chap4.1

Price controls

• always produce an equitable outcome.

• always produce an efficient outcome.

• can generate inequities of their own.

• produce revenue for the government.

Policymakers use taxes

• to raise revenue for public purposes, but not to influence market outcomes.

• both to raise revenue for public purposes and to influence market outcomes.

• when they realize that price controls alone are insufficient to correct market inequities.

• only in those markets in which the burden of the tax falls clearly on the sellers.

A price ceiling

• is a legal maximum on the price at which a good can be sold.

• is often imposed in markets in which “cutthroat competition” would prevail without a price ceiling.

• 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.

• All of the above are correct.

A legal minimum price at which a good can be sold is

• exemplified by rent-control laws.

• usually intended to enhance efficiency in a market.

• called a price ceiling.

• called a price floor.

A price floor

• is a legal minimum on the price at which a good can be sold.

• 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.

• can create inequities in a market.

• All of the above are correct.

A shortage results when

• a binding price ceiling is imposed.

• a binding price floor is imposed.

• a price ceiling is imposed but it is not binding.

• a price floor is imposed but it is not binding.

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

• greater than quantity supplied.

• less than quantity supplied.

• equal to quantity supplied.

• Any of the above is possible.

To say that a price ceiling is binding is to say that the price ceiling

• results in a scarcity.

• is set above the equilibrium price.

• results in excess demand.

• All of the above are correct.

A price floor is binding if it

• is set lower than the equilibrium market price.

• results in an observed price that is the same as the equilibrium price.

• leads to a surplus.

• is strictly enforced by the government.

An example of a price floor is

• the regulation of gasoline prices in the U.S. in the 1970s.

• rent control.

• the minimum wage.

• any restriction on price that leads to a shortage.