Chapter 6
Supply, Demand, and Government Policies
Multiple Choice
1. Price controls are usually enacted
a. as a means of raising revenue for public purposes.
b. when policymakers believe that the market price of a good or service is unfair to buyers or sellers. c. when policymakers detect inefficiencies in a market. d. All of the above are correct. ANS: B PTS: 1 DIF: 1 REF: 6-0 TOP: Price ceilings | Price floors MSC: Interpretive
2. The presence of price controls in a market usually is an indication that
a. an insufficient quantity of a good or service was being produced in that market to meet the public’s need. b. the usual forces of supply and demand were not able to establish an equilibrium price in that market.
c. policymakers believed that the price that prevailed in that market in the absence of price controls was unfair to
buyers or sellers.
d. policymakers correctly believed that, in that market, price controls would generate no inequities of their own. ANS: C PTS: 1 DIF: 2 REF: 6-0 TOP: Price ceilings | Price floors MSC: Interpretive
3. Policymakers sometimes are attracted to price controls because a. they view the market's outcome as inefficient. b. they view the market's outcome as unfair.
c. it is politically popular to impose price controls in markets in which the demand for the good or service is
inelastic.
d. they are required to do so under the Employment Act of 1946. ANS: B PTS: 1 DIF: 2 REF: 6-0 TOP: Price ceilings | Price floors MSC: Interpretive
4. Price controls
a. always produce an equitable outcome. b. always produce an efficient outcome. c. can generate inequities of their own. d. produce revenue for the government. ANS: C PTS: 1 DIF: 2 REF: 6-0 TOP: Price ceilings | Price floors MSC: Interpretive
5. Policymakers use taxes
a. to raise revenue for public purposes, but not to influence market outcomes. b. both to raise revenue for public purposes and to influence market outcomes.
c. when they realize that price controls alone are insufficient to correct market inequities. d. only in those markets in which the burden of the tax falls clearly on the sellers. ANS: B PTS: 1 DIF: 2 REF: 6-0 TOP: Taxes MSC: Interpretive
6. A legal maximum price at which a good can be sold is a price
a. floor.
b. stabilization. c. support. d. ceiling. ANS: D PTS: 1 DIF: 1 REF: 6-1 TOP: Price ceilings MSC:
Definitional
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7. A price ceiling
a. is a legal maximum on the price at which a good can be sold.
b. is often imposed in markets in which “cutthroat competition” would prevail without a price ceiling.
c. is often imposed when sellers of a good are successful in their attempts to convince the government that the
market outcome is unfair without a price ceiling. d. All of the above are correct. ANS: A PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings MSC: Interpretive
8. A legal minimum price at which a good can be sold is
a. exemplified by rent-control laws.
b. usually intended to enhance efficiency in a market. c. called a price ceiling. d. called a price floor. ANS: D PTS: 1 DIF: 1 REF: 6-1 TOP: Price floors MSC: Definitional
9. A price floor
a. is a legal minimum on the price at which a good can be sold.
b. can result when sellers of a good are successful in their attempts to convince the government that the market
outcome without a price floor is unfair to them. c. can create inequities in a market. d. All of the above are correct. ANS: D PTS: 1 DIF: 1 REF: 6-1 TOP: Price floors MSC: Definitional
10. Which of the following is the most likely explanation for the imposition of a price floor in the market for corn?
a. Policymakers have studied the effects of the price floor carefully and they recognize that the price floor is
advantageous for society as a whole.
b. Buyers and sellers of corn have agreed that the price floor is good for both of them and have therefore pressured
policy makers into enacting the price floor.
c. Buyers of corn, recognizing that the price floor is good for them, have pressured policy makers into enacting the
price floor.
d. Sellers of corn, recognizing that the price floor is good for them, have pressured policy makers into enacting the
price floor.
ANS: D PTS: 1 DIF: 2 REF: 6-1 TOP: Price floors MSC: Interpretive
11. A price ceiling will be binding only if it is set
a. equal to equilibrium price. b. above equilibrium price. c. below equilibrium price.
d. none of the above; a price ceiling is never binding. ANS: C PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings MSC: 12. A price ceiling is binding when it is set
a. above the equilibrium price, causing a shortage. b. above the equilibrium price, causing a surplus. c. below the equilibrium price, causing a shortage. d. below the equilibrium price, causing a surplus. ANS: C PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings | Shortages MSC: Interpretive 13. Suppose a price ceiling is not binding; this means that
a. the equilibrium price is above the price ceiling. b. the equilibrium price is below the price ceiling. c. it has no legal enforcement mechanism.
d. people are finding a way to circumvent the law. ANS: B PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings MSC:
Interpretive
Interpretive
Chapter 6/Supply, Demand, and Government Policies ? 219
14. A price ceiling that is not binding will
a. cause a surplus in the market. b. cause a shortage in the market.
