Price Ceilings, Price Floors, and Black Markets quiz #2 Flashcards
Price Ceilings, Price Floors, and Black Markets quiz #2
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Compared with other methods used to set prices, cost-plus pricing is relatively simple. True; cost-plus pricing is straightforward and easy to implement. Setting a price with no variation for product buyers is called a one price policy. True; a one price policy means all buyers pay the same price. Which one of the following is not a measure of the price level? Minimum wage is not a measure of the overall price level. Which of the following taxes has a ceiling on the amount of annual earnings subject to tax? Social Security payroll tax has a ceiling on taxable earnings. The price strategy of unbundling involves what? Selling components of a product separately rather than as a package. What is the amount of money a business thinks it should charge for its product or service called? It is called the target or intended price. If the government fears there may be a shortage of something, they may choose to ration it. True; rationing is used to allocate scarce goods. Who can set price controls on goods? Governments set price controls on goods. A price ceiling is a legislated price that is what? It is the maximum legal price that can be charged for a good or service. Government intervention that typically results in a surplus of services and goods is called what? It is called a price floor. What is the pricing strategy of setting prices low until after a reliable customer base is established, then raising prices? This is called penetration pricing. What is a price ceiling? A price ceiling is a government-imposed maximum price for a good or service. Who can set price controls on goods? Governments set price controls. The highest amount a landlord can charge for rent is an example of what? It is an example of a price ceiling. If a price ceiling is not binding, then what happens? It has no effect; the market operates at equilibrium. A price ceiling means there will be what in the supply of rental spaces? There will be a shortage of rental spaces. In a free market system, price control can include both a floor and a ceiling. True; both price floors and ceilings can be imposed. Landlords will not raise rent prices as demand increases because they are restricted by rent control. True; rent control prevents landlords from raising rents above the ceiling. If the government removes a binding price floor from a market, then the price paid by buyers will what? The price will fall to the equilibrium level. Why do binding price floors cause a deadweight loss? They create surpluses, preventing mutually beneficial trades and reducing total surplus. In general, what effect does a quota have on the prices of comparable goods in the domestic market? Quotas restrict supply, causing prices to rise. Using the table above, if the government imposes a price floor of $10, what will the effect be? If $10 is above equilibrium, there will be a surplus; if below, no effect. The presence of a price control in a market for a good or service usually is an indication that what? It indicates the government is trying to address affordability or income concerns. What is the deadweight loss associated with the price floor? It is the loss of total surplus due to the surplus created by the price floor. An effective price floor will do what? It will create a surplus in the market. The graph shows the market for corn with a price ceiling of $7. What is the effect? If $7 is below equilibrium, there will be a shortage; if above, no effect. A price floor is a minimum price fixed by the government, generally imposed above the equilibrium price. True; price floors are effective only when set above equilibrium. A price ceiling is the maximum legal price a seller may charge for a product or service. True; price ceilings set the upper limit. Refer to figure 6-2. The price ceiling causes quantity to do what? Quantity demanded exceeds quantity supplied, causing a shortage. Minimum-wage laws dictate what? They set the lowest legal wage that can be paid to workers. When the government prevents prices from adjusting naturally to supply and demand, it causes what? It causes market inefficiencies such as shortages or surpluses. Refer to figure 6-1. A binding price ceiling is shown in which part of the graph? It is shown below the equilibrium price. What sets the ceiling for product prices? The government sets the ceiling through price controls. If a price floor is not binding then what happens? It has no effect; the market operates at equilibrium. A binding price ceiling on apartments (effective rent control) will do what? It will cause a shortage of apartments. Income taxes have the effect of what? They reduce disposable income and can affect demand. Price floors create what? Price floors create surpluses. The imposition of a binding price ceiling on a market causes what? It causes a shortage. If a price ceiling is set above the equilibrium price in a market, what happens? It has no effect; the market operates at equilibrium. To say that a price ceiling is binding is to say that the price ceiling is what? It is set below equilibrium and restricts market price.
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