Question 1

Suppose the government imposes a price ceiling on rental apartments that is below the market equilibrium price. Which of the following is the most likely outcome in the long run?

Accepted Answer

A shortage of rental apartments and the emergence of hidden markets.

Question 2

If the demand for vinyl records increases while the supply simultaneously decreases, what will happen to the equilibrium price and quantity?

Accepted Answer

Equilibrium price will increase, but the change in equilibrium quantity is indeterminate without more information.

Question 3

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

Accepted Answer

Prices synchronize the decisions of buyers and sellers, leading to equilibrium.

Question 4

A binding price floor is set above the equilibrium price in the milk market. What is the most likely result?

Accepted Answer

A surplus of milk as producers supply more than consumers demand.

Question 5

Which of the following equations represents consumer surplus for a single unit, given the willingness to pay $$W$$ and the market price $$P$$?

Accepted Answer

$$CS = W - P$$

Question 6

If a minimum wage is set above the equilibrium wage, what is the likely effect on the labour market?

Accepted Answer

The quantity of labour supplied will exceed the quantity of labour demanded, resulting in unemployment.

Question 7

Which of the following is a likely unintended consequence of price ceilings on pharmaceuticals?

Accepted Answer

Shortages of the drug and higher prices for substitute medications.

Question 8

What is the effect on total surplus when a price ceiling is imposed below the equilibrium price?

Accepted Answer

Total surplus decreases due to deadweight loss from underproduction.

Question 9

Which of the following best explains why middlemen (intermediaries) exist in markets?

Accepted Answer

They reduce transaction costs by providing information and facilitating exchange.

Question 10

Suppose the government imposes an import quota on a good. What is the most likely effect?

Accepted Answer

The quantity of the good imported will be restricted, potentially raising domestic prices.

Question 11

Which of the following is an example of nonprice rationing?

Accepted Answer

Distributing goods using coupons or random assignment.

Question 12

If the supply of a good increases while demand remains constant, what happens to equilibrium price and quantity?

Accepted Answer

Equilibrium price falls and equilibrium quantity rises.

Question 13

Which formula correctly represents producer surplus for a single unit, given the market price $$P$$ and the minimum acceptable price $$C$$?

Accepted Answer

$$PS = P - C$$

Question 14

A government sets a price floor for wheat at $$2.00 per bushel, while the equilibrium price is 1.50 $$per bushel. What is the likely result?

Accepted Answer

A surplus of wheat as producers supply more than consumers demand.

Question 15

Which of the following best describes deadweight loss?

Accepted Answer

The loss of total surplus due to market inefficiency caused by price controls.

Question 16

If both the demand and supply curves for a good shift to the right, what is the certain outcome?

Accepted Answer

Equilibrium quantity increases.

Question 17

Which of the following is a likely response by firms to a higher minimum wage, according to economic theory and experimental evidence?

Accepted Answer

Reducing hiring and cutting the number of hours for hired workers.

Question 18

Which of the following best explains why price rationing is often preferred over nonprice rationing mechanisms?

Accepted Answer

Price rationing leads to the most efficient use of available resources.

Question 19

Suppose a price ceiling is imposed on a good, and as a result, a hidden market emerges. What is the likely price in the hidden market relative to the legal ceiling and the equilibrium price?

Accepted Answer

The hidden market price will be between the legal ceiling and the equilibrium price, or even higher if transaction costs are significant.

Question 20

Which of the following best describes the effect of a government-imposed ban on the sale of a good?

Accepted Answer

The legal market for the good disappears, and a hidden or black market may emerge.

Extensions of Demand and Supply Analysis: Price System, Market Equilibrium, and Government Intervention

Study Guide - Practice Questions

Study Guide - Flashcards