effective.
E) a maximum price set by government. It causes a surplus if effective.

Question 10

If a price ceiling is imposed on a good, then a shortage for that good will occur.

Question 11

Which of the following statements about price ceilings is false?

A) Quality often suffers when a price ceiling is imposed.
B) Rent control is an example of a price ceiling.
C) Poor people will always be able to buy more of the product than if the price ceiling did not exist.
D) Price ceilings result in shortages.
E) Just as a producer is not allowed to sell a good for more than the price ceiling, it is illegal for a consumer to pay more than the price ceiling.

Question 12

If price gouging is prohibited by the government so that sellers cannot suddenly raise prices, then a sudden drop in gasoline supply due to bad weather will most likely result in

A) an equilibrium in the gasoline market.
B) a surplus in the gasoline market.
C) a shortage in the gasoline market.
D) high profits for sellers.
E) a sudden increase in the gasoline supply.

Question 13

The minimum wage is an example of a

A) price floor.
B) price ceiling.
C) market equilibrium.
D) restriction on quantity.
E) price elasticity.

Question 14

All of the following are forms or examples of price control except

A) a price ceiling.
B) free market interactions.
C) the minimum wage.
D) rent control.
E) a price floor.

Question 15

A price ceiling is typically set below the equilibrium price.

Question 16

Which of the following is not a likely result of a price floor?

A) Excess supply of a good
B) A persistent shortage
C) A market price higher than equilibrium
D) The quantity supplied exceeds the quantity demanded.
E) Resources are diverted away from other activities to deal with the extra output.

Question 17

The government can issue ration coupons to deal with problems resulting from a price floor.

Question 18

In the case of a price floor,

A) there will be a shortage.
B) there is no need for government to buy any excess.
C) government must require producers to increase production to meet demand.
D) there is a redistribution of income from consumers to producers.
E) supply decreases.

Question 19

Which of the following often occurs as a result of a price ceiling?

A) More of a product is produced than people are willing to buy.
B) The product becomes unavailable.
C) Consumers wanting to buy the product form long lines.
D) Poor people find it harder to obtain the product.
E) Black markets for the product disappear.

Question 20

Which of the following statements about the minimum wage is false?

A) The minimum wage causes a shortage of unskilled labor.
B) The minimum wage is an example of a price floor.
C) The minimum wage increases unemployment among unskilled workers.
D) More unskilled individuals are willing to offer their services in the labor market with a minimum wage than they would without it.
E) The minimum wage is set above the equilibrium wage.

Question 21

To say that gasoline has a low price elasticity of demand is to say the quantity demanded of gasoline

A) has a relatively flat demand curve.
B) has a horizontal demand curve.
C) is not sensitive to changes in gasoline prices.
D) is very sensitive to changes in gasoline prices.
E) is very sensitive to changes in consumer income.

Question 22

Which of the following formulas is a correct expression of the price elasticity of demand?

A)
B)
C)
D)
E)

Question 23

By knowing how much quantity demanded changes for a given change in price, we can also know

A) exactly which individuals will or will not continue to buy a good whose price has increased.
B) how much quantity supplied changes for a given change in price.
C) how much price changes when the amount of a good available for sale changes.
D) how much supply changes for a given change in price.
E) how much demand changes for a given change in price.

Question 24

Assume that the price elasticity of demand equals .2 (e_d = .2). Given a 10 percent increase in price, there will be a

A) 20 percent increase in the quantity demanded.
B) 2 percent decrease in the quantity demanded.
C) 20 percent decrease in the quantity demanded.
D) 2 percent increase in the quantity demanded.
E) .2 percent decrease in the quantity demanded.

Question 25

Suppose that the government imposes a sales tax on the consumption of natural gas, which of the following would have the least impact on the producers of natural gas?

A) Perfectly elastic demand
B) Perfectly inelastic demand
C) Unitary elastic demand
D) Zero demand
E) Plastic is an inferior good.

Question 26

Suppose there is a sudden decrease in the supply of oranges. Compare the effect of the change in orange supply on the price of oranges in a market with high demand elasticity and a market with low demand elasticity.

