… a core topic in Economic Analysis and Atlas102
This topic deals with the price system in free markets and the impacts of price regulation by government.
The treatment of this topic on the Atlas follows closely that in Chapter 5, The Price System , and Chapter 6, Price Ceilings and Price Floors, in the open access Principles of Microeconomics course offered by Tyler Cowen and Alex Tabarrok at the Marginal Revolution University online education platform (http://www.mruniversity.com/courses/principles-economics-microeconomics , accessed 1 May 2016).
Topic learning outcome Appropriately utilize and interpret results of applying to the analysis of public policy and management problems the basic principles of the price system and the impacts of price regulation, including following core concepts.
Core concepts associated with this topic Readings
We believe that this topic and its core concepts can be mastered to the MPP/MPA level by watching and re-watching the 115 minutes of MRU course videos listed below and doing the 73 sample questions associated with these video segments and reproduced at the bottom of this page and repeated on the appropriate concept pages.
Atlas pages: The Price System and Price Regulation and associated Concepts
Alex Tabarrok, I Rose (3-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-system-definition-invisible-hand , accessed 1 May 2016.
Alex Tabarrok, Markets Link the World (5-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/markets-invisible-hand-supply-chain , accessed 1 May 2016.
Alex Tabarrok, Information and Incentives (10-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/information-problem-economics-hayek , accessed 1 May 2016.
Alex Tabarrok, A Price Is a Signal Wrapped up in an Incentive (5-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-system-spontaneous-order , accessed 1 May 2016.
Alex Tabarrok, The Great Economic Problem (8-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/economic-problem-central-planning-70s-oil-crisis , accessed 1 May 2016.
Tyler Cowen, Speculation (11-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/speculation-oil-futures-market , accessed 1 May 2016.
Tyler Cowen, Prediction Markets (9-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/prediction-markets-election-forecasting , accessed 1 May 2016.
Alex Tabarrok, Price Ceilings (4-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-controls-definition-nixon , accessed 1 May 2016.
Alex Tabarrok, Price Ceilings: Shortages and Quality Reduction (6-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-ceiling-shortages-reduce-quality , accessed 1 May 2016.
Alex Tabarrok, Price Ceilings: Lines and Search Costs (10-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-ceiling-gasoline-example-search-costs , accessed 1 May 2016.
Alex Tabarrok, Price Ceilings: Deadweight Loss (4-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-ceiling-deadweight-loss , accessed 1 May 2016.
Alex Tabarrok, Price Ceilings: Misallocation of Resources (12-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-ceiling-misallocation-of-resources , accessed 1 May 2016.
Alex Tabarrok, Price Ceilings: Rent Controls (10-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/rent-controls-economics , accessed 1 May 2016.
Alex Tabarrok, Price Floors (10-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/rent-controls-economics , accessed 1 May 2016.
Alex Tabarrok, Price Floors: Airline Fares (8-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-floor-effect-on-quality-airline-deregulation , accessed 1 May 2016.
Textbook readings in MPP and MPA courses
Harvard Kennedy School: API-101
Pindyck, Robert S. and Daniel L. Rubinfeld. Microeconomics, 8th Edition. Prentice-Hall, 2012. Chapter 10 (Pp. 357-385, 389-392)
NYU Wagner: GP-1018
Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. Chapters 6 and 7 (up to pg. 201)
Johnson-Shoyama: JS-805
Weimer, David L. and Aidan R. Vining. Policy Analysis , 5th edition. London: Longman Publishers, 2011. Chapters 6 and 7
George Washington: PPPA-6003
Mankiw, N. Gregory. Principles of Microeconomics , 6th edition. Mason: South-Western College Publishers, 2011. Chapters 6 and 8
Wheelan, Charles. Naked Economics: Undressing the Dismal Science. New York: W. W. Norton & Company, 2010. Chapter 4
American: PAUD-630
Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. Chapter 5
Assessment questions (from MRU Practice Questions for Chapters 5 and 6)
From http://www.mruniversity.com/node/190032 , http://www.mruniversity.com/node/192285 and http://www.mruniversity.com/node/192286 , http://www.mruniversity.com/node/192283 , http://www.mruniversity.com/node/192285 , http://www.mruniversity.com/node/192287 , http://www.mruniversity.com/node/192290 , http://www.mruniversity.com/courses/principles-economics-microeconomics/price-ceiling-practice-questions?utm_source=PrinciplesAnnot&utm_medium=PQAnnot&utm_campaign=MRUYTAnnotation , http://www.mruniversity.com/node/201740 , http://www.mruniversity.com/node/201776?utm_source=PrinciplesAnnot&utm_medium=PQAnnot&utm_campaign=MRUYTAnnotation , http://www.mruniversity.com/node/201785 , http://www.mruniversity.com/node/201790 , http://www.mruniversity.com/node/201794 , http://www.mruniversity.com/node/201803 , http://www.mruniversity.com/node/201805 , http://www.mruniversity.com/node/201811?utm_source=PrinciplesAnnot&utm_medium=PQAnnot&utm_campaign=MRUYTAnnotation , accessed 1 May 2016.
