Principles of Microeconomics, 8e (Case/Fair)

Chapter 4: Demand and Supply Applications

The Price System
Multiple Choice
1)
The adjustment of __________ is the rationing mechanism in free markets.
A)
quantity

price

B)

C)

supply

D)

demand

Answer:

Diff: 1
Type: D

2)
When excess ________ exists, a market system allocates goods and service by a price rationing device.
A)
demand

supply

quantity

inventory

B)

C)

D)

Answer:

87

Diff: 2
Type: D

3)
A price ceiling is
A)
a minimum price set by government that sellers must charge for a good.
B)
a maximum price set by government that sellers may charge for a good.
C)
the difference between the initial equilibrium price and the equilibrium price after a decrease in supply.
D)
the minimum price that consumers are willing to pay for a good.
Answer:

Diff: 2
Type: D

4)
A price floor is
A)
a government set minimum price that sellers may charge for a good.
B)
a government set maximum price that sellers may charge for a good.
C)
the difference between the initial equilibrium price and the equilibrium price after a decrease in supply.
D)
the minimum price that buyers are able and willing to pay for a good.
Answer:

Diff: 2
Type: D

88

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5)
A maximum price, set by the government, that sellers may charge for a good is known as a
A)
price floor.

B)

price rationing mechanism.

C)
price ceiling.
D)
subsidy.

Answer:

Diff: 2
Type: D

6)
A minimum price, set by the government, that sellers may charge for a good is known as
A)
a price floor.
B)
a price rationing mechanism.
C)
a price ceiling.
D)
a subsidy.

Answer:

Diff: 2
Type: D

7)

90

For a price ceiling to cause a shortage in a market, the government must set it _______ the equilibrium
market price.
A)
above

B)

at

C)

below

D)

sometimes above and sometimes below

Answer:

Diff: 2
Type: D

8)
Assume the market equilibrium price of rice is $5.00 per pound. If the government does not allow rice
farmers to charge more than $1.00 per pound of rice,
A)
there will be a rice surplus.
B)
there will be a rice shortage.
C)
quantity demanded will equal quantity supplied.
D)
the market equilibrium price will move from $5.00 to $1.00.
Answer:

Diff: 2
Type: C

9)

91

If a(n) _________ some alternate rationing device will become necessary.

A)
ceiling price falls short of the equilibrium price
B)
excess quantity supplied exists
C)
surplus exists
D)
price floor is set below the equilibrium price
Answer:

Diff: 2
Type: D

92

Refer to the information provided in Figure 4.1 below to answer the questions that follow.

Figure 4.1
10)
Refer to Figure 4.1 An example of an effective price ceiling would be the government setting rental rates
for apartments at
A)
$400.

B)

$500.

C)

$600.

D)

$700.

Answer:

Diff: 1
Type: F

11)
Refer to Figure 4.1 An example of an effective price floor would be the government setting rental rates for
apartments at
A)
below $400.

B)

$400.

93

C)
$500.

D)

$600.

Answer:

Diff: 1
Type: F

12)
Refer to Figure 4.1. If the government will not allow landlords to charge more than $400 for an apartment,
which of the following will happen?
A)
Demand must eventually decrease so that the market will come into equilibrium at a price of $400.
B)
Supply must eventually increase so that the market will come into equilibrium at a price of $400.
C)
A nonprice rationing system such as queuing must be used to ration the available supply of apartments.
D)
The market will be in equilibrium at a price of $400.
Answer:

Diff: 1
Type: F

94

13)
Refer to Figure 4.1 If the government will not allow landlords to charge less than $600 for an apartment,
which of the following will happen?
A)
Demand must eventually increase so that the market will come into equilibrium at a price of $600.
B)
Supply must eventually decrease so that the market will come into equilibrium at a price of $600.
C)
Landlords will supply more apartments than renters will demand.
D)
The market will be in equilibrium at a price of $600.
Answer:

Diff: 2
Type: F

14)
If government sets a price ceiling below an equilibrium price,
A)
quantity demanded will equal quantity supplied.
B)
there will be a surplus.
C)
there will be a shortage.
D)
demand will be less than supply.
Answer:

Diff: 2
Type: F

15)

95

If government sets a price floor below an equilibrium price,

A)
quantity demanded will equal quantity supplied.
B)
there will be a surplus.
C)
there will be a shortage.
D)
the floor will be ineffective.
Answer:

Diff: 2
Type: F

16)
If government sets a price ceiling above an equilibrium price,
A)
the ceiling will be ineffective.
B)
there will be a surplus.
C)
there will be a shortage.
D)
demand will be less than supply.
Answer:

Diff: 1
Type: F

17)
If government sets a price floor above the equilibrium price,
A)

96

quantity demanded will equal quantity supplied.

