Practice Problems for Mod 8 and 9

Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. Rapidly increasing health costs have been a major political concern for several decades. Suppose that to control rising health costs the government sets the maximum price for a normal doctor's visit at $20, but the current market price is $40. Then: A more people will try to visit the doctor, but the doctor will see fewer patients. . B the same number of people will try to visit the doctor, and the doctor will see the same . number of patients. C more people will be able to see the doctor, since the price is lower. . D fewer people will try to see the doctor, and the doctors will see fewer patients. . E fewer people will try to see the doctor, and the doctor will see the same number of . patients.

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2. The government decides to impose a price ceiling on a good, because it thinks the market-determined price is too high. If the government imposes the price ceiling below the equilibrium price: A consumers will respond to the lower price and therefore wish to purchase more of the . good than at the equilibrium price. B producers will respond to the lower price and therefore offer more units for sale. . C consumers will be able to purchase more of the good after the price ceiling is imposed. . D it will not be binding. . E a surplus of the good will exist. .

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3. One of the ways rent control is inefficient is that it leads to: A higher-quality apartments. . B high opportunity costs associated with wasted time for apartment seekers. . C markets that maximize total surplus. . D the construction of more apartments. . E an increase in producer surplus with a larger decrease in consumer surplus. .

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4. Suppose the government of the oil-rich country of Oiland sets gasoline prices at $0.25 per gallon, when the market price is $1.50. The Oiland government's actions will: A improve efficiency since the low prices will force producers to find cheaper production

. B . C . D . E .

methods. result in gasoline surpluses even in an oil-rich country. result in an increase in the total quantity of gasoline consumed. improve equality between rich and poor since the poor can now afford gasoline. cause gasoline shortages even in an oil-rich country.

Price (unit) $1.10 1.20 1.30 1.40 1.50

Quantity Demanded (units) Quantity Supplied (units) 9,000 3,000 8,000 5,000 7,000 7,000 6,000 9,000 5,000 1,100 Table 8-1: Market for Fried Twinkies

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5. Use Table 8-1. In response to popular anger over the high price of fried Twinkies, the government imposes a price ceiling of $1.20 per fried Twinkie. From this table, the price ceiling causes: A a shortage of 3,000 fried Twinkies. . B a shortage of 5,000 fried Twinkies. . C a surplus of 8,000 fried Twinkies. . D a surplus of 3,000 fried Twinkies. . E a shortage of 5,000 fried Twinkies. .

Rent (per apartment per month) $1,400 1,300 1,200 1,100 1,000 900 800 700 600

Quantity Demanded (millions Quantity Supplied (millions of of apartments) apartments) 1.6 2.4 1.7 2.3 1.8 2.2 1.9 2.1 2.0 2.0 2.1 1.9 2.2 1.8 2.3 1.7 2.4 1.6 Scenario 8-1: Market for Apartments

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6. Use Scenario 8-1. This figure represents a competitive market for apartments. If a government price ceiling at $700 is now imposed on this market (in the name of fairness), then an inefficiency will result in the form of a: A surplus of 0.6 million apartments. . B shortage of 0.6 million apartments. . C surplus of 0.2 million apartments. . D shortage of 0.2 million apartments. . E shortage of 2.3 million apartments. .

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7. Use Scenario 8-1. This figure represents a competitive market for apartments. If a government price ceiling at $900 is now imposed on this market (in the name of fairness), then an inefficiency will result in the form of a: A surplus of 0.6 million apartments. . B shortage of 0.6 million apartments. . C surplus of 0.2 million apartments. . D shortage of 0.2 million apartments. . E shortage of 2.1 million apartments. .

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8. Use Scenario 8-1. This figure represents a competitive market for apartments. If a government price ceiling at $600 is now imposed on this market (in the name of fairness), then an inefficiency will result in the form of a: A surplus of 0.6 million apartments. . B surplus of 0.8 million apartments. . C shortage of 0.8 million apartments.