Question 27

If the price elasticity of demand is equal to 4, a 1 percent increase in price will cause the quantity demanded to ____ by ____ percent.

A) decrease; 25
B) increase; 4
C) decrease; 1/4
D) decrease; 4
E) increase; 1/4

Question 28

The size of the price elasticity of demand is important to determine how much market price will change in response to a shift in the supply.

Question 29

Does a price floor result in a shortage or a surplus? Why?

Question 30

Explain why economists care about the price elasticity of demand. What does it tell us?

Question 31

The concept of price elasticity of demand makes it possible to

A) predict how much demand will shift with a change in price.
B) predict how much price will change with a change in demand.
C) predict how much price will change with a change in supply.
D) predict how much supply will shift with a change in price.
E) anticipate shifts in demand.

Question 32

By knowing the price elasticity of demand, economists can anticipate the size of shifts in the supply of a commodity, such as oil.

Question 33

The size of the price elasticity of demand is important to determine how much market price will change in response to a shift in the supply.

Question 34

For a given reduction in the supply of oil, the equilibrium price of oil will

A) decrease by a larger amount for a higher price elasticity of demand.
B) decrease by a smaller amount for a higher price elasticity of demand.
C) increase by a larger amount for a higher price elasticity of demand.
D) increase by a smaller amount for a higher price elasticity of demand.
E) not change, regardless of the price elasticity of demand.

Question 35

Explain, in words, the difference between a low price elasticity of demand and a high price elasticity of demand for a 15 percent increase in price.

Question 36

If the price elasticity of demand for apples is higher than the price elasticity of demand for oranges, then a given percentage increase in the price of apples and oranges will result in more percentage decrease in the quantity demanded for apples than for oranges.

Question 37

The price elasticity of demand measures

A) a buyer's responsiveness to a change in income.
B) a buyer's responsiveness to a change in price.
C) a seller's responsiveness to a change in demand.
D) how much price increases for a change in demand.
E) how much demand changes for a change in supply.

Question 38

If the demand for bananas has a high price elasticity, then a 5 percent decrease in the price of bananas will result in

A) a more than 5 percent increase in the quantity demanded.
B) a less than 5 percent increase in the quantity demanded.
C) no change in the quantity demanded.
D) a more than 5 percent decrease in the quantity demanded.
E) a less than 5 percent decrease in the quantity demanded.

Question 39

The price elasticity of demand is expressed as the

A) percentage change in the quantity demanded divided by the percentage change in income.
B) percentage change in the price divided by the percentage change in the quantity demanded.
C) percentage change in the quantity demanded divided by the percentage change in the price.
D) percentage change in supply divided by the percentage change in demand.
E) absolute change in the quantity demanded divided by the absolute change in the price.

Question 40

A given change in oil supply will result in a smaller change in the equilibrium price of oil if the

A) price elasticity of demand for oil is higher.
B) price elasticity of demand for oil is lower.
C) income elasticity for oil is higher.
D) income elasticity for oil is lower.
E) demand for oil is not sensitive to the price of oil.

Question 41

Which of the following statements about the price elasticity of demand is true?

A) Slope and elasticity measure the same things.
B) Price elasticity of demand varies depending on how price and quantity are measured.
C) It is important to know whether the price elasticity of demand is a positive or negative number.
D) The slope of a demand curve does not tell us the price elasticity of demand.
E) Price elasticity is the same everywhere along a demand curve of any shape.

Question 42

If a 1 percent decrease in the price of steak results in a 2 percent increase in the quantity demanded for steak, then the price elasticity of the demand for steak is

A) 2 cents.
B) 2 pounds of steak.
C) 2 percent.
D) $2.
E) 2.

Question 43

If a 1 percent change in price results in a 5 percent change in quantity demanded, then

A) the price elasticity of demand is 5.
B) the slope of the demand curve is 1/5.
C) the slope of the demand curve is 5.
D) the price elasticity of demand is 1/5.
E) there is not enough information to calculate slope or elasticity.