AQ102.05.01. Circa 1200 BCE, a decreasing supply of tin due to wars and the breakdown of trade led to a drastic increase in the price of bronze in the Middle East and Greece (tin being necessary for its production). It is around this time that blacksmiths developed iron- and steel-making techniques (as substitutes for bronze). What does the increasing price of bronze signal?
It tells people that bronze is getting harder to find and its higher price will signal consumers to conserve it more or seek substitutes.
It tells people that there is a price bubble forming around bronze and that people are overvaluing the price of bronze.
It tells people that the wars in the Middle East and Greece are coming close to being resolved because of bronze scarcity.
It tells people to buy more bronze because it is going to be more valuable in the future.
AQ102.05.02. How is the increasing price of bronze an incentive?
Consumers will save more money by conserving bronze.
Consumers who switch to substitutes can save money.
Entrepreneurs can profit by developing new alternatives to bronze.
Entrepreneurs can profit by developing ways to recycle bronze.
All of the above.
AQ102.05.03. Why do you think iron and steel became more common around the same time as the increase in price of bronze?
An increase in the demand for bronze signals that people are wealthy enough to afford iron and steel.
An increase in the price of bronze encourages innovation to produce substitutes.
An increase in the price of a resources signals that it is too competitive to make a profit, so entrepreneurs seek other alternatives.
The introduction of iron and steel differentiates bronze for specific uses and therefore causes its price to increase.
AQ102.05.04. After the development of iron, did the supply or demand for bronze shift? Which way did it shift? Why?
The demand for bronze shifted to the left (down) because there was now a good substitute for bronze.
The demand for bronze shifted to the right (up) because there was now a good substitute for bronze.
The supply for bronze shifted to the right (down) because there was now a good substitute for bronze.
The supply for bronze shifted to the left (up) because the quantity demanded of bronze decreased.
AQ102.05.05. One question that economics students often ask is “In a market with a lot of buyers and sellers, who sets the price of the good?” There are two possible correct answers to this question: “Everyone” and “No one.” What is meant by “Everyone?”
In a market operating in a western democracy, everyone gets to vote on price controls and restrictions to ensure the market operates fairly.
In a market with many participants, each person’s actions push the supply or the demand just a little bit, so everyone has some small influence.
In a market with many suppliers and demanders, each person’s actions have a negligible effect on supply or the demand, so everyone has to work together to influence the market.
Everyone has to consume something.
AQ102.05.06. What is meant by “No one?”
No one person’s behavior can affect prices.
No one wants the equilibrium price. Everyone wants the lowest price possible.
There is too much information for suppliers to know how to set prices.
Nobody actually plans for a given price to be the equilibrium price.
AQ102.05.07. Let’s see if the forces of the market can be as efficient as a benevolent dictator. Since laptop computers are increasingly easy to build and since they allow people to use their computers wherever they like, an all-wise benevolent dictator would probably decree that most people buy laptops rather than desktop computers. This is especially true now that laptops are about as powerful as most desktops. Since it’s become much easier to build better laptop computers in recent years, laptop supply has increased. What does this do to the price of laptops?
The price of laptops increases.
The price of laptops decreases.
