Question 1

Which of the following best describes the rationing function of prices in a market economy?

Accepted Answer

Prices allocate scarce resources to their most valued uses by adjusting to eliminate shortages and surpluses.

Question 2

Suppose the government imposes a price ceiling below the equilibrium price in the rental housing market. What is the most likely immediate result?

Accepted Answer

A shortage of rental housing, as quantity demanded exceeds quantity supplied.

Question 3

If both the demand and supply curves for a good shift to the right, what can we say about the new equilibrium?

Accepted Answer

Equilibrium quantity will increase, but the effect on equilibrium price is indeterminate without more information.

Question 4

Which of the following is an example of a non-price rationing device that may arise when a price ceiling creates a shortage?

Accepted Answer

Waiting in long lines to purchase the good.

Question 5

A government sets a minimum wage above the equilibrium wage. What is the most likely effect in the labor market?

Accepted Answer

A surplus of labor, resulting in unemployment.

Question 6

Which formula correctly represents consumer surplus?

Accepted Answer

$$CS = \sum (WTP - P)$$, where $$WTP is $$the maximum willingness to pay and $$P is $$the actual price paid for each unit.

Question 7

What is the deadweight loss in a market with a binding price ceiling?

Accepted Answer

The reduction in total surplus (consumer plus producer surplus) compared to the allocatively efficient equilibrium.

Question 8

If the government sets a price floor above the equilibrium price in the milk market, what will happen to the quantity supplied and quantity demanded?

Accepted Answer

Quantity supplied will exceed quantity demanded, resulting in a surplus.

Question 9

Which of the following best describes producer surplus?

Accepted Answer

The difference between the actual amount producers receive and the minimum amount they would accept for all units sold.

Question 10

A sudden increase in demand for electric vehicles occurs due to new environmental regulations. What will happen to the equilibrium price and quantity in the short run, assuming supply is unchanged?

Accepted Answer

Equilibrium price and quantity will both increase.

Question 11

Which of the following is NOT a likely consequence of rent control (a price ceiling on rental housing)?

Accepted Answer

An increase in the construction of new rental housing.

Question 12

Suppose the government imposes an import quota on a commodity. What is the most direct effect on the domestic market?

Accepted Answer

The quantity of the commodity that can be imported is limited, which may raise domestic prices.

Question 13

Which equation correctly represents total surplus in a market?

Accepted Answer

$$TS = CS + PS$$

Question 14

If a price floor is set below the equilibrium price, what will be the effect on the market?

Accepted Answer

There will be no effect; the market will remain at equilibrium.

Question 15

Which of the following best explains why transaction costs are lower in markets with intermediaries?

Accepted Answer

Intermediaries reduce the time and effort needed to find trading partners and negotiate terms.

Question 16

A decrease in supply, with demand held constant, will result in:

Accepted Answer

An increase in equilibrium price and a decrease in equilibrium quantity.

Question 17

Which of the following is a real-world example of a government-imposed quantity restriction?

Accepted Answer

Import quotas on foreign cars.

Question 18

If a price ceiling is set at $$PCeiling$$ below the equilibrium price $$PE$$, and the quantity supplied at $$PCeiling is$$ $$QS$$ while the quantity demanded is $$QD$$, what is the deadweight loss?

Accepted Answer

Deadweight loss is the reduction in total surplus, represented by the area between $$QS$$ and $$QE at $$prices between $$PCeiling$$ and $$PE.$$

Question 19

Which of the following statements about consumer and producer surplus is correct?

Accepted Answer

Consumer surplus is maximized when the market is at equilibrium without price controls.

Question 20

A government sets a support price for milk at $$1.50$$ per litre, above the equilibrium price of $$1.00$$ per litre. If the quantity supplied at $$1.50 is$$ $$49.8$$ million hectolitres and the quantity demanded is $$27.3$$ million hectolitres, what must the government do to maintain the price floor?

Accepted Answer

Purchase the surplus of $$49.8 - 27.3 = 22.5$$ million hectolitres.

Chapter 4: Extensions of Demand and Supply Analysis – Microeconomics Study Notes

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