Question 44

Suppose that, as the price of product H falls from $5 to $4, the quantity of H demanded increases from 2,000 to 6,000 units. In this case, what is the elasticity of demand, using the midpoint formula?

A) .9
B) .4
C) 4.5
D) 1.6
E) 3.0

Question 45

The measurement for the price elasticity of demand is

A) unit free.
B) in percentage terms.
C) in dollar terms.
D) in terms of the quantity measurement of the good involved.
E) in terms of the currency used to purchase the good.

Question 46

Suppose that the price of product G increases from $10 to $20 and, in response, quantity demanded declines from 100 to 80. Using the midpoint formula, what is the elasticity of demand?

A) .5
B) 3
C) .67
D) .33
E) 2

Question 47

Suppose a $1 change in the price of a good results in the quantity demanded changing by .2 percent. Then you know

A) the price elasticity of demand is 1/5.
B) nothing about slope or price elasticity of demand based on this information.
C) the price elasticity of demand is 5.
D) the slope of the demand curve is 5.
E) the slope of the demand curve is 1/5.

Question 48

If the price elasticity of demand is equal to 4, a 1 percent increase in the price will cause quantity demanded to increase from 100 to 104 units.

Question 49

The price elasticity of demand is expressed in dollar changes in price and quantity demanded.

Question 50

The price elasticity of demand is a more precise measure of the slope of a demand curve.

Question 51

If a $1 increase in price changes quantity demanded by 4 units, the price elasticity of demand

A) must equal .25 percent.
B) must equal 4 percent.
C) must equal 1/4.
D) cannot be calculated with this information.
E) must equal 4.

Question 52

Which of the following correctly represents the midpoint formula?

A)
B)
C)
D)
E)

Question 53

The price elasticity of demand is measured by the percentage change in quantity demanded divided by the percentage change in price.

Question 54

The price elasticity of demand measures the change in quantity demanded given a dollar change in price.

Question 55

Consider two demand curves with different slopes. It is possible to predict ranges on each demand curve where the price elasticities of demand will be different.

Question 56

The measurement of the price elasticity of demand is unit free.

Question 57

The price elasticity of demand is negative because the demand curve slopes downward.

Question 58

The price elasticity of demand is the same as the slope of the demand curve.

Question 59

If 12 candy bars are demanded at $.30 each and 4 candy bars are demanded at $.50 each, what is the price elasticity of demand using the midpoint formula?

A) 2
B) .5
C) 7.5
D) .4
E) 1.67

Question 60

The price elasticity of demand measures how much price changes given a change in demand.

Question 61

A perfectly elastic demand curve has a price elasticity

A) equal to zero.
B) that varies.
C) equal to 1.
D) less than 1.
E) of infinity.

Question 62

For demand to be elastic,

A) the percentage change in quantity demanded must be greater than the associated percentage change in price.
B) demand must change with a change in price.
C) the percentage change in quantity demanded must be less than the associated percentage change in price.
D) the percentage change in quantity demanded must be equal to the associated percentage change in price.
E) quantity demanded must change with a change in price.

Question 63

Suppose the price elasticity of demand for apples is 2.3 and the price elasticity of demand for housing is .65. In comparing price elasticities of demand, it is proper to say that the demand for apples is

A) inelastic; for housing it is elastic.
B) more elastic than the demand for housing.
C) more inelastic than the demand for housing.
D) more than three times as inelastic as the demand for housing.
E) less elastic than the demand for housing.

Question 64

Exhibit 4-1
Refer to Exhibit 4-1. The price elasticity of demand is most likely to be inelastic

A) at point A.
B) at point B.
C) at point C.
D) anywhere along the demand curve.
E) nowhere along the demand curve.

Question 65

A product with an elastic demand means that

A) consumers are relatively insensitive to a change in the quantity demanded.
B) consumers are relatively insensitive to a change in the price of the product.
C) consumers are relatively sensitive to a change in the price of the product.
D) producers are relatively insensitive to a change in the price of the product.
E) producers are relatively sensitive to a change in the quantity demanded.