An increase in laptop supply will not change its price.
AQ102.05.08. Laptop and desktop computers are substitutes. Now that the price of laptops has changed, what does this do to the demand for desktop computers?
The demand for desktops increases
The demand for desktops decreases.
A change in the price of laptops will not affect the price of desktops.
AQ102.05.09. How does the change in desktop demand affect the quantity supplied of desktop computers?
The supply of desktops increases.
The supply of desktops decreases.
The supply of desktops is unaffected.
AQ102.05.10. Once it became easier to build good laptops, did “invisible hand” forces push more of society’s resources into making laptop and push resources away from making desktops?
Yes.
No.
AQ102.05.11. The process of market creation is most similar to the creation of a country’s
Constitution
Language
Defense strategy
AQ102.05.12. If a nation’s government made it impossible for inefficient firms to fail by giving them loans, cash grants, and other bailouts to stay in business, is that nation likely to be poorer or richer as a result of this strategy? (Hint: Steven Davis and John Haltiwanger. 1999. “Gross Job Flows.” In Handbook of Labor Economics (Amsterdam: North–Holland) found than in the United States, 60% of the increase in U.S. manufacturing efficiency was caused by people moving from weak firms to strong firms.)
Richer.
Poorer.
AQ102.05.13. Suppose a new invention comes along that makes it easier and much less expensive to recycle clothing: perhaps a new device about the size of a washing machine can bleach, re-weave, and re-dye cotton fabric to closely imitate any cotton item you see in a fashion magazine. Head into the laundry room, drop in a batch of old clothes, scan in a couple of pages from Vogue, and come back in an hour. If you think of the “market for clothing” as the “market for new clothing,” does this shift the demand or the supply of clothing, and in which direction?
The supply of clothing shifts right: a rise in supply.
The supply of clothing shifts left: a fall in supply.
The demand for clothing shifts right: a rise in demand.
The demand for clothing shifts left: a fall in demand.
AQ102.05.14. If you instead think of the “market for clothing” as the “market for clothing, whether it’s new or used,” does this shift the demand or supply of clothing, and in which direction?
The supply of clothing shifts right: a rise in supply.
The supply of clothing shifts left: a fall in supply.
The demand for clothing shifts right: a rise in demand.
The demand for clothing shifts left: a fall in demand.
AQ102.05.15. What happens to the price of new, unrecycled clothing?
The price of new clothing increases.
The price of new clothing decreases.
The change in price direction depends on the size of the supply curve’s shift.
The price of new clothing will not change.
AQ102.05.16. After this invention, will society’s scarce productive resources (machines, workers, retail space) flow toward the “new clothing” sector or away from it? (Note: You may think this theoretical question is fanciful but three-dimensional printers, which can create plastic or plaster prototypes of small items such as toys, cups, etc., have fallen dramatically in price. Every day, you’re getting just a bit closer to having your own personal Star Trek replicator.)
Resources will flow toward the new clothing sector.
Resources will flow away from the new clothing sector.
Resource flows will remain unchanged.
AQ102.05.17. Suppose you learned that growing political instability in Chile (the largest producer of copper) will greatly reduce the productivity of its mines in two years. Ignoring all other factors, which curve (demand or supply) will shift which way in the market for copper two years from now?
Demand curve will increase, that is, a shift to the right (up).
Demand curve will decrease, that is, a shift to the left (down).
Supply curve will increase, that is, a shift to the right (down).
Supply curve will decrease, that is, a shift to the left (up).
AQ102.05.18. Will the price rise or fall as a result of this curve shift?
The price will rise.
The price will fall.
AQ102.05.19. The video explores how prices tie all goods together. To illustrate this idea, suppose new farming techniques drastically increased the productivity of growing wheat. Given this change, how would the price of wheat change?
Increase, because demand would shift to the right.
Increase, because supply would shift to the left.
Fall, because supply would shift to the right.
Fall, because demand would shift to the left.
AQ102.05.20. How would the price of cookbooks specializing in recipes using wheat flour change?
Increase, because demand would shift to the right.
Increase, because supply would shift to the left.
Fall, because demand would shift to the right.
Fall, because demand would shift to the left.