. D shortage of 0.6 million apartments. . E shortage of 1.6 million apartments. .

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9. The market for apples is in equilibrium at a price of $0.50 per pound. If the government imposes a price ceiling in the market at a price of $0.40 per pound, then: A quantity demanded will decrease. . B quantity supplied will increase. . C there will be a shortage of the good. . D the price ceiling will not affect the market price or output. . E there will exist no dead weight loss. .

____ 10. Producers may supply a good with an inefficiently low quality if the government imposes a(n): A price control. . B excise tax. . C binding price floor. . D binding price ceiling. . E per-unit subsidy. .

Figure 8-4: Market for Blue Jeans

____ 11. Use the Market for Blue Jeans Figure 8-4. Suppose the government believes blue jeans are too expensive and it wants to make sure blue jeans are affordable to more citizens. This type of price control is called a ________ and the price would be set equal to ________. A price floor; $100 . B price floor; $55 . C price ceiling; $55 . D price ceiling; $100 . E price ceiling, $80 .

____ 12. Use the Market for Blue Jeans Figure 8-4. If a price ceiling at $55 exists in the market for jeans, the market outcome would be: A a surplus of 17 jeans. . B a surplus of 7 jeans. . C a shortage of 17 jeans. . D a shortage of 7 jeans. . E neither a shortage nor a surplus. .

____ 13. West African cotton farmers are very upset about the subsidies the U.S. government pays to American cotton farmers. One reason for this could be that subsidized cotton from the United States: A leads to global cotton surpluses and lower prices for West African farmers. . B raises the world price of cotton. . C has led to a global shortage of cotton. . D has led to an increase in the demand for West African cotton. . E has led to improved efficiency in the global cotton market. .

____ 14. When the government imposes a limit on sales of a good or service by a quota, it usually issues a license that gives the owner the right to sell a given quantity of the good. The market price of the license is equal to: A the demand price of the good. . B the wedge that represents the difference between the demand price and the supply price. . C the quota rent.

. D the quota rent plus the wedge that represents the difference between the demand price . and the supply price. E the market equilibrium price. .

____ 15. Suppose the U.S. government imposes a quota on the number of Japanese-made cars allowed into the United States (the quota is set at a quantity below equilibrium). Then we would expect the price of Japanese cars to ________ and the price of U.S.-made cars to ________. A increase; increase . B increase; decrease . C decrease; increase . D decrease; decrease . E increase; remain the same .

____ 16. The quota rent refers to: A the difference between the demand price and the supply price at the quota limit. . B the rent received by landlords who own rent-controlled apartments. . C the opportunity cost of using a quota-controlled service, or of buying a good that is . subject to an import quota. D the minimum rent that the owner of a building must receive before he or she is willing to . rent out the building. E the difference between the demand price at the quota limit and the market equilibrium . price.

Price (unit) $1.10 1.20 1.30 1.40 1.50

Quantity Demanded Quantity Supplied (units) (units) 9,000 3,000 8,000 5,000 7,000 7,000 6,000 9,000 5,000 1,100 Table 9-1: Market for Fried Twinkies

____ 17. Use Table 9-1. Suppose the government decides to reduce fried Twinkie consumption as part of a War on Obesity. After careful study, the government decides to limit production (i.e., the government imposes a quota on production) of fried Twinkies to 5,000 for the current calendar year. Using the table, what price will producers charge, if they obey the quota law?

A . B . C . D . E .

$1.20 $1.30 $1.50 $1.10 $1.40

____ 18. Use Table 9-1. Using the table, if the government imposes a quota on the fried Twinkie market of 5,000, the quota rent (per fried Twinkie. collected by the fried Twinkie producers will be: A $1.20. . B $0.30. . C $1.50. . D $1.00. . E $0.10. .