Question 66

If a 3 percent change in price results in a 1.5 percent change in quantity demanded, then the price elasticity of demand is ____ and demand is ____.

A) 1/2; inelastic
B) 1/2; elastic
C) 2; inelastic
D) 1; unit elastic
E) 2; elastic

Question 67

If the price elasticity of demand is 5.3, demand is said to be

A) inelastic.
B) elastic.
C) unit elastic.
D) perfectly inelastic.
E) perfectly elastic.

Question 68

A product with an inelastic demand means that

A) consumers are relatively insensitive to a change in the price of the product.
B) producers are relatively sensitive to a change in the quantity demanded.
C) consumers are relatively sensitive to a change in the price of the product.
D) producers are relatively insensitive to a change in the quantity demanded.
E) consumers are relatively insensitive to a change in the quantity demanded.

Question 69

Exhibit 4-1
Refer to Exhibit 4-1. The price elasticity of demand is most likely to be elastic

A) at point A.
B) at point B.
C) at point C.
D) anywhere along the demand curve.
E) nowhere along the demand curve.

Question 70

For demand to be inelastic,

A) the percentage change in quantity demanded must be equal to the associated percentage change in price.
B) demand must change with a change in price.
C) the percentage change in quantity demanded must be less than the associated percentage change in price.
D) quantity demanded must change with a change in price.
E) the percentage change in quantity demanded must be greater than the associated percentage change in price.

Question 71

The midpoint formula for calculating price elasticity of demand gives the same answer, regardless of the direction of the price change.

Question 72

A horizontal demand curve is

A) unit elastic.
B) relatively inelastic.
C) relatively elastic.
D) perfectly inelastic.
E) perfectly elastic.

Question 73

Suppose that, as the price of wheat falls from $10 to $8, the quantity demanded of wheat increases from 100 bushels to 150 bushels. Using the midpoint formula, the price elasticity of demand for wheat is 1.8.

Question 74

Suppose one market demand (D₁) has a price elasticity of .65 and a second market demand (D₂) has a price elasticity of .89. In comparing price elasticities of demand, it is proper to say that

A) D₂ is elastic compared to D₁.
B) D₂ is inelastic compared to D₁.
C) D₂ is more inelastic than D₁.
D) D₂ is more elastic than D₁.
E) the elasticity of D₁ and D₂ is the same.

Question 75

For demand to be unit elastic,

A) the percentage change in quantity demanded must be equal to the associated percentage change in price.
B) the percentage change in quantity demanded must be less than the associated percentage change in price.
C) quantity demanded must change with a change in price.
D) demand must change with a change in price.
E) the percentage change in quantity demanded must be greater than the associated percentage change in price.

Question 76

If the price of a product increases by 10 percent and the quantity demanded decreases by 15 percent, then the

A) product has an elastic demand.
B) product has an inelastic demand.
C) product has an elastic supply.
D) product has a unit-elastic demand.
E) producer should raise the price further to increase total revenue.

Question 77

When the demand curve is a vertical line, demand is

A) relatively elastic.
B) perfectly inelastic.
C) unit elastic.
D) infinitely elastic.
E) cross-elastic.

Question 78

If demand is perfectly inelastic, then the

A) quantity demanded does not change when price changes.
B) demand curve is nonexistent.
C) elasticity of demand is -1.
D) elasticity of demand is 1.
E) demand curve is a horizontal line.

Question 79

A perfectly inelastic demand curve has a price elasticity

A) equal to zero.
B) that varies.
C) equal to 1.
D) less than 1.
E) of infinity.

Question 80

Carla buys one soft drink a day, regardless of the price. Which of the following statements is correct with respect to Carla?

A) Price elasticity of demand for soft drinks is infinite.
B) Price elasticity of demand for soft drinks is zero.
C) Price elasticity of demand for soft drinks is 1.
D) Cross-price elasticity of demand for soft drinks is 1.
E) Price elasticity of demand cannot be calculated with the information given.