AQ102.05.21. Given your answer to the previous question, what would happen to the price of paper?
Increase, because demand would shift to the right.
Increase, because supply would shift to the left.
Fall, because demand would shift to the right.
Fall, because demand would shift to the left.
AQ102.05.22. Given your prediction about the change in the price of paper, how would the price of pencils change? (Hint: are paper and pencils complements or substitutes?)
Rise, because demand would shift to the right.
Rise, because supply would shift to the left.
Fall, because demand would shift to the right.
Fall, because demand would shift to the left.
AQ102.05.23. Let’s see if the forces of the market can be as efficient as a benevolent dictator. Since laptop computers are increasingly easy to build and since they allow people to use their computers wherever they like, an all-wise benevolent dictator would probably decree that most people buy laptops rather than desktop computers. This is especially true now that laptops are about as powerful as most desktops. Since it’s become much easier to build better laptop computers in recent years, laptop supply has increased. What does this do to the price of laptops?
The price of laptops increases.
The price of laptops decreases.
An increase in laptop supply will not change its price.
AQ102.05.24. Laptop and desktop computers are substitutes. Now that the price of laptops has changed, what does this do to the demand for desktop computers?
The demand for desktops increases
The demand for desktops decreases.
A change in the price of laptops will not affect the price of desktops.
AQ102.05.25. How does the change in desktop demand affect the quantity supplied of desktop computers?
The supply of desktops increases.
The supply of desktops decreases.
The supply of desktops is unaffected.
AQ102.05.26. Once it became easier to build good laptops, did “invisible hand” forces push more of society’s resources into making laptop and push resources away from making desktops?
Yes.
No.
AQ102.05.27. Sometimes speculators get it wrong. In the months before the Persian Gulf War, speculators drove up the price of oil: The average price in October 1990 was $36 per barrel, more than double its price in 1988. Oil speculators, like many people around the world, expected the Gulf War to last for months, disrupting the oil supply throughout the Gulf region. Thus, speculators either bought oil on the open market (almost always at the high speculative price) or they already owned oil and kept it in storage. Either way, their plan was the same: to sell it in the future, when prices might even be higher. As it turned out, the war was swift: After one month of massive aerial bombardment of Iraqi troops and a 100-hour ground war, then President George H. W. Bush declared a cessation of hostilities. Despite the fact that Saddam Hussein set fire to many of Kuwait’s oil fields, the price of oil plummeted to about $20 per barrel, a price at which it remained for years. How much money did speculators lose or make on each barrel?
Speculators made a profit of $16 per barrel.
Speculators lost $16 per barrel.
Most oil speculators broke even.
AQ102.05.28. When speculators sold their stored oil in the months after the war, did this massive resale tend to increase the price of oil or decrease it?
The resale increased the price of oil.
The resale decreased the price of oil.
AQ102.05.29. In 1980, University of Maryland, Julian Simon bet Stanford entomologist Paul Ehrlich that the price of any five metals of Ehrlich’s choosing would fall over 10 years. Ehrlich believed that resources would become scarcer over time as the population grew, while Simon believed that people would find good substitutes, just as earlier people developed iron as a substitute for scarce bronze. The price of all five metals that Ehrlich chose (nickel, tin, tungsten, chromium, and copper) fell over the next 10 years and Simon won the bet. Ehrlich, an honorable man, sent a check in the appropriate amount to Simon. What does the falling price tell us about the relative scarcity of these metals?
The falling price indicates that the metals are scarcer than what they were before.
The falling price indicates that the metals are less scarce than what they were before.
The falling price tells us nothing about scarcity.
AQ102.05.30. Which of the following could not have caused the shift?
Scientists developed substitutes for the minerals.
The demand for the minerals increased.
The supply of the minerals increased.
AQ102.05.31. Choose the pair that best expresses a relationship similar to that in the original pair. Arbitrager: Region
Speculator: Market
Speculator: Time
Speculator: Forecast
Speculator: Bet
AQ102.05.32. You manage a department store in Florida, and one winter you read in the newspaper that orange juice futures have fallen dramatically in price. Should your store stock up on more sweaters than usual, or should your store stock up on more Bermuda shorts?
