Modern Principles of Economics 3rd Edition by Tyler Cowen - Test Bank

Modern Principles of Economics 3rd Edition by Tyler Cowen – Test Bank

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Sample Questions Are Posted Below

1.	The demand curve for physician office visits is quite inelastic; therefore:
	A)	a large increase in price causes quantity demanded to decrease by very little.
	B)	a large decrease in price causes quantity demanded to decrease by a lot.
	C)	a small increase in price causes quantity demanded to decrease by a lot.
	D)	a small decrease in price causes quantity demanded to decrease by very little.

2.	The demand curve for Froot Loops breakfast cereal is very elastic because:
	A)	most breakfast cereals are considered a luxury good.
	B)	there are many good substitutes for Froot Loops.
	C)	the demand curve is negatively sloped.
	D)	it is one of the most advertised cereals in the world.

3.	Figure: Demand Elasticities Refer to the figure. It shows two different demand curves. Based on the graph, which statement is TRUE?
	A)	Elasticity of demand equals the slope of the curve so demand curve A is more elastic.
	B)	Elasticity of demand equals the slope of the curve so demand curve B is more elastic.
	C)	Since these two linear demand curves run through a common point we can say that at any given quantity, demand curve A is more elastic than curve B.
	D)	We cannot infer anything about elasticity from this diagram because slope does not equal elasticity.

4.	The elasticity of demand:
	A)	equals the inverse of price to quantity demanded.
	B)	measures how far the demand curve shifts from a change in price.
	C)	tells us how responsive consumer purchases are to price changes.
	D)	estimates the relationship between quantity demanded and production costs.

Table: Elasticity Characteristics

Good X	Good Y	Good Z
Few Substitutes	Many Substitutes	Few Substitutes
Luxury good	Luxury good	Necessary good
Small part of budget	Large part of budget	Small part of budget

The table lists the characteristics of three goods. Good ________ is the most inelastic, and Good ________ is the most elastic.

X; Y

Z; Y

X; Z

Y; X

6.	The price elasticity of demand is:
	A)	the responsiveness of price to changes in the quantity demanded of the product.
	B)	the responsiveness of quantity demanded to changes in the price of the product.
	C)	the change in the firm’s total revenue when prices change.
	D)	exactly the same as the slope of the demand curve.

7.	Figure: Price Elasticity of Demand Refer to the figure. Which of the four demand curves has the greatest responsiveness to price changes?
	A)	A
	B)	B
	C)	C
	D)	D

8.	Which of the following factors causes a demand curve to become more elastic over time?
	A)	New substitutes for the product are discovered.
	B)	New and important uses for the product are discovered.
	C)	More producers begin to produce the product.
	D)	More consumers acquire a desire for the product.

9.	Which good below might be expected to have the most inelastic demand curve?
	A)	salt
	B)	women’s blouses from Walmart
	C)	potato chips
	D)	Tylenol

10.	Which of the following is a reason why the demand curve for an item would be more elastic?
	A)	The item is a necessity.
	B)	People’s incomes are very high relative to the cost of the item.
	C)	The item has many very good substitutes.
	D)	The cost of the item forms a very small part of consumers’ budgets.

11.	Why is the demand curve for oil rather inelastic?
	A)	There are few widely available good substitutes for oil.
	B)	To increase the production of oil requires a significant outlay of exploration and drilling costs.
	C)	The world supply of oil is low relative to demand.
	D)	The demand curve for oil is always perfectly inelastic.

12.	The elasticity of demand measures how sensitive the:
	A)	price is to a change in quantity demanded.
	B)	quantity demanded is to a change in price.
	C)	price is to a change in the quantity supplied.
	D)	demand is to a change in the number of suppliers.

13.	Which one of the following products would tend to have inelastic demand?
	A)	luxury sedans
	B)	candy
	C)	crude oil
	D)	Black Angus T-bone steak

14.	Which of the following would NOT make elasticity of demand for a good more elastic?
	A)	more substitutes
	B)	luxuries
	C)	large part of budget
	D)	less time

15.	The elasticity of demand measures:
	A)	the height of the demand curve.
	B)	how sensitive the quantity demanded is to a change in price.
	C)	how sensitive the price is to a change in demand.
	D)	the extent to which demand shifts in response to supply changes.

16.	The demand curve for oil is inelastic, meaning that the quantity of oil demanded:
	A)	rises by a lot even when the price of oil increases by only a little.
	B)	rises by only a little even when the price of oil increases by a lot.
	C)	falls by a lot even when the price of oil increases by only a little.
	D)	falls by only a little even when the price of oil increases by a lot.

17.	The demand for oil is inelastic because there are:
	A)	many complements for oil in its major use.
	B)	few complements for oil in its major use.
	C)	many substitutes for oil in its major use.
	D)	few substitutes for oil in its major use.

18.	All of the following conditions would cause the demand curve for a good to be more elastic EXCEPT:
	A)	a longer time horizon.
	B)	the good is considered a luxury good.
	C)	the price of the good falls.
	D)	the good has many substitutes.

19.	Figure: Elasticity and Quantity Demanded Refer to the figure. An increase in price from $40 to $50 would cause the change in quantity demanded for D₁ to be:
	A)	greater than the change in quantity demanded for D₂ so D₁ is more elastic than D₂.
	B)	greater than the change in quantity demanded for D₂ so D₂ is more elastic than D₁.
	C)	less than the change in quantity demanded for D₂ so D₁ is more inelastic than D₂.
	D)	less than the change in quantity demanded for D₂ so D₂ is more inelastic than D₁.

20.	The price of wheat increases, but few people cut back on their consumption of bread because:
	A)	the price of bread is a small portion of the budget, and thus the demand for bread is inelastic.
	B)	the price of bread is a large portion of the budget, and thus the demand for bread is elastic.
	C)	change in the price of wheat does not affect the price of bread.
	D)	None of the answers is correct.

21.	If the price of gasoline in this country were expected to rise due to a permanent increase in the tax on gasoline, which of the following would you expect to happen?
	A)	The demand for gasoline would become more elastic.
	B)	The demand for gasoline would decrease as a result of the higher price.
	C)	Producers will have less of an incentive to supply gasoline as a result of the higher taxes.
	D)	The elasticity of demand will not change since gasoline is a necessary good.

22.	If Major League Baseball ticket prices rise by 15 percent, the number of tickets sold falls by 5 percent. The elasticity of demand is:
	A)	–3.
	B)	–1/3.
	C)	–7.5.
	D)	–0.75.

23.	A 4 percent increase in the price of beer will cause a 1 percent decline in the quantity of beer demanded. The demand for beer is:
	A)	elastic.
	B)	unitary elastic.
	C)	inelastic.
	D)	elastic at 4 (in absolute value).

24.	The elasticity of demand for a good is –0.75. A 4 percent increase in price will cause a:
	A)	3 percent decrease in quantity demanded.
	B)	5.33 percent increase in quantity demanded.
	C)	5.33 percent decrease in quantity demanded.
	D)	0.19 percent decrease in quantity demanded.

25.	If the price of Good X rises from $4 to $5, and the quantity demanded of it falls from 200 units to 180 units, the absolute value of the price elasticity of demand is:
	A)	2.1.
	B)	0.47.
	C)	1.4.
	D)	0.4.

26.	If the price of Good Y falls from $10 to $8, and the quantity demanded of it rises from 1,000 units to 1,200 units, the price elasticity of demand expressed in absolute value is:
	A)	1.00.
	B)	0.20.
	C)	0.82.
	D)	1.22.

27.	If the price elasticity of demand is 2 in absolute value, then when the price of Good X rises by 25 percent:
	A)	the quantity demanded of it rises by 50 percent.
	B)	the quantity demanded of it falls by 50 percent.
	C)	the quantity demanded of it rises by 12.5 percent.
	D)	the quantity demanded of it falls by 12.5 percent.

28.	If the price elasticity of demand is 0.5, then when the price of Good X rises by 20 percent:
	A)	the quantity demanded of it rises by 40 percent.
	B)	the quantity demanded of it rises by 10 percent.
	C)	the quantity demanded of it falls by 10 percent.
	D)	the quantity demanded of it falls by 40 percent.

29.	If the price of ice cream changes by 30 percent and the quantity demanded changes by 75 percent, what is the absolute value of demand elasticity?
	A)	2.5, so demand is inelastic
	B)	0.4, so demand is inelastic
	C)	0.4, so demand is elastic
	D)	2.5, so demand is elastic

30.	The price of cigars is $10, with a quantity demanded of 1,000 per day. If the price increases to $12, the quantity demanded declines to 800 per day. What is the absolute value of elasticity of demand?
	A)	1.00
	B)	0.82
	C)	1.22
	D)	12.2

31.	If an increase in the price of oil by 10 percent would cause the quantity demanded for oil to fall by 5 percent, the elasticity of demand for oil in absolute terms is:
	A)	10.
	B)	5.
	C)	2.
	D)	0.5.

32.	The demand curve is inelastic if the absolute value of the elasticity is:
	A)	greater than 1.
	B)	greater than 0.
	C)	less than 1.
	D)	equal to 1.

33.	Total revenue is:
	A)	price × quantity.
	B)	quantity/price.
	C)	the elasticity of demand X price.
	D)	price + quantity.

34.	Marge tutors English students. If she raises rates, her revenues increase. Brad tutors biology students. If he lowers rates, his revenues increase. Which of the following is TRUE?
	A)	Marge’s demand is elastic, and Brad’s demand is inelastic.
	B)	Marge’s demand is inelastic, and Brad’s demand is elastic.
	C)	Marge’s demand is elastic, and Brad’s demand is elastic.
	D)	Marge’s demand is inelastic, and Brad’s demand is inelastic.

35.	Figure: Elasticity and Total Revenue Refer to the figure. If price falls from $60 to $40, total revenue goes ________, so demand is ________.
	A)	down by $100; inelastic
	B)	down by $480; elastic
	C)	up by $360; inelastic
	D)	up by $120; elastic

36.	When the demand curve for a good is unit elastic, raising the price of the good by 25 percent will change the revenue of the firm by:
	A)	125 percent.
	B)	100 percent.
	C)	25 percent.
	D)	0 percent.

37.	Figure: Elasticity and Revenue Refer to the figure. When the price of the product rises from $4 to $6, the total revenue changes by the area(s) represented by:
	A)	F.
	B)	F – E.
	C)	F – (E + B).
	D)	F + D + A.

38.	Assume that the supply curve for a good is fixed at 100 units. Now suppose that the demand curve for the good increases such that the equilibrium price rises from $20 to $30. How does total revenue for the sale of this product change?
	A)	Total revenue rises by $1,000.
	B)	Total revenue does not change.
	C)	Total revenue rises by $3,000.
	D)	Total revenue rises by $10.

39.	If demand is inelastic, a price ________ causes ________ in total revenue.
	A)	decrease; a decrease
	B)	decrease; an increase
	C)	increase; a decrease
	D)	increase; no change.

40.	If demand is elastic, a price ________ causes ________ in total revenue.
	A)	decrease; a decrease
	B)	increase; an increase
	C)	decrease; an increase
	D)	increase; no change.

41.	What happens to total revenue when demand is unit elastic and the price changes?
	A)	Revenues increase when the price increases.
	B)	Revenues remain unchanged.
	C)	Revenues decrease when the price increases.
	D)	The change in revenues cannot be estimated.

42.	If demand is inelastic then an increase in price would cause a _____ in the quantity demanded and a(n) _____ in total revenue:
	A)	decrease; increase
	B)	decrease; decrease
	C)	increase; increase
	D)	increase; decrease

43.	If the demand for a good is estimated to be _____, then firms producing the good will experience an increase in total revenue if prices fall.
	A)	.05
	B)	.75
	C)	1
	D)	2.5

44.	The manager of a company notices that the company’s total revenue would increase if she raised the price of the company’s product. Accordingly, the manager can assert that the demand for the company’s product is:
	A)	elastic.
	B)	inelastic.
	C)	unit elastic.
	D)	perfectly elastic.

45.	Figure: Price Increase and Elasticity Refer to the figure. If price increases from $10 to $20, total revenue will:
	A)	increase by $800 so the demand curve must be inelastic.
	B)	increase by $100 so the demand curve must be inelastic.
	C)	decrease by $800 so the demand curve must be elastic.
	D)	decrease by $100 so the demand curve must be elastic.

46.	Figure: Price Decrease and Elasticity Refer to the figure. If price decreases from $20 to $10, total revenue will:
	A)	decrease by $1,500, so the demand curve is inelastic.
	B)	decrease by $2,500, so the demand curve is inelastic.
	C)	increase by $1,500, so the demand curve is elastic.
	D)	increase by $2,500, so the demand curve is elastic.

47.	The elasticity of demand measures:
	A)	whether consumers will buy more or less as the price increases.
	B)	how much less of a good or service consumers will buy when the price increases.
	C)	a supplier’s estimate of market demand.
	D)	how consumers substitute across goods when the price of one good increases.

48.	The more quantity demanded responds to a change in the price of that good the _____ is for that good.
	A)	more elastic demand
	B)	less elastic demand
	C)	more elastic supply
	D)	less elastic supply

49.	The elasticity of demand measures:
	A)	how responsive price is to a change in the quantity demanded of a good or service.
	B)	how much value consumers place on each unit of the good or service.
	C)	the rate of change of demand in relation to supply.
	D)	how responsive quantity demanded is to a change in the price of a good or service.

50.	When comparing two linear demand curves at a common point, the flatter curve is:
	A)	more normal.
	B)	less responsive.
	C)	more elastic.
	D)	less elastic.

51.	The elasticity of demand measures:
	A)	how responsive quantity demanded is to a change in price.
	B)	the percent change in quantity demanded.
	C)	the percent change in price.
	D)	the percent change in quantity supplied divided by the percent change in price.

52.	If two linear demand (or supply) curves run through a common point, then at any given quantity, the curve that is steeper is more:
	A)	elastic.
	B)	inelastic.
	C)	responsive.
	D)	resilient.

53.	The price of good X increases from $55 to $60, and quantity demanded decreases from 500 to 400. The price of good Y increases from $55 to $60, and quantity demanded decreases from 500 to 475. Given this information, the:
	A)	consumers who buy good X are less sensitive to price changes than consumers who buy good Y.
	B)	demand curve for good X is less elastic than the demand curve for good Y.
	C)	demand curve for good X is more elastic than the demand curve for good Y.
	D)	demand curves for good X and good Y violate the law of demand.

54.	To examine how responsive consumers are to price changes, economists measure:
	A)	the elasticity of demand.
	B)	mean household income.
	C)	median household income.
	D)	key economic indicators such as unemployment, inflation, and economic growth.

55.

Table: Demand Curves

Demand Curve			Q_d at P = $90		Q_d at P = $100
	A	100		97
	B	100		96
	C	100		94
	D	100		98

In the table, which demand curve is most price elastic over the range of prices considered?

demand curve A

demand curve B

demand curve C

demand curve D

56.	The fundamental determinant of the elasticity of demand for a good is:
	A)	the opportunity cost of producing the good.
	B)	the value that consumers place on one more unit of the good.
	C)	how easy it is to substitute the good for another.
	D)	the number of consumers in the market.

57.	The demand for most goods tends to become ______ over time.
	A)	downward sloping
	B)	more vertical
	C)	more elastic
	D)	less elastic

58.	Over time, the demand for most goods becomes ______ elastic since we are able to ______.
	A)	more; develop more/better substitutes
	B)	less; develop more/better substitutes
	C)	more; produce more of the good or service
	D)	less; produce more of the good or service

59.	Which of the following probably has the most elastic demand?
	A)	gasoline
	B)	prescription medications
	C)	toilet paper
	D)	McDonald’s hamburgers

60.	Which of the following probably has the least elastic demand?
	A)	cable television
	B)	prescription medications
	C)	eggs
	D)	McDonald’s hamburgers

61.	Which of the following statements is TRUE?
	A)	Luxury goods tend to have more elastic demand curves.
	B)	Goods that are necessities tend to have more elastic demand curves.
	C)	The elasticity of demand for a particular brand of product equals the elasticity of demand for the product category.
	D)	Goods with more substitutes tend to have a lower elasticity of demand.

62.	The fundamental determinant of the elasticity of demand is:
	A)	how quickly per-unit costs increase with an increase in production.
	B)	tastes and preferences.
	C)	population.
	D)	the number and closeness of substitutes.

63.	If gasoline prices remain high long enough, people will arrange to do more telecommuting. This would be an example of why the elasticity of:
	A)	supply for gasoline is higher in the long run.
	B)	supply for gasoline is lower in the long run.
	C)	demand for gasoline is higher in the long run.
	D)	demand for gasoline is lower in the long run.

64.	Are there more substitutes for Cheerios or for cereal in general? For which good is demand more elastic?
	A)	Cheerios; Cheerios
	B)	Cheerios; cereal
	C)	cereal; Cheerios
	D)	cereal; cereal

65.	Most people, when asked, cannot name the price of a canister of table salt at the grocery store within a factor of 25 percent. Which elasticity argument explains why?
	A)	Table salt has many substitutes; demand is highly elastic.
	B)	Expenditures on table salt make up a tiny fraction of the average person’s budget; demand is highly inelastic.
	C)	Most people make their salt consumption decisions in the short run.
	D)	People are loyal to their specific brands of salt.

66.	Why might the demand for massages be more elastic than the demand for chiropractic adjustments?
	A)	Relative to massages, there are more substitutes for chiropractic adjustments.
	B)	People get massages in the short run and chiropractic adjustments in the long run.
	C)	Massages are much cheaper than chiropractic adjustments.
	D)	Massages tend to be luxuries and chiropractic adjustments tend to be necessities.

67.	A good with many substitutes will have a _____ curve that is relatively _____ elastic than a good with few substitutes.
	A)	supply; less
	B)	supply; more
	C)	demand; less
	D)	demand; more

68.	In 2005, Ireland began taxing residents on how much garbage they threw away in an effort to promote recycling. In response, residents began burning trash (which is environmentally more harmful and resulted in an increase in burn victims as people accidentally set themselves on fire). This story suggests that the elasticity of demand for trash collection was more ______ than lawmakers believed because ______ than previously thought.
	A)	elastic; the tax took up a larger part of residents’ budgets
	B)	elastic; there were more substitutes for trash collection
	C)	inelastic; the tax took up a smaller part of residents’ budgets
	D)	inelastic; there were fewer substitutes for trash collection

69.	The demand for Michelin tires is ______ elastic than the demand for tires, and the demand for chocolate is ______ elastic than the demand for Godiva chocolate.
	A)	more; more
	B)	less; more
	C)	less; less
	D)	more; less

70.	There are ______ substitutes for oil, so the elasticity of demand for oil is ______ elastic.
	A)	few; very
	B)	few; not very
	C)	many; perfectly
	D)	many; very

71.	The most important determinant of the elasticity of demand is the:
	A)	number of consumers.
	B)	number of substitutes.
	C)	size of the population.
	D)	level of income in the economy.

72.	The availability of fewer substitutes for a good means its demand curve:
	A)	becomes less elastic.
	B)	becomes more elastic.
	C)	maintains the same elasticity.
	D)	changes elasticity in an indeterminate direction.

73.	The long-run demand for oil ______ the short-run demand for oil.
	A)	is more elastic than
	B)	is less elastic than
	C)	is equally elastic to
	D)	differs in elasticity in an indeterminate direction compared with

74.	Demand for a specific brand ______ demand for the corresponding product category.
	A)	is more elastic than
	B)	is less elastic than
	C)	is equally elastic to
	D)	differs indeterminately from

75.	A higher income tends to make demand for a given good ______ elastic.
	A)	more
	B)	less
	C)	equally
	D)	indeterminately

76.	Necessities tend to have a(n) ______ demand than luxuries.
	A)	more elastic
	B)	more inelastic
	C)	equally elastic
	D)	equally inelastic

77.	If the absolute value of the price elasticity of demand for a good is 1.5, the good has a(n):
	A)	elastic demand.
	B)	inelastic demand.
	C)	unit elastic demand.
	D)	unit inelastic demand.

78.	A good with an absolute value of the price elasticity of demand of 1.0 is classified as:
	A)	elastic.
	B)	inelastic.
	C)	unit elastic.
	D)	perfectly inelastic.

79.	A good with an absolute value of the price elasticity of demand of 0.5 has:
	A)	an elastic demand.
	B)	an inelastic demand.
	C)	unit elastic demand.
	D)	perfectly inelastic demand.

80.	Economists categorize price elasticity of demand greater than 1 as:
	A)	elastic.
	B)	inelastic.
	C)	unit elastic.
	D)	normal.

81.	The elasticity of demand is always negative because:
	A)	of the Law of Demand: when price goes up, quantity demanded goes down.
	B)	of the Law of Demand: when price goes down, quantity demanded goes down.
	C)	when demand increases, the price goes up.
	D)	when demand increases, the price goes down.

82.	Suppose that along a given demand curve, price goes up by 10 percent, decreasing quantity demanded by 5 percent. The price elasticity of demand is:
	A)	50.
	B)	–2.
	C)	–1/2.
	D)	impossible to calculate without specific prices and quantities.

83.	If the price elasticity of demand is –1.2, economists would say the demand is:
	A)	elastic.
	B)	inelastic.
	C)	unit elastic.
	D)	unelastic.

84.	Suppose the price of a good rises from $10 to $20 and quantity demanded falls from 500 to 400. If you calculate the elasticity of demand WITHOUT using the midpoint method, the answer would be _____. If you calculate the elasticity of demand WITH the midpoint method, the answer would be _____. Economists say _____ when calculating elasticity.
	A)	–1/2; –1/3; use the midpoint method
	B)	–1/3; –1/5; do not use the midpoint method
	C)	–1/4; –1/4; it doesn’t matter which method you use
	D)	–1/5; –1/3; use the midpoint method

85.	On October 1, 2009, the Nintendo Wii’s Japanese price dropped from ¥25,000 to ¥20,000. In the three months after the price drop, Japanese sales of the Wii were approximately 1,040,000. Twelve months earlier, over the same interval at the high price, sales totaled 890,000. Using the midpoint method, what is the absolute value of the price elasticity of demand of a Wii console? Is it an elastic or inelastic good?
	A)	1.43; inelastic
	B)	0.7; inelastic
	C)	1.43; elastic
	D)	0.7; elastic

86.	If a 4 percent increase in the price of pepper results in a 1 percent decrease in pepper sales, what is the absolute value of the price elasticity of demand for pepper? Is it elastic or inelastic?
	A)	4; elastic
	B)	0.25; elastic
	C)	4; inelastic
	D)	0.25; inelastic

87.	If the price of electronic readers falls 6 percent and quantity demanded rises by 9 percent, the elasticity of demand is ______ in absolute value, so demand is ______.
	A)	3.0, elastic
	B)	15; inelastic
	C)	0.67; inelastic
	D)	1.5; elastic

88.

Table: Elasticities

	I		II		III		IV
\|E_d \| > 1, elastic		\|E_d \| > 1, inelastic		\|E_d \| > 1, unit elastic		\|E_d \| > 1, elastic
\|E_d \| < 1, inelastic		\|E_d \| < 1, elastic		\|E_d \| < 1, elastic		\|E_d \| < 1, unit elastic
\|E_d \| = 1, unit elastic		\|E_d \| = 1, perfectly elastic		\|E_d \| = 1, inelastic		\|E_d \| = 1, inelastic

Which column in the table is correct?

Column I

Column II

Column III

Column IV

89.	Figure: Demand 1 In the diagram, what is the elasticity of demand between a price of $100 and $200? Use the midpoint method of calculation to find your answer.
	A)	–1.8.
	B)	–0.9.
	C)	–0.6.
	D)	–0.2.

90.	Use the midpoint method to answer this question. When a good’s price increases from $20 to $25 and its quantity demanded decreases from 100 to 75, the elasticity of demand for that good is:
	A)	unit elastic.
	B)	inelastic.
	C)	perfectly inelastic.
	D)	elastic.

91.	In the market for backpacks, 100 backpacks are sold at $40 each. Then a fall in wages results in sales of 500 backpacks at a price of $20 each. Using the midpoint method, what is the absolute value of the elasticity of demand for backpacks?
	A)	0.125
	B)	0.5
	C)	2
	D)	8

92.	If the demand for a good is elastic, then:
	A)	revenues increase when the price goes up.
	B)	revenues decrease when the price goes up.
	C)	any change in price is matched by an equal and opposite percentage change in quantity, so revenues stay the same.
	D)	revenues decrease regardless of the direction of the price change.

93.	If the demand for a good is unit elastic, then:
	A)	revenues increase when the price goes up.
	B)	revenues decrease when the price goes up.
	C)	any change in price is matched by an equal and opposite percentage change in quantity, so revenues stay the same.
	D)	revenues decrease regardless of the direction of the price change.

94.	If the demand for a good is inelastic, then:
	A)	revenues increase when the price goes up.
	B)	revenues decrease when the price goes up.
	C)	any change in price is matched by an equal and opposite percentage change in quantity, so revenues stay the same.
	D)	revenues decrease regardless of the direction of the price change.

95.	If the demand for heroin is inelastic and heroin users get the money to pay for heroin by committing crimes, policymakers who want to reduce crime should:
	A)	make it harder to find heroin.
	B)	tax heroin.
	C)	try to lower the price of heroin.
	D)	try to raise the price of heroin.

96.	If the supply of rental housing increases causing its price to fall and apartment dwellers move into bigger apartments that cost the same as their old ones, we can infer that the:
	A)	demand for apartments is elastic.
	B)	supply of apartments is elastic.
	C)	demand for apartments is unit elastic.
	D)	demand for apartments is inelastic.

97.	Why do revenues increase when producers decrease the price of an elastically demanded good?
	A)	Increased sales more than make up for the loss in revenue per unit sold.
	B)	Marginal costs decrease when the price of an elastically demanded good decreases.
	C)	Marginal benefits increase when the price of an elastically demanded good decreases.
	D)	They don’t. Revenues increase when the price of an inelastic good decreases.

98.	Walter provides lawn-cutting services and notices that his total revenue increases when he cuts prices. The elasticity of demand for his services is:
	A)	unit elastic.
	B)	inelastic.
	C)	perfectly inelastic.
	D)	elastic.

99.	When demand is ______, an increase in price ______ total revenue.
	A)	inelastic; raises
	B)	inelastic; lowers
	C)	unit elastic; raises
	D)	elastic; raises

100.	In the elastic portion of a linear demand curve, firm revenue ______ when price falls.
	A)	increases
	B)	decreases
	C)	remains the same
	D)	changes in an indeterminate direction

101.	In the inelastic portion of a linear demand curve, firm revenue ______ when price falls.
	A)	increases
	B)	decreases
	C)	remains the same
	D)	changes in an indeterminate direction

102.	Increases in farm productivity have lowered the prices of many agricultural products. Farm revenues decreased, which implies that the:
	A)	demand for many agricultural products is inelastic.
	B)	costs of production increased.
	C)	demand for many agricultural products is elastic.
	D)	costs of production stayed the same.

103.	Compared to the 1980s, the price of computer chips is much lower today and revenues from computer chips are _____ because demand is _____.
	A)	higher; elastic
	B)	lower; inelastic
	C)	approximately unchanged; unit elastic
	D)	higher; inelastic

104.	In regards to the criminalization of drugs, Nobel prize–winning economist Gary Becker suggested:
	A)	raising the capital gains tax to help provide more government resources for the war on drugs.
	B)	that the government should make drugs legal and then place a tax on drugs to control their usage.
	C)	subsidizing the consumption of illegal drugs in an effort to avoid deadweight losses.
	D)	All of the answers are correct.

105.	Since roughly 1950, total revenues in the farming sector have ________, and since 1980 total revenues in computer chips have ________.
	A)	increased; decreased
	B)	decreased; decreased
	C)	increased; increased
	D)	decreased; increased

106.	Why is the war on drugs hard to win?
	A)	It is not a conventional war.
	B)	The government has not used adequate resources in the war.
	C)	Drug dealers get greater revenue following successful government prohibition efforts.
	D)	The demand for illegal drugs is too elastic.

107.	Farmers can produce more milk at lower cost, but Americans want to drink only so much milk. This suggests that the demand curve for milk is:
	A)	elastic.
	B)	inelastic.
	C)	unit elastic.
	D)	unaffected by elasticity.

108.	Since the demand curve for computer chips is elastic, a decrease in the price of computer chips caused by an increase in productivity will _____ revenue for the computer chip industry and make computer chips a _____ share of the American economy.
	A)	increase; larger
	B)	increase; smaller
	C)	decrease; larger
	D)	decrease; smaller

109.	Since the demand for illegal drugs is quite inelastic, an increase in the price of illegal drugs:
	A)	increases seller revenues.
	B)	decreases seller revenues.
	C)	does not affect seller revenues.
	D)	put an end to the use of illegal drugs.

110.	Nobel prize–winning economist Gary Becker suggested prohibited drugs should be legalized and then taxed. This would _____ the seller’s cost and _____ government revenue.
	A)	decrease; decrease
	B)	decrease; increase
	C)	increase; increase
	D)	increase; decrease

111.	If the demand for currently illegal recreational drugs is highly inelastic and these drugs became legal, prices would fall. An economist would expect which of the following to happen in response to the lower price?
	A)	Total spending on drugs would rise.
	B)	No one would follow the laws of economics anymore.
	C)	Many more people would become drug users.
	D)	Not many more people would become drug users.

112.	Which statement about the computer chip market is TRUE?
	A)	An increase in productivity shifted the supply curve to the left, driving up the price.
	B)	Computer chip demand is estimated to be unit elastic, which explains why the market has not expanded as production technology has improved.
