Microeconomics Chapter 4

What is the economic effect of price ceilings?

An effective price ceiling will lead to a shortage

The minimum wage is an example of

A price floor

A price ceiling is

A government imposed maximum price that may be charged for a good or service, which can lead to shortages

Given the existence of relative scarcity, resources can be rationed by

All of the above (a system of prices, political mandate, queuing/standing in line)

In a price system, changes in prices

Signal to consumers that some goods are relatively more or less scarce

When supply increases and the (downward sloping) demand curve remains in the same position,

Price falls and equilibrium quantity rises

Scarcity implies that

A way of rationing supplies of goods must be found

In a rent controlled market, we would expect to observe

Renters moving into the market to take advantage of the lower rents

Import quotas are an example of government imposed

Quantity restrictions

Buyers and sellers receive information about what should be bought and what should be produced

From prices in a market system

All of the following are government imposed quantity restrictions except

Rent controls

Suppose that you are investigating the market for wheat. The price of corn, a substitute good, has decreased. Which of the following would best describe the market reaction to this event?

The demand for wheat decreases, which creates a surplus of wheat, causing the price of wheat to decrease

Price ceilings, such as rent controls

All of the above (reduce tenant mobility as people may be reluctant to change apartments, discourage the construction of new housing, lead to the deterioration of existing housing)

What is the economic effect of price floors?

Surpluses

Which of the following statements is true concerning the consequences of rent controls?

Upper income earners are big winners due to the fact that they can better exploit nonprice rationing devices

Suppose that a country band called Only Here has released its first CD with Wanted Records at an intended list price of $14.99. Music stores have discovered that they can markup the price to #17.99 with continued strong sales. What information does this higher price convey to the recording label?

The recording label should expand the production and distribution of Only Here’s first CD

Suppose the market of corn is $5 a bushel but the government sets a price of $7. As a result,

the government must purchase the surplus to maintain the price

Other things remaining equal, a decrease in the world oil supply like those that occurred in 1973-74 and 1979 would

increase the price of airline travel and decrease its equilibrium quantity

The price of milk increase. Which of the following is not part of the likely chain of events that follows from this price change?

The manufacturers of milking machines lay off some workers

Labor is a key input at fast food restaurants. Suppose that the government boosts the minimum wage above the equilibrium wage of fast food workers. Which of the following best describes the response of the quantity of labor employed at restaurants?

Fewer workers will be employed since the wage increase will induce managers to seek to substitute other inputs for the now relatively more expensive labor

Black markets usually arise when there are

Price ceilings

An import quota is an example of

Quantity restriction

The effect of a quantity restriction is

A higher price

Opponents of minimum wage legislation argue that higher minimum wages serve to

increase unemployment, particularly among unskilled minority teenagers

Government enforced prices such as price ceilings

Disrupt the rationing function performed by prices in a market system

In a market based economy, what is the role of a system of prices?

To address the problem of scarcity

When demand decreases and the (upward sloping) supply curve remains in the same position,

Price falls and equilibrium quantity falls

The concept of consumer surplus is best described by the following situation

The maximum price that Jackie was willing to pay for an iphone was $400, but she bought it for $250 on Black Friday

Gains from trade are

equal to the sum of consumer surplus and producer surplus

The government’s imposition of a price control

reduces gains from trade

Ron advertised his care for sale for $6000, although he was willing to accept $4000. When he finally sells his car for $5500, his producer surplus from the sale is

$1500

Economic system in which relative prices are constantly changing to reflect changes in supply and demand for different commodities. The prices of those commodities are signals to everyone within the system as to what is relatively scarce and what is relatively abundant

Price System

Act of trading, done on an elective basis, in which both parties to the trade expect to be better off after the exchange

Voluntary exchange

Costs associated with exchange, including the informational costs of finding out the price and quality, service record, and durability of a product, plus the cost of contracting and enforcing that contract

Transaction costs

As long as there are costs of bringing together buyers and sellers, there will be an incentive for intermediaries, normally called middlemen, to lower those costs. This means that middlemen specialize in lowering transaction costs. Whenever producers do not sell their products directly to the final consumer, by definition, one of more middlemen are involved

The role of middlemen

The minimum wage is a wage floor, legislated by government, setting the lowest hourly rate that firms may legally pay workers

Price floors in the labor market