Sweaters
Bermuda shorts
AQ102.05.33. Andy enters in a futures contract allowing him to sell 5,000 troy ounces of gold at $1,000 per ounce in 36 months. After that time passes, the market price of gold is $950 per troy ounce. How much did Andy make or lose?
Andy made $50.
Andy lost $50.
Andy made $250,000.
Andy lost $250,000.
AQ102.05.34. Two major-party presidential candidates are running against each other in the 2016 election. The Democratic Party candidate promises more money for corn-based ethanol research and the Republican Party candidate promises more money for defense contractors. In the weeks before the election, defense stocks take a nosedive. Who is probably going to win the election: the pro-ethanol candidate or the pro-defense spending candidate?
Pro-ethanol research, or the Democratic Party, candidate
Pro-defense spending, or the Republican Party, candidate
AQ102.05.35. How does a free market eliminate a shortage?
By letting the price fall.
By letting the price rise.
By creating quotas.
By creating a price ceiling.
AQ102.05.36. Business leaders often say that there is a “shortage” of skilled workers, and so they argue that immigrants need to be brought in to do these jobs. For example, an AP article entitled “New York farmers fear a shortage of skilled workers,” pointing out that a special U.S. visa program, the H-2A program, “allows employers to hire foreign workers temporarily if they show that they were not able to find U.S. workers for the jobs.” (Source: Thompson, Carolyn. May 13, 2008. N.Y. farmers fear a shortage of skilled workers Associated Press.) How do unregulated markets cure a “labor shortage” when there are no immigrants to boost the labor supply?
Let the price of labor increase.
Let the price of labor decrease.
Contract production.
Expand production.
AQ102.05.37. In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In an almost identical town of Meterville, parking costs $5 per hour (or $1.25 per 15 minutes). Where will it be easier to find parking: in Freedonia or Meterville?
Freedonia
Meterville
Indeterminate with the given information.
AQ102.05.38. One town will tend to attract shoppers who hate driving around looking for parking. Which one?
Freedonia
Meterville
AQ102.05.39. Which town will likely attract shoppers with higher incomes?
Freedonia
Meterville
AQ102.05.40. Suppose that the quantity demanded and quantity supplied in the market for milk is as follows:
price: $4; quantity: 4500
price: $3; quantity: 3500
price: $2, quantity: 2000
Indeterminate from the information given.
AQ102.05.41. If the government places a price ceiling of $2 on milk, how large with the shortage be?
2300 gallons
2100 gallons
3500 gallons
2000 gallons
AQ102.05.42. If a government decides to make health insurance affordable by requiring all health insurance companies to cut their prices by 30%, what will probably happen to the number of people covered by health insurance?
More people will be covered because it’s cheaper and more people can now afford it.
Fewer people will be covered because health insurance companies will supply less.
The number of insured will not change.
Indeterminate with the given information.
AQ102.05.43. If the government forced all bread manufacturers to sell their products at a “fair price” that was half the current, free-market price, what would happen to the quantity supplied of bread?
quantity supplied decreases.
quantity supplied increases.
Indeterminate with the given information.
AQ102.05.44. With these price controls on bread, would you expect bread quality to rise or fall?
Quality rises
Quality falls
Indeterminate with the given information.
AQ102.05.45. When a price ceiling is in place keeping the price below the market price, what’s larger: quantity demanded or quantity supplied?
Quantity demanded.
Quantity supplied.
Indeterminate with the given information.
Neither.
AQ102.05.46. Suppose that the market for coats is described as follows: What is the equilibrium price of coats?
$120
$100
$80
$60
AQ102.05.47. Suppose the government sets a price ceiling of $80. How large will the shortage be?
5 million coats
4 million coats
3 million coats
There is no shortage
AQ102.05.48. Suppose again that the government sets a price ceiling of $80 and that people line up to get this good. For how long will people wait in line to obtain a coat if they value their time at $10 an hour?
2 hours
3 hours
4 hours
Indeterminate from the given information.
