$$DW = \frac{1}{2} \times (Q^* - Q_c) \times (P_d - P_s)$$

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 outcome when a binding price ceiling is imposed on the market for apartments?

Accepted Answer

A shortage of apartments and some renters unable to find housing.

Question 3

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

Accepted Answer

Inefficiently high quality.

Question 4

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

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 policy reduces the quantity transacted below the efficient market equilibrium quantity.

Question 6

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

Accepted Answer

A surplus of butter.

Question 7

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

Accepted Answer

A surplus and wasted resources.

Question 8

Which of the following equations represents deadweight loss due to a price control?

Accepted Answer

$$DW = \frac{1}{2} 	imes (Q^* - Q_c) 	imes (P_d - P_s)$$

Question 9

A government-imposed quota on taxi rides is an example of:

Accepted Answer

A quantity control.

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 floor?

Accepted Answer

Minimum wage laws.

Question 12

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

Accepted Answer

It will have no effect.

Question 13

Which of the following is NOT a likely consequence of a binding price floor?

Accepted Answer

Inefficiently low quality.

Question 14

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

Accepted Answer

A shortage of taxi rides and a higher market price.

Question 15

Which of the following best describes a quota rent?

Accepted Answer

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

Question 16

Which of the following is a likely effect of a binding price ceiling on the quality of goods sold?

Accepted Answer

Quality will decrease as sellers cut costs to maintain profits.

Question 17

A binding price floor in the labor market (minimum wage) can lead to which of the following?

Accepted Answer

Unemployment (a surplus of labor).

Question 18

Which of the following equations represents the calculation of total surplus in a market?

Accepted Answer

$$TS = CS + PS$$

Question 19

Which of the following is a reason why black markets may arise under price controls?

Accepted Answer

There are willing buyers and sellers at illegal prices.

Question 20

If the government imposes a quota that reduces the quantity of a good below the equilibrium quantity, what is the effect on total surplus?

Accepted Answer

Total surplus decreases due to deadweight loss.

Economic Efficiency, Government Price Setting, and Taxes: Price Controls and Quantity Controls

Study Guide - Practice Questions