Question 1

Suppose the government imposes a binding price ceiling on gasoline after a natural disaster. Which of the following is the most likely immediate effect in the gasoline market?

Accepted Answer

Excess demand for gasoline, leading to potential shortages.

Question 2

A minimum wage is an example of which type of government intervention in the market?

Accepted Answer

Price floor

Question 3

If a binding price floor is set above the equilibrium price in the wheat market, what is the most likely consequence?

Accepted Answer

Excess supply of wheat

Question 4

Which of the following best describes the concept of economic surplus in a market?

Accepted Answer

The sum of consumer surplus and producer surplus.

Question 5

Consider a market for apartments in a city with binding rent controls. In the long run, what is the most likely effect on the supply of rental housing?

Accepted Answer

Supply becomes more elastic and the shortage worsens.

Question 6

Suppose the equilibrium price of pizza is $$12.50. If the government sets a price ceiling at 10$$, what happens to consumer and producer surplus?

Accepted Answer

Consumer surplus increases for some consumers but total surplus falls due to deadweight loss.

Question 7

Which of the following equations correctly represents the change in total economic surplus due to a binding price floor, as shown in the study materials?

Accepted Answer

$$\Delta TS = - (D + E)$$

Question 8

A black market is most likely to arise under which of the following conditions?

Accepted Answer

When a binding price ceiling creates excess demand.

Question 9

Which of the following is NOT a typical government objective for imposing a price ceiling?

Accepted Answer

To maximize producer surplus

Question 10

If the government sets an output quota below the competitive equilibrium quantity, what is the welfare effect?

Accepted Answer

There is a deadweight loss equal to the area $$(D + E).$$

Question 11

In the context of minimum wage laws, which group is most likely to benefit?

Accepted Answer

Only those workers who retain their jobs at the higher wage.

Question 12

Which of the following best explains why rent controls can lead to illegal schemes such as 'key money'?

Accepted Answer

Because rent controls create excess demand, leading to alternative allocation mechanisms.

Question 13

Suppose the demand curve for a product shows the maximum price consumers are willing to pay for each unit. What does the area between the demand curve and the equilibrium price represent?

Accepted Answer

Consumer surplus

Question 14

Which of the following is a likely long-run effect of a binding price ceiling on rental housing?

Accepted Answer

The shortage of rental housing becomes more severe as supply becomes more elastic.

Question 15

If a government wants to reduce the shortage caused by rent controls, which of the following policies could it implement?

Accepted Answer

Subsidize housing production or provide public housing.

Question 16

Which of the following statements about market efficiency is correct?

Accepted Answer

Market efficiency is achieved when total economic surplus is maximized at the competitive equilibrium.

Question 17

Suppose a binding price floor is imposed in the market for milk. Which of the following is a likely real-world consequence?

Accepted Answer

Accumulation of surplus milk in government warehouses.

Question 18

Which formula correctly represents the change in consumer surplus due to a binding price ceiling, as shown in the study materials?

Accepted Answer

$$\Delta CS = C - D$$

Question 19

Why do economists argue that government intervention in competitive markets often creates overall losses, even if some groups benefit?

Accepted Answer

Because intervention redistributes surplus but creates deadweight loss.

Question 20

A government sets a quota on taxi licenses in a city, limiting the number of taxis below the competitive equilibrium. What is the most likely effect on total economic surplus?

Accepted Answer

Total economic surplus decreases due to deadweight loss.

Chapter 5: Price Controls and Market Efficiency – Study Notes

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