Deck 8: Price Ceilings and Floors

Question 1

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

Answer 1

surpluses

Question 2

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.

Answer 2

Nothing unusual would happen.

Question 3

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.

Answer 3

cannot legally go higher than the ceiling.

Question 4

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 5

Use the following to answer questions:
Figure: Price Ceiling
(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 6

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.

Question 7

Use the following to answer questions:
Figure: Price Ceiling
(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 8

Use the following to answer questions:
Figure: Price Controls
(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

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

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.

Question 11

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.

Question 12

Use the following to answer questions:
Figure: Price Ceiling
(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 13

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.

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

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.

Question 16

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.

Question 17

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

Question 18

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 19

Use the following to answer questions:
Figure: Price Controls
(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.

Question 20

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.

Question 21

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 22

If quantity supplied equals 80 units and quantity demanded equals 85 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.

Question 23

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.

Question 24

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 25

Use the following to answer questions:
Figure: Labor Market 1
(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.

Question 26

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 27

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

Question 28

Use the following to answer questions:
Figure: Labor Market 1
(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.

Question 29

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

Question 30

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.

Question 31

A nonbinding price ceiling leads to a(n):

A) shortage.
B) surplus.
C) equilibrium quantity.
D) quantity of zero units.

Question 32

A binding price ceiling leads to a(n):

A) shortage.
B) surplus.
C) equilibrium quantity.
D) quantity of zero units.

Question 33

If quantity supplied equals 85 units and quantity demanded equals 80 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.

Question 34

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 35

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.

Question 36

Use the following to answer questions:
Figure: Government Price Controls
(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 37

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.

Question 38

Use the following to answer questions:
Figure: Government Price Controls
(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 39

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

Question 40

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.

Question 41

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

Question 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.

Question 43

Use the following to answer questions:
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 44

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 45

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.
D) None of the answers are correct.

Question 46

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

Question 47

Use the following to answer questions:
Figure: Effects of Price Ceilings
(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 48

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 49

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.

Question 50

When a price ceiling is in effect:

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.

Question 51

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

Question 52

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 53

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 54

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 55

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.

Question 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.

Question 57

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 58

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.

Question 59

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.

Question 60

Use the following to answer questions:
Figure: Effects of Price Ceilings
(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 61

What do price ceilings NOT cause?

A) waiting in line
B) speculation
C) bribes
D) search costs

Question 62

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.

Question 63

Use the following to answer questions:
Figure: Costs of Price Ceilings
(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 64

Use the following to answer questions:
Figure: Losses from Price Ceilings
(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 65

Use the following to answer questions:
Figure: Costs of Price Ceilings 2
(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

Question 66

Use the following to answer questions:
Figure: Price Ceiling of Ps
(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 Q_s.
B) Buyers' willingness to pay for the good is P_d.
C) The quantity demanded in the market is Q_d.
D) All of the answers are correct.

Question 67

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.

Question 68

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 69

Use the following to answer questions:
Figure: Supply and Demand 2
(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.

Question 70

Use the following to answer questions:
Figure: Costs of Price Ceilings 2
(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

Question 71

Use the following to answer questions:
Figure: Costs of Price Ceilings
(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 72

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.

Question 73

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.

Question 74

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

Question 75

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 76

Use the following to answer questions:
Figure: Losses from Price Ceilings
(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 77

Use the following to answer questions:
Figure: Supply and Demand 2
(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

Question 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.

Question 79

Use the following to answer questions:
Figure: Price Ceiling of Ps
(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 80

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.