AQ102.05.49. Between 2000 and 2008, the price of oil increased from $30 per barrel to $140 per barrel, and the price of gasoline in the United States rose from about $1.50 per gallon to over $4.00 per gallon. Unlike in the 1970s when oil prices spiked, there were no long lines outside gas stations. Why?
Government intervened to prevent lines.
Government intervened to enact gasoline rations.
There was no price control on gasoline at the time.
AQ102.05.50. Price controls distribute resources in many unintended ways. In the following cases below, who will probably spend more time waiting in line to get scarce, price-controlled goods? Choose one from each pair:
Working people
Retired people
AQ102.05.51. Choose one from each pair:
Fast-food employees who earn $8 per hour
Lawyers who charge $800 per hour
Choose one from each pair:
People with desk jobs
People who can disappear for a couple of hours during the day
AQ102.05.52. Which job exists in part because time-sensitive wealthy individuals want to pay someone else to wait in line for them?
Fast food employees
Ticket scalpers
Construction workers
Truck drivers
AQ102.05.53. During a crisis such as Hurricane Katrina, governments often make it illegal to raise the price of emergency items like flashlights and bottled water. In practice, this means that these items get sold on a first-come, first-served basis. If a person has a flashlight that she values at $5, but its price on the black market is $40, what gains from trade are lost if the government shuts down the black market?
$45
$40
$35
$30
Indeterminate with the given information.
AQ102.05.54. When will entrepreneurs be more likely to fill up their pickup trucks with flashlights and drive into a disaster area: when they can sell their flashlights for $5 each or when they can sell them for $40 each?
$5
$40
Equal numbers of entrepreneurs will be present at both prices.
AQ102.05.55. In the late 1990s, the city of Santa Monica, California, made it illegal for banks to charge people ATM fees. As you probably know, it’s almost always free to use your own bank’s ATMs, but there’s usually a fee charged when you use another bank’s ATM. (Source: The War on ATM Fees, Time, November 29, 1999). As soon as Santa Monica passed this law, Bank of America stopped allowing customers from other banks to use their ATMs: In bank jargon, B of A banned “out-of-network” ATM usage. In fact, this ban only lasted for a few days, after which a judge allowed banks to continue to charge fees while awaiting a full court hearing on the issue. Eventually, the court declared the fee ban illegal under federal law. But let’s imagine the effect of a full ban on out-of-network fees. Calculate the exact amount of producer and consumer surplus in the out-of-network ATM market in Santa Monica after the ban. How large is consumer surplus?
10
0
15
Indeterminate with the given information.
AQ102.05.56. Suppose the government forced all bread manufacturers to sell their products at a “fair price” that was half the current, free-market price. To keep it simple, assume that people must wait in line to get bread at the controlled price. Would consumer surplus rise, fall, or can’t you tell with the information given?
consumer surplus increases.
consumer surplus decreases.
Indeterminate with the given information.
AQ102.05.57. The Canadian government has wage controls for medical doctors. To keep things simple, let’s assume that they set one wage for all doctors: $100,000 per year. It takes about 6 years to become a general practitioner or a pediatrician, but it takes about 8 or 9 years to become a specialist like a gynecologist, surgeon, or ophthalmologist. What kind of doctor would you want to become under this system? (Note: The actual Canadian system does allow a specialist to earn a bit more than general practitioners, but the difference isn’t big enough to matter.)
Pediatrician
Surgeon
AQ102.05.58. Antibiotics are often given to people with colds (even though they are not useful for that purpose), but they are also used to treat life-threatening infections. If there was a price control on antibiotics, what do you think would happen to the allocation of antibiotics across these two uses?
It would go to those who need it most.
It would go to those who need it least.
It would go to a mix of the two.
AQ102.05.59. A review of the jargon: Is rent control a “price ceiling” or a “price floor?”
price ceiling
price floor
AQ102.05.60. In a rent-controlled apartment, a landlord will likely do which of the following more often:
Rent more apartments
Provide more unfurnished apartments
Discriminate more against applicants
Allow more renters per room
AQ102.05.61. Harry is lucky enough to get a rent-controlled apartment for $300 per month. The market rent on such an apartment is $3,000 per month. Harry himself values the apartment at $2,000 per month, and he’d be quite happy with a regular, $2,000 per month New York apartment. If he stays in the apartment, how much consumer surplus does he enjoy?
$1,700 per month
$2,100 per month
$2,400 per month
Indeterminate given the information.
AQ102.05.61. If he illegally subleases his apartment to Sally on the black market for $2,500 per month and instead rents a $2,000 apartment, is he better off or worse off than if he obeyed the law?
Better off
Worse off
Indeterminate given the information.
AQ102.05.62. A review of the jargon: Is the minimum wage a “price ceiling” or a “price floor?”
price ceiling
price floor
AQ102.05.63. Who is impacted most by a change in the minimum wage?
unionized workers
senior citizens
stay-at-home parents
teenagers
AQ102.05.64. Imagine that you can hire four low-skilled workers to move dirt with shovels at $5 an hour, or you can hire one skilled worker at $24 an hour to move the same amount of dirt with a skid loader. Who will you hire if the minimum wage increases from $5 per hour to $6.50 per hour?
4 low-skilled workers
1 high-skilled worker
AQ102.05.65. Suppose you’re doing some history research on shoe production in ancient Rome, during the reign of the famous Emperor Diocletian. Your records tell you how many shoes were produced each year in the Roman Empire, but it doesn’t tell you the price of shoes. You find a document that says that in the year 301, Emperor Diocletian issued an “edict on prices,” but you don’t know whether he imposed price ceilings or price floors – your Latin is a little rusty. However, you can clearly tell from the documents that the number of shoes actually sold in markets fell dramatically, and that both potential shoe sellers and potential shoe buyers were unhappy with the edict. With the information given, can you tell whether Diocletian imposed a ceiling or a floor? If so, which is it? (Yes, there really was an edict of Diocletian, and Wikipedia has excellent coverage of ancient Roman history.)
Price ceiling
Price floor
Neither- it was a government shoe ration
Indeterminate with the given information.
AQ102.05.66. In the 1970s, AirCal and Pacific Southwest Airlines flew only within California. As we mentioned, the federal price floors didn’t apply to flights within just one state. A major route for these airlines was flying from San Francisco to Los Angeles, a distance of 350 miles. This is about the same distance as from Chicago, Illinois, to Cleveland, Ohio. Which flight had a nicer meal?
San Francisco-to-Los Angeles flight
Chicago-to-Cleveland flight
AQ102.05.67. Airline regulation of the 1970s produced a similar result to which of the following government interventions?
Rent control laws
Minimum wage laws
Communism
The Affordable Care Act
AQ102.05.68. President Jimmy Carter didn’t just deregulate airline prices. He also deregulated much of the trucking industry, as well. Trucks carry almost all of the consumer goods that you purchase, so almost every time you purchase something, you’re paying money to a trucking company. Based on what happened in the airline industry after prices were deregulated, what do you think happened in the trucking industry after deregulation? You can find some answers here: http://www.econlib.org/Library/Enc/TruckingDeregulation.html. For another look that is critical of trucking deregulation, but comes to basically the same answers, see Michael Belzer, 2000. Sweatshops on Wheels: Winners and Losers in Trucking Deregulation, Thousand Oaks, CA: SAGE.
a. Trucking salaries increased
b. Trucking salaries decreased
c. Trucking companies increased
d. Trucking companies decreased
b. and c.
AQ102.05.69. Who do you think asked Congress and the president to keep price floors for trucking?
a. consumer groups
b. retail shops like Wal-Mart
c. Republicans
d. trucking companies
a. and d.
AQ102.05.70. If a government decided to impose price controls on gasoline, what could it do to avoid the time wasted waiting in lines? Though there are several solutions to this problem, only one of the options below is correct.
Restrict gasoline consumption to high-value uses.
Ban lines for gasoline.
Create gasoline rations.
Ban black markets for gasoline.
Page created by: Ian Clark, last modified on 16 May 2016.
Image: Minute 2:36 of Alex Tabarrok, Information and Incentives, at http://www.mruniversity.com/courses/principles-economics-microeconomics/information-problem-economics-hayek , accessed 1 May 2016.
Topic description
What is the equilibrium price and quantity of milk?