Deck 8: Price Ceilings and Floors

Question 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.

Answer 1

C

Question 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.

Answer 2

A

Question 3

Reference: Ref 8-2 (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.

Answer 3

C

Question 4

Reference: Ref 8-2 (Figure: Price Controls) Refer to the figure. Which of the following price controls 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

Question 5

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, and cherries.
C) reducing hours of operation.
D) All of the answers are correct.

Question 6

Reference: Ref 8-3 (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

Question 7

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.

Question 8

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.

Question 9

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

A) stabilization.
B) ceiling.
C) support.
D) floor.

Question 10

Figure: Price Ceiling Reference: Ref 8-1 (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

Question 11

Reference: Ref 8-3 (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.

Question 12

Reference: Ref 8-1 (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.

Question 13

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.

Question 14

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

Question 15

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.

Question 16

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 the answers are correct.

Question 17

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.

Question 18

Which of the following is NOT an effect of a price ceiling?

A) surpluses
B) misallocation of resources
C) loss of gains from trade
D) wasteful lineups

Question 19

Figure: Price Ceiling Reference: Ref 8-1 (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.

Question 20

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.

Question 21

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.

Question 22

Which of the following 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.

Question 23

Figure: Price Ceiling of Ps Reference: Ref 8-6 (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.

Question 24

Reference: Ref 8-5 (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

Question 25

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.

Question 26

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.

Question 27

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.

Question 28

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.

Question 29

Which of the following statements about price ceilings is 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

Question 30

Figure: Effects of Price Ceilings (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.

Question 31

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.

Question 32

Reference: Ref 8-6 (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.
D) All of the answers are correct.

Question 33

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.

Question 34

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.

Question 35

Which of the following observations 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.

Question 36

Price ceilings reduce quality because:

A) buyers are willing to accept lower quality of goods with lower prices.
B) facing excess demand sellers cannot raise prices to increase profit.
C) the law would mandate the quality of goods to match the price of the goods.
D) None of the answers is correct.

Question 37

Figure: Effects of Price Ceilings Reference: Ref 8-4 (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.

Question 38

Reference: Ref 8-5 (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

Question 39

Reference: Ref 8-4 (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.

Question 40

(Table: Gasoline Market) 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

Question 41

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.

Question 42

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.

Question 43

Which of these statements 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.

Question 44

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.

Question 45

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.

Question 46

Reference: Ref 8-9 (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

Question 47

In a market with a price ceiling which of the following is TRUE?

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.

Question 48

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.

Question 49

Reference: Ref 8-8 (Figure: Costs of Price Ceilings) 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

Question 50

Reference: Ref 8-7 (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

Question 51

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.

Question 52

Reference: Ref 8-9 (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
D) None of the answers is correct.

Question 53

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 in getting the good.

Question 54

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

Question 55

Reference: Ref 8-7 (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

Question 56

Reference: Ref 8-10 (Figure: Price Ceilings and Valuation of Uses) Refer to the figure. The single highest value user is willing to pay how many dollars for the product?

A) $15
B) $25
C) $45
D) $35

Question 57

Figure: Costs of Price Ceilings Reference: Ref 8-8 (Figure: Costs of Price Ceilings) 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

Question 58

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.

Question 59

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.

Question 60

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.

Question 61

(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

Question 62

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.

Question 63

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.
D) All of the answers are correct.

Question 64

Which President ended the price controls on oil?

A) Nixon
B) Ford
C) Carter
D) Reagan

Question 65

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.
D) All of the answers are correct.

Question 66

Reference: Ref 8-10 (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.

Question 67

Reference: Ref 8-11 (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.

Question 68

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 quickly supply began to increase and prices fell.
D) prices rose dramatically as a result of the repealed legislation.

Question 69

Which of the following 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.

Question 70

Reference: Ref 8-10 (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.

Question 71

A rent control is a regulation that:

A) ensures apartments being available for rent.
B) controls rents at constant levels.
C) upholds rents to above equilibrium levels.
D) prevents rents from rising to equilibrium levels.

Question 72

Reference: Ref 8-11 (Figure: Price Ceilings and Consumer Valuation) Refer to the figure. Suppose a price 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

Question 73

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.

Question 74

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 as the market collapsed due to a lack of government regulation.
D) was not able to eliminate the shortages of gasoline in the United States.

Question 75

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 U.S.
D) U.S. government regulation of gasoline prices.

Question 76

(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.

Question 77

Which of the following 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

Question 78

Reference: Ref 8-11 (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 to buyers randomly, what is the total consumer surplus in this market?

A) $90
B) $120
C) $30
D) $150

Question 79

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.

Question 80

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