B)
there will be a surplus.
C)
there will be a shortage.
D)
demand will be less than supply.
Answer:

Diff: 1
Type: F

97

18)
The government imposes a maximum rental price on apartments that is ABOVE the equilibrium rental
price. You accurately predict that
A)
the law will be ineffective and have no economic impact.
B)
the law will be effective and create a surplus of apartments.
C)
renters will find that landlords start offering to furnish the apartments.
D)
landlords are less likely to do routine maintenance work in the apartments.
Answer:

Diff: 2
Type: C

19)
The government imposes a price ceiling on gasoline that is BELOW the market equilibrium price. You are
asked to suggest a rationing scheme that will minimize the misallocation of resources. You suggest using
rationing
A)
coupons that can be resold.
B)
coupons that cannot be resold.
C)
on a first-come, first-served basis.
D)
only on weekdays.
Answer:

Diff: 3
Type: C

98

20)
Assume the government imposes a price ceiling on sugar that is ABOVE the market equilibrium price.
You are asked to suggest a rationing scheme that will minimize the misallocation of resources. You
suggest
A)
using rationing coupons that cannot be resold.
B)
using rationing on a first-come, first-served basis.
C)
using rationing coupons that can be resold.
D)
that no rationing system will be necessary.
Answer:

Diff: 2
Type: C

21)
If the government imposes a maximum price that is above the market equilibrium price, the
A)
ceiling price will have no economic impact and price will return to equilibrium.
B)
ceiling price will have an economic impact and price will not return to equilibrium.
C)
government will create a permanent surplus of the commodity.
D)
available supply must be rationed with a nonprice rationing mechanism.
Answer:

Diff: 2
Type: F

99

22)
People scalping tickets for a rock concert can sell their tickets for a profit
A)
any time the rock group is popular.
B)
when the price set by the concert hall is less than the market equilibrium price.
C)
when prices are too high.
D)
only when there is excess supply.
Answer:

Diff: 2
Type: C

23)
People most successfully scalp tickets for a rock concert when the
A)
quantity of tickets available exceeds the quantity demanded.
B)
price set by the concert hall is less than the market equilibrium price.
C)
price set by the concert hall exceeds the market equilibrium price.
D)
price set by the concert hall equals the market equilibrium price.
Answer:

Diff: 2
Type: F

24)

100

People scalping tickets for the Super Bowl will be successful

A)
any time the Super Bowl is popular.
B)
when prices are too high.
C)
when the price set by the National Football League is less than the market equilibrium price.
D)
only when there is excess supply.
Answer:

Diff: 2
Type: F

25)
If the equilibrium price of gasoline is $2.00 per gallon and the government will not allow oil companies to
charge more than $1.00 per gallon of gasoline, which of the following will happen?
A)
Demand must eventually decrease so that the market will come into equilibrium at a price of $1.00.
B)
Supply must eventually increase so that the market will come into equilibrium at a price of $1.00.
C)
A nonprice rationing system such as ration coupons must be used to ration the available supply of
gasoline.
D)
The market will be in equilibrium at a price of $1.00.
Answer:

Diff: 1
Type: F

26)

101

An example of an ineffective price ceiling would be the government setting the price of gasoline at
__________ per gallon when the market price is at $2.00 per gallon.
A)
$1.25

$1.50

$1.75

$2.25

B)

C)

D)

Answer:

Diff: 3
Type: C

102

27)
Consider a market that has many buyers but only one seller. Assume the seller has only one unit of the
product to sell. Then the market demand curve will be ________ and the sellers supply curve will be
_______.
A)
horizontal; horizontal
B)
vertical; upward sloping
C)
downward sloping; vertical
D)
downward sloping; upward sloping
Answer:

Diff: 2
Type: C

28)
In the former Soviet Union, central planners fixed the quantity supplied of a staple product in a market at
a certain level regardless of the price. The planners also would set the market price below what the
equilibrium price would have been. Soviet citizens ________in line to buy staple products and _______ the
amount they wanted to buy given the price they paid.
A)
stood; received
B)
stood; did not receive
C)
did not stand; received
D)
did not stand; did not receive
Answer:

Diff: 3

103

Type: C

Supply and Demand Analysis

Multiple Choice
Refer to the information provided in Figure 4.2 below to answer the questions that follow.

Figure 4.2

104

1)
Refer to Figure 4.2. At the world price of $10 per barrel of oil, the United States imports __________
million barrels of oil per day.
A)
3

B)

C)

D)

11

Answer:

Diff: 2
Type: A

2)
Refer to Figure 4.2. If a $2 per barrel tax is levied on imported oil, the United States will _______ million
barrels of oil per day.
A)
import 2

import 5.

import 8

export 8

B)

C)

D)

Answer:

Diff: 2
Type: A

105

3)
Refer to Figure 4.2. If the United States levies no taxes on imported oil, the price of oil in the United States
A)
would be $8 per barrel, and the United States would import 8 million barrels of oil per day.
B)
would be $10 per barrel, and the United States would import 5 million barrels of oil per day.
C)
would be $12 per barrel, and the United States would import 2 million barrels of oil per day.
D)
after the U.S. government eliminated all taxes on imported oil cannot be determined from this
information.
Answer:

Diff: 2
Type: A

4)
Refer to Figure 4.2. Assume that initially there is free trade. If the United States then imposes a $2 tax per
barrel of imported oil,
A)
the quantity demanded of oil will be reduced by 2 million barrels per day.
B)
the quantity of oil supplied by U.S. firms will increase by 5 million barrels per day.
C)
U.S. imports of oil will increase by 3 million barrels per day.
D)
the price of oil in the U.S. will increase to $12 per barrel.
Answer:

Diff: 2
Type: A

106

107

5)
Refer to Figure 4.2. Assume that initially there is free trade. If the United States then imposes a $2 tax per
barrel of imported oil, the tax revenue generated will equal _______ million per day.
A)
$4

B)

$6

C)

$10

D)

$14

Answer:

Diff: 2
Type: A

Refer to the information provided in Figure 4.3 below to answer the questions that follow.

Figure 4.3
6)
Refer to Figure 4.3. At the world price of 50 cents per bell pepper the United States imports __________
million bell peppers per day.
A)
1

B)

108

C)

D)

Answer:

Diff: 2
Type: A

7)
Refer to Figure 4.3. If a 10-cent-per-bell-pepper tax is levied on imported bell peppers, the United States
will import _____ million bell peppers per day.
A)
4

B)

C)

D)

Answer:

Diff: 2
Type: A

109

8)
Refer to Figure 4.3. If the United States levies no taxes on bell peppers, the price of bell peppers in the
United States
A)
would be 40 cents per bell pepper, and the United States would import 5 million bell peppers per day.
B)
would be 60 cents per bell pepper, and the United States would import 1 million bell peppers per day.
C)
would be 50 cents per bell pepper, and the United States would import 3 million bell peppers per day.
D)
after the U.S. government eliminated all taxes on imported bell peppers cannot be determined from this
information.
Answer:

Diff: 2
Type: A

9)
Refer to Figure 4.3. Assume that initially there is free trade. If the United States then imposes a 10-cent tax
per bell pepper,
A)
the quantity demanded of bell peppers will be reduced by 2 million bell peppers per day.
B)
the quantity of bell peppers supplied by U.S. firms will increase by 5 million bell peppers per day.
C)
the price of bell peppers in the United States will increase to 60 cents per bell pepper.
D)
U.S. imports of bell peppers will increase by 3 million per day.
Answer:

Diff: 2
Type: A

110

Refer to the information provided in Figure 4.4 below to answer the questions that follow.

Figure 4.4

111

10)
Refer to Figure 4.4. At the world price of $20 per computer chip, the United States imports __________
million computer chips.
A)
2

B)

C)

10

D)

12

Answer:

Diff: 2
Type: A

11)
Refer to Figure 4.4. If a $5.00 each computer chip tax is levied on imported computer chips, the United
States will import _____ million computer chips.
A)
6

10

B)

C)

D)

Answer:

Diff: 2
Type: A

112

12)
Refer to Figure 4.4. If the United States eliminates all taxes on computer chips, the price of computer chips
in the United States
A)
would be $15 per computer chip, and the United States would import 10 million computer chips.
B)
would be $25 per computer chip, and the United States would import 2 million computer chips.
C)
would be $20 per computer chip, and the United States would import 6 million computer chips.
D)
cannot be determined from this information.
Answer:

Diff: 1
Type: F

13)
Refer to Figure 4.4. Assume that initially there is free trade. If the United States then imposes a $5.00 tax
on imported computer chips,
A)
the quantity demanded of computer chips will be reduced by 4 million computer chips.
B)
the quantity of computer chips supplied by U.S. firms will increase by 2 million computer chips.
C)
the price of computer chips in the United States will decrease to $15.
D)
U.S. imports of computer chips will increase by 1 million computer chips.
Answer:

Diff: 2
Type: A

113

114

14)
Refer to Figure 4.4. Assume that initially there is free trade. If the United States then imposes a $5.00 per
computer chip tax on imported computer chips, the tax revenue generated will equal ______ million.
A)
$50

$10

$60

$75

B)

C)

D)

Answer:

Diff: 2
Type: A

Supply and Demand and Market Efficiency

Multiple Choice
1)
The difference between the maximum amount a person is willing to pay for a good and its current market
price is known as
A)
producer surplus.
B)
profits.

C)

revealed preferences.
D)
consumer surplus.
Answer:

Diff: 2

115

Type: D

2)
The difference between the minimum amount a firm is willing to accept for a good and its current market
price is known as
A)
the paradox of value.
B)
profits.

C)

producer surplus.
D)
consumer surplus.
Answer:

Diff: 2
Type: D

3)
You would be willing to pay a maximum of $50 to attend a concert, and you can buy a ticket for $30. Your
consumer surplus is
A)
$10.

$20.

$30.

$50.

B)

C)

D)

Answer:

Diff: 2

116

Type: A

117

4)
You would be willing to pay a maximum of $100 to attend a football game, and you can buy a ticket for
$30. Your consumer surplus is
A)
$30.

B)

$50.

C)

$70.

D)

$100.

Answer:

Diff: 2
Type: A

5)
When the equilibrium price of ginger ale increases while your demand schedule for ginger ale remains
unchanged, then your consumer surplus
A)
decreases.

increases.

B)

C)

remains constant.
D)
may increase or decrease depending on the amount of the price decrease.
Answer:

Diff: 2
Type: A

118

6)
When buyer and seller trade to the market equilibrium quantity, they
A)
maximize the difference between consumer and producer surplus.
B)
minimize the sum of consumer and producer surplus.
C)
minimize deadweight loss.
D)
maximize deadweight loss.
Answer:

Diff: 3
Type: C

Refer to the information provided in Figure 4.5 below to answer the questions that follow.

Figure 4.5

119

7)
Refer to Figure 4.5. Which of the following areas represents consumer surplus?
A)
A

B)

C)

D)

Answer:

Diff: 1
Type: D

8)
Refer to Figure 4.5. Which of the following areas represents producer surplus?
A)
A

B)

C)

D)

Answer:

Diff: 1
Type: D

9)

120

Refer to Figure 4.5. Which of the following areas represents deadweight loss?
A)
A

B)

C)

D)

There is no deadweight loss in this market.

Answer:

Diff: 2
Type: D

10)
There will be a deadweight loss in a market if
A)
the actual quantity traded equals the market equilibrium quantity.
B)
the actual quantity traded is other than the market equilibrium quantity.
C)
producer surplus exceeds consumer surplus.
D)
consumer surplus exceeds producer surplus.
Answer:

Diff: 2
Type: C

11)
When there is a deadweight loss because of _________ in a market, the full cost of production _______
consumer willingness to pay.

121

A)
underproduction; rises above
B)
overproduction; rises above
C)
underproduction; equals
D)
overproduction; falls below
Answer:

Diff: 3
Type: C

122

12)
When the government sets a price floor above the equilibrium price in a market, consumer surplus will
A)
rise.

B)

fall.

C)

not change.

D)

not enough information available to determine an answer.

Answer:

Diff: 2
Type: C

13)
Suppose market demand and supply curves are linear and the market price settles to the equilibrium
level. We can calculate the cumulative consumer surplus as the area of a ______.
A)
circle

B)

square

C)

rectangle

triangle

D)

Answer:

Diff: 2
Type: A

True/False

123

1)
Deadweight loss is minimized when the market achieves the equilibrium price.
Answer:

TRUE

Diff: 1
Type: D

124