ECN 104 Lecture Notes - Price Ceiling, Price Floor, Price Controls

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Chapter 6
1. Which of the following statements about price controls is correct?
a. Price controls are used to make markets more efficient.
b. Price controls are usually enacted when policymakers believe that the market price of a
good or service is unfair to buyers or sellers.
c. Price controls are nearly always effective in eliminating inequities.
d. Price controls are established by firms with monopoly power.
2. Which of the following statements about price controls is correct?
a. Price controls produce an equitable outcome.
b. Price controls produce an efficient outcome.
c. Price controls are imposed by business firms to promote an equitable outcome.
d. Price controls lead to shortages or surpluses.
3. What is a government-imposed maximum price at which a good can be sold?
a. a price floor
b. a price ceiling
c. a price support
d. a price equilibrium
4. What does a binding price ceiling cause?
a. a shortage that cannot be eliminated through market adjustment
b. a surplus that cannot be eliminated through market adjustment
c. a shortage that is temporary, since market adjustment will cause price to rise
d. a surplus that is temporary, since market adjustment will cause price to rise
Figure 6-1
5. Refer to Figure 6-1. Where is a binding price ceiling shown?
a. panel (a)
b. panel (b)
c. both panel (a) and panel (b)
d. neither panel (a) nor panel (b)
Figure 6-2
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6. Refer to Figure 6-2. If the government imposes a binding price floor of $14.00 in this market, what is the
result?
a. a surplus of 20 units
b. a shortage of 30 units
c. a surplus of 40 units
d. a shortage of 40 units
7. Refer to Figure 6-2. At what price would there be a binding price floor?
a. a price of $10.00
b. a price of $8.00
c. any price above $10.00
d. any price below $10.00
8. When binding price ceilings are imposed to benefit buyers, what happens?
a. Every buyer in the market benefits because of lower prices.
b. Some buyers will not be able to buy any of the product.
c. Sellers in the market will also benefit from price ceilings.
d. The quantity sellers want to sell will equal the quantity buyers want to buy.
9. What will a binding price ceiling make it necessary to do?
a. supply more of the product
b. develop a way of rationing the product, because there will be a shortage
c. develop a better marketing plan, because there will be a surplus
d. increase demand for the product
Figure 6-3
10. Refer to Figure 6-3. With a price ceiling present in this market, what will happen when the supply curve for
gasoline shifts from S
1
to S
2
?
a. The price will increase to P
3
.
b. A surplus will occur at the new market price of P
2
.
c. The market price will stay at P
1
due to the price ceiling.
d. A shortage will occur at the price ceiling of P
2
.
11. Refer to Figure 6-3. Without the price ceiling in this market for gasoline, what will happen to the price when
the supply curve shifts from S
1
to S
2
?
a. It will increase to P
3
, but a shortage will still exist.
b. It will increase to P
3
and the market will clear.
c. It will remain at P
1
and a shortage will still exist.
d. It will eventually move to P
2
without government assistance.
12. What do we know about price ceilings and price floors?
a. They are desirable because they make markets more efficient as well as equitable.
b. They cause surpluses and shortages to persist since price cannot adjust to the market
equilibrium price.
c. They can be enacted to restore a market to equilibrium.
d. They are imposed because they can make the poor in the economy better off without
causing adverse effects.
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Document Summary

Where is a binding price ceiling shown: panel (a, panel (b, both panel (a) and panel (b, neither panel (a) nor panel (b) Figure 6-3 increase demand for the product: refer to figure 6-3. Without the price ceiling in this market for gasoline, what will happen to the price when. It will increase to p3, but a shortage will still exist. the supply curve shifts from s1 to s2: it will increase to p3 and the market will clear, it will eventually move to p2 without government assistance. What is the equilibrium price in the market before the tax is imposed: . 00, . 00, . 00, . 00, refer to figure 6-4. What is the price buyers will pay after the tax is imposed: . 00, . 00, . 00, . 00, refer to figure 6-4. What is the amount of the tax imposed in this market: . 00 per unit, . 50 per unit, . 50 per unit, . 00 per unit, refer to figure 6-4.

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