1. For a price ceiling to be a binding constraint on the market, the government must set it
b. Below the equilibrium price.
2. Which side of the market is more likely to lobby government for a price floor?
c. The sellers
3. Within the supply and demand model, a tax collected from the buyers of a good shifts the
a. Demand curve upward by the size of the tax per unit.
4. When tax is collected from the buyers in a market,
d. The tax burden falls most heavily on the buyers.
5. Which of the following is an example of a price floor?
c. The minimum wage
6. The surplus caused by a binding price floor will be greatest if
d. Demand is inelastic and supply is elastic.
7. If a market generates a side effect or externality, then free market solutions
c. Are inefficient.
8. The seller's cost of production is
d. The minimum amount the seller is willing to accept for a good.
Equations: Questions 9~12
Market Demand: PD = -20QD + 1500
Market Supply: PS = 10QS
10QS = -20QD + 1500
30Q = 1500
Q = 1500/30
Q = 75
Equilibrium Quantity is 75 units
9. In response to lobbying by the Bicycle Riders Association, Congress places a price ceiling of $700 on bicycles. What effect will this have on the market for bicycle? Why?
A price ceiling set below the free-market price has several effects. Suppliers find they can't charge what they had been. As a result, some suppliers drop out of the market. This reduces supply. Meanwhile, consumers find they can now buy the product for less, so quantity demanded increases. These two actions cause demand to exceed supply, which causes a shortage—unless rationing or other consumption controls are enforced. It can also lead to various forms of non-price competition so supply can meet demand.
To supply demand at the legal price, the most obvious approach is to lower costs. However, in most cases, lower costs means lower quality. During World War II, for example, food sellers operating under ceilings reduced portion size and used less expensive ingredients (e.g., more fat, flour, etc.). It can also be seen in decreased maintenance of rent controlled apartments.
Some scholars, however, doubt that price ceilings necessarily drive quality down in the case of an oligopoly. They argued that with few competing firms selling under a price ceiling, a company at the lower end of the market must find ways to achieve better quality without raising price.
If somebody cannot obtain needed goods because a price ceiling reduces the quantity, they may turn to the black market. Those who—by luck or good management—obtain goods in short supply can profit by illegally selling at a higher price than the free market allows. The black market price is higher than the free market price because the quantity is less than in a free market transaction, where more sellers could afford to sell the product.
If there is a shortage, sellers may discriminate among customers. In the case of rent control in Bicycle market, sellers might have given the cycles at controlled prices ...