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ECON201 Lecture Notes - Lecture 3: Deadweight Loss, Price Support, Variable Cost

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School
University of Waterloo
Department
Economics
Course
ECON201
Professor
John Smith

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Document Summary

A price ceiling is a legal maximum on the price at which a good can be sold. Examples of price ceilings include rent control, price controls on gasoline in the 1970s, and price ceilings on water during a drought. A price floor is a legal minimum on the price at which a good can be sold. Examples of price floors include the minimum wage and farm-support prices. A price ceiling leads to a shortage, if the ceiling is binding, because suppliers won"t produce enough goods to meet demand unless the price is allowed to rise above the ceiling. A price floor leads to a surplus, if the floor is binding, because suppliers produce more goods than are demanded unless the price is allowed to fall below the floor. With no tax, as shown in figure 1, the demand curve is d1 and the supply curve is s. the equilibrium price is p1 and the equilibrium quantity is q1.

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Related Questions

1.) An excise tax on a good typically reduces the net price received by the seller. (TRUE/FALSE)

2.) The burden of an excise tax on gasoline falls entirely on consumers of gasoline. (TRUE/FALSE)

3.) Rent controls are one of the few examples of a price floor in market economies. (TRUE/FALSE)

4.) Imposing a price ceiling below the equilibrium price of a good often leads to_____.

A) A greater supply of the good

B) A black market for the good

C) A rightward shift of the supply curve for the good.

D) A leftward shift of the demand curve for the good.

E) All of these

5.) Which of the following is true of price floors and ceilings?

A) Lead to the same price and quantity as in competitive market.

B) Lead to technical efficiency

C) Cause the demand curve to shift left

D) Usually result from government intervention

E) Cause the supply curve to shift right.

6.) Price ceilings often lead to black markets. (TRUE/FALSE)

7.) When minimum wage is above the equilibrium wage what occurs?

A) There will be a shortage of labor

B) There will be no effect on the number of people employed

C) There will be an increase in unemployment rate

D) There will be a decrease in unemployment rate

8.) An excise tax on a good typically reduces the price paid by the consumer (TRUE/FALSE)

9.) If a price ceiling is below the equilibrium price is imposed on a market, it will cause the quantity demanded to rise and the quantity supplied to fall. (TRUE/FALSE)

10.) Price floors often lead to black markets. (TRUE/FALSE)

11.) If an excise tax is imposed on restaurant meals what occurs?

A) Fewer meals will be produced and sold

B) More meals will be produced and sold

C) Market price of the meals will fall

D) Government tax revenue will fall.

QUESTION 38

You are the president of the United States. In an attempt to make gasoline prices cheaper, you have imposed a binding price ceiling on gas. What would you expect your critics to say?

  a.

The binding price ceiling will cause firms to minimize their spending on the research and development of alternatives to gasoline.
  b.

The binding price ceiling will discourage individuals from using their personal automobile to commute to work or school.
  c.

The binding price ceiling will increase the likelihood that customers obtain needed
gasoline on the black market.
  d.

The binding price ceiling will encourage oil companies to deplete the resource too quickly.
  e.

The binding price ceiling will cause firms to produce only gasoline of the highest quality.

1.05000 points

QUESTION 39

If a firm's long-run average total costs increase as it increases its scale of production, the firm is experiencing:

  a.

increasing returns from specialization.
  b.

diseconomies of scale.
  c.

economies of scale.
  d.

constant returns to scale.
  e.

diminishing marginal product.

1.05000 points

QUESTION 40

A(n) __________ in the elasticity of supply or demand in a market for a good that is taxed would tend to __________ tax revenue from that tax.

  a.

increase; increase
  b.

increase; have no effect on
  c.

decrease; have no effect on
  d.

decrease; decrease
  e.

increase; decrease

1.05000 points

QUESTION 41

The costs of a market activity paid for by an individual engaged in the market activity are:

  a.

external costs.
  b.

social costs.
  c.

common costs.
  d.

free-rider costs.
  e.

internal costs.

1.05000 points

QUESTION 42

Assume that the price of rubber increased at the same time that Michael Jordan, arguably the best NBA basketball player of all time, became famous. What do you expect to happen to the equilibrium price and equilibrium quantity of the basketball shoes that are promoted by Michael Jordan?

  a.

Equilibrium price will go down and equilibrium quantity will be indeterminate.
  b.

Equilibrium price will go up and equilibrium quantity will go down.
  c.

Equilibrium price will go up and equilibrium quantity will be indeterminate.
  d.

Equilibrium price will go down and equilibrium quantity will go up.
  e.

Equilibrium price will go up and equilibrium quantity will go up.

1.05000 points

QUESTION 43

The minimum wage law is an example of a:

  a.

price floor.
  b.

law that sets the minimum number of hours that an employee must work for wages during the week.
  c.

law that allows individual employers and employees to make free decisions.
  d.

law that requires quantity demanded to equal quantity supplied.
  e.

price ceiling.

"Shortages, price controls, and queuesDuring the late 1980s and early 1990s, economic reforms initiated  by  Soviet  president  Mikhail  Gorbachev  began  to  raise  consumer  incomes;  however,  the  Soviet  government continued to impose price ceilings on basic goods like food, clothing, and household goods. As higher income led to increased demand, severe shortages of many goods and long lines at all kinds of stores became common. Finally, in January 1992, a new Russian government under president Boris Yeltsin removed retail price controls on most goods. Within a month, prices more than doubled on average, and lines  disappeared.  Analyze  these  events  using  the  supply  and  demand  model.  First  draw  a  supply  and  demand diagram for some normal good such as butter. Show the market in equilibrium at a price of 1 ruble per kilo before the beginning of the Gorbachev reforms. Draw a horizontal line at that level to represent the  price  ceiling;  no  butter  can  be  sold  for  more  than  1  ruble  per  kilo.  Next  show  the  effect  of  rising  income. Does it shift the supply curve? Does it shift the demand curve? What is the shortage or surplus at the controlled price? After the price control ends, assuming no further shift in the supply and demand curve, what happens to the price? What happens to the shortage or surplus?"