Chapter 5

Question 1

Price controls

Answer 1

• legal restrictions on how high or low a market price may go
• take two forms
  
  • price ceiling
  • price floor

Question 2

Price ceiling

Answer 2

• a maximum price sellers are allowed to charge for a good or service
• ex. rent control

Question 3

Price floor

Answer 3

• A minimum price buyers are required to pay for a good or service
• ex. minimum wage paid to workers

Question 4

When are price feilings typically imposed?

Answer 4

• During crises - wars, harvest failures, natural disasters

Question 5

Price ceilings create what?

Answer 5

Shortages

Question 6

Four ways price celings create inefficiency:

Answer 6

• reduces quantity below efficient level
• misallocation of apartments among consumers
• leads to wasted time as people search for apartments
• maintain apartments in low quality
  
  • also give rise to illegal behavior

Question 7

Deadweight loss

Answer 7

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

Question 8

Deadweight-loss triangle

Answer 8

• the deadweight loss shown graphically
• above the supply but below the demand

Question 9

Deadweight loss is a loss to society

Answer 9

• it is a reduction in total surplus, a loss in surplus that accrues to no one as a gain

Question 10

Transfer of surplus

Answer 10

• A loss in surplus to one person that then accrues as a gain to someone else

Question 11

inefficient allocation to consumers

Answer 11

• people who want the good badly and are willing to pay a high price dont get it, and those who care relatively little about the good are only willing to pay a low price DO get it
• a result of price ceilings

Question 12

Wasted resources

Answer 12

• People expend money, effort, and time to cope with the shortages caused by the price ceilings

Question 13

Inefficiently low quality

Answer 13

• Sellers offer low-quality goods at a low price even though buyers would prefer a higher quality at a higher price

Question 14

Black market

Answer 14

• a market in which good or services are bought and sold illegally - either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling.

Question 15

Minimum wage

Answer 15

• A legal floor on the wage rate, which is the market price of labor

Question 16

“Bonus foods”

Answer 16

• Government surpluses of food that are given to school lunch programs for free
• a result of price floors

Question 17

Both price floors and price ceilings…

Answer 17

• reduce the quantity bought and sold

Question 18

Inefficient allocation of sales among sellers

Answer 18

• those who would be willing to sell the good at the lowest price are not always those who actually manage to sell it

Question 19

Inefficiently high quality

Answer 19

• Sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price

Question 20

Does the United States have a low minimum wage?

Answer 20

Yes

Question 21

The most familiar price floor:

Answer 21

Minimum wage

Question 22

quantity control (quota)

Answer 22

• An upper limit on the quantity of some good that can be bought or sold

Question 23

Quota limit

Answer 23

• The total amount of the good that ban be legally transacted

Question 24

Liscence

Answer 24

• Gives its owner the right to supply a good

Question 25

Demand price

Answer 25

• the price at which consumers will demand that quantity

Question 26

Supply price

Answer 26

• the price at which producers will supply that quantity

Question 27

Wedge

Answer 27

• between the demand price and the supply price of a good

Question 28

Quota rent

Answer 28

• The earnings that accrue to the liscence-holder from ownership of the right to sell the good
• Equal to the market price of the liscence when the liscences are traded

Question 29

When the demand price of a given quantity excees the supply price:

Answer 29

• Deadweight loss