c. cause the market to be less efficient than it would be without the price ceiling. d. have no effect on the market price. ANS: D PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings MSC: Interpretive 15. A shortage results when
a. a binding price ceiling is imposed. b. a binding price floor is imposed.
c. a price ceiling is imposed but it is not binding. d. a price floor is imposed but it is not binding. ANS: A PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings MSC:
Interpretive
16. When, in a particular market, the law of demand and the law of supply both apply, the imposition of a binding price
ceiling in that market causes quantity demanded to be a. greater than quantity supplied. b. less than quantity supplied. c. equal to quantity supplied. d. Any of the above is possible. ANS: A PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings | Shortages MSC: Interpretive 17. To say that a price ceiling is binding is to say that the price ceiling
a. results in a scarcity.
b. is set above the equilibrium price. c. results in excess demand. d. All of the above are correct. ANS: C PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings | Shortages MSC: Interpretive
Figure 6-1
18. Refer to Figure 6-1. A binding price ceiling is shown in
a. panel (a) but not panel (b). b. panel (b) but not panel (a). c. both panel (a) and panel (b). d. neither panel (a) nor panel (b). ANS: B PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings MSC:
Applicative
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19. Refer to Figure 6-1. In which panel(s) of the figure would there be a shortage of the good at the ceiling price?
a. panel (a) but not panel (b) b. panel (b) but not panel (a) c. panel (a) and panel (b)
d. neither panel (a) nor panel (b) ANS: B PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings | Shortages MSC: Applicative 20. Refer to Figure 6-1. The situation in panel (a) may be described as one in which
a. the price ceiling is not binding.
b. the price “ceiling” really functions as a price floor. c. a surplus of the good will be observed. d. All of the above are correct. ANS: A PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings MSC: Applicative
Figure 6-2 21. Refer to Figure 6-2. A binding price ceiling would be the result if the price ceiling were set at
a. $14. b. $12. c. $10. d. $8. ANS: D PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings MSC: Applicative 22. Refer to Figure 6-2. Which of the following statements is correct?
a. A price ceiling set at $12 would be binding, but a price ceiling set at $8 would not be binding. b. A price floor set at $8 would be binding, but a price ceiling set at $8 would not be binding. c. A price ceiling set at $9 would result in an excess supply. d. A price floor set at $11 would result in a surplus. ANS: D PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings | Price floors MSC: Applicative
23. Refer to Figure 6-2. If the government imposes a price floor of $14 in this market, the result would be a
a. surplus of 20. b. surplus of 40. c. shortage of 20. d. shortage of 40. ANS: B PTS: 1 DIF: 2 REF: 6-1 TOP: Price floors | Surpluses MSC: Applicative
Chapter 6/Supply, Demand, and Government Policies ? 221
24. Refer to Figure 6-2. If the government imposes a price ceiling of $8 in this market, the result would be a
a. surplus of 10. b. surplus of 20. c. shortage of 10. d. shortage of 20. ANS: D PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings | Shortages MSC: Applicative 25. Refer to Figure 6-2. If the government imposes a price ceiling of $12 in this market, the result would be
a. a surplus of 10. b. a surplus of 20. c. a shortage of 20.
d. neither a surplus nor a shortage. ANS: D PTS: 1 DIF: 3 REF: 6-1 TOP: Price ceilings MSC: Applicative 26. Refer to Figure 6-2. In which of the following cases would sellers have to develop a rationing mechanism?
a. A price ceiling is set at $8. b. A price ceiling is set at $12. c. A price floor is set at $8. d. A price floor is set at $10. ANS: A PTS: 1 DIF: 3 REF: 6-1 TOP: Price ceilings | Price floors MSC: Applicative
27. A price floor is binding if it
a. is set lower than the equilibrium market price.
b. results in an observed price that is the same as the equilibrium price. c. leads to a surplus.
d. is strictly enforced by the government. ANS: C PTS: 1 DIF: 2 REF: 6-1 TOP: Price floors | Surpluses MSC: Interpretive 28. An example of a price floor is
a. the regulation of gasoline prices in the U.S. in the 1970s. b. rent control.
c. the minimum wage.
d. any restriction on price that leads to a shortage. ANS: C PTS: 1 DIF: 1 REF: 6-1 TOP: Price ceilings | Price floors MSC: Definitional
29. When a price floor is binding, the equilibrium price is
a. lower than the price floor. b. higher than the price floor. c. equal to the price floor.
d. It is impossible to compare the equilibrium price with the price floor. ANS: A PTS: 1 DIF: 2 REF: 6-1 TOP: Price floors MSC: Interpretive
30. A binding price floor in a market is set
a. above equilibrium price and causes a shortage. b. above equilibrium price and causes a surplus. c. below equilibrium price and causes a surplus. d. below equilibrium price and causes a shortage. ANS: B PTS: 1 DIF: 2 REF: 6-1 TOP: Price floors | Surpluses MSC: Interpretive