____ 19. If a quota is set above the equilibrium quantity, there will be: A incentives for illegal activities. . B missed opportunities in the form of mutually beneficial transactions that don't occur. . C a supply price for the quantity transacted that will exceed the demand price of the . quantity transacted. D no effect from the quota. . E a lower price than the market equilibrium price. .

Price per Treatment $50 100 150 200 250

Quantity Treatments Quantity Treatments Demanded (monthly) Supplied (monthly) 100 20 80 40 60 60 40 80 20 100 Table 9-2: The Market for Acupuncture

____ 20. Use Table 9-2. A small town has a thriving market for acupuncture treatments. In an effort to regulate this market, the town requires each acupuncture therapist to purchase a license. Initially, the government issues only enough licenses to provide for 20 treatments per month. This quota creates a quota rent equal to: A $50. . B $100. . C $150. . D $250 . E .$200. .

____ 21. Use Table 9-2. The production quota of 20 acupuncture treatments prevents mutually beneficial transactions because there are ________ additional transactions that people would like to make but would not take place given the quota. A 80 . B 60 . C 40 . D 20 . E 100 .

____ 22. Use Table 9-2. A small town has a thriving market for acupuncture treatments. In an effort to regulate this market, the town requires each acupuncture therapist to purchase a license. Initially the government issues only enough licenses to provide for 20 treatments per month. Suppose this quota is in place for many years and, over time, the population of the town has substantially grown. This would result in: A larger quota rents and more missed opportunities as the demand curve has shifted to the . left. B larger quota rents and more transactions as the supply curve has shifted to the right. . C larger quota rents and more missed opportunities as the demand curve has shifted to the . right. D smaller quota rents and more missed opportunities as the demand curve has shifted to the . right. E larger quota rents and more transactions as the supply curve has shifted to the left. .

Practice Problems for Mod 8 and 9 Answer Section

MULTIPLE CHOICE 1. ANS: A PTS: 1 SKL: Critical Thinking 2. ANS: A PTS: 1 SKL: Critical Thinking 3. ANS: B SKL: Fact-Based PTS: 1 DIF: M DIF: M DIF: M DIF: M DIF: M DIF: M DIF: M DIF: M DIF: M DIF: M DIF: M DIF: M DIF: M DIF: E DIF: D REF: Module 8 REF: Module 8 REF: Module 8 REF: Module 8 REF: Module 8 REF: Module 8 REF: Module 8 REF: Module 8 REF: Module 8 REF: Module 8 REF: Module 8 REF: Module 8 REF: Module 8 REF: Module 9 REF: Module 9

4. ANS: E PTS: 1 SKL: Critical Thinking 5. ANS: A PTS: 1 SKL: Analytical Thinking 6. ANS: B PTS: 1 SKL: Critical Thinking 7. ANS: D PTS: 1 SKL: Critical Thinking 8. ANS: C PTS: 1 SKL: Critical Thinking 9. ANS: C PTS: 1 SKL: Critical Thinking 10. ANS: D SKL: Fact-Based PTS: 1

11. ANS: C PTS: 1 SKL: Critical Thinking 12. ANS: C PTS: 1 SKL: Concept-Based 13. ANS: A PTS: 1 SKL: Critical Thinking 14. ANS: D SKL: Fact-Based PTS: 1

15. ANS: A PTS: 1 SKL: Analytical Thinking

16. ANS: A SKL: Definitional

PTS: 1

DIF: M DIF: M DIF: M DIF: M DIF: M DIF: M DIF: M

REF: Module 9 REF: Module 9 REF: Module 9 REF: Module 9 REF: Module 9 REF: Module 9 REF: Module 9

17. ANS: C PTS: 1 SKL: Analytical Thinking 18. ANS: B PTS: 1 SKL: Analytical Thinking 19. ANS: D PTS: 1 SKL: Critical Thinking 20. ANS: E PTS: 1 SKL: Concept-Based 21. ANS: C PTS: 1 SKL: Concept-Based 22. ANS: C PTS: 1 SKL: Analytical Thinking