Question 1

Which of the following best describes a price ceiling?

Accepted Answer

A maximum price sellers are allowed to charge for a good or service, usually set below equilibrium.

Question 2

What is the most likely result of a binding price ceiling on the market for apartments?

Accepted Answer

A shortage of apartments and inefficient allocation to customers.

Question 3

Which of the following is NOT a typical side effect of a price ceiling?

Accepted Answer

Inefficiently high quality.

Question 4

Suppose the equilibrium rent for apartments is $$1,200, but the government imposes a price ceiling of 900. $$What is the likely outcome?

Accepted Answer

A shortage of apartments.

Question 5

Deadweight loss is best defined as:

Accepted Answer

The loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity.

Question 6

Which of the following is a likely consequence of a binding price floor in the butter market?

Accepted Answer

Inefficiently low quantity.

Question 7

A price floor set above the equilibrium price will most likely result in:

Accepted Answer

A surplus.

Question 8

Which of the following best explains why price floors can lead to wasted resources?

Accepted Answer

Sellers spend time and resources producing goods that cannot be sold.

Question 9

A quota is:

Accepted Answer

An upper limit, set by the government, on the quantity of some good that can be bought or sold.

Question 10

The market price of a license under a quota system is equal to:

Accepted Answer

The difference between the demand price and the supply price at the quota limit.

Question 11

Which of the following is a real-world example of a price ceiling?

Accepted Answer

Rent control in major cities.

Question 12

If a price floor is set at $$1.20 per pound of butter, but the equilibrium price is 1.00$$, what will happen?

Accepted Answer

There will be a surplus of butter.

Question 13

Which of the following is NOT a likely effect of a quota?

Accepted Answer

Efficient allocation of resources.

Question 14

Suppose the government sets a quota on taxi rides below the market equilibrium quantity. What is the likely result?

Accepted Answer

The price of taxi rides will rise above equilibrium.

Question 15

Which of the following best describes the inefficiency caused by a price ceiling?

Accepted Answer

Some consumers who value the good highly do not get it, while others who value it less do.

Question 16

A black market is most likely to arise when:

Accepted Answer

Price controls prevent the market from clearing.

Question 17

Which formula correctly represents deadweight loss due to a quota?

Accepted Answer

$$DW = \frac{1}{2} 	imes (Q^* - Q_{quota}) 	imes (P_D - P_S)$$

Question 18

If a price floor leads to inefficiently high quality, what does this mean for buyers?

Accepted Answer

Buyers receive higher quality goods but would prefer a lower price.

Question 19

Which of the following is a likely effect of a binding price floor in the labor market (minimum wage)?

Accepted Answer

A surplus of workers (unemployment).

Question 20

Which of the following statements about government intervention in markets is correct?

Accepted Answer

Quotas can lead to deadweight loss by preventing mutually beneficial trades.

Economic Efficiency, Government Price Setting, and Taxes: Study Notes

Study Guide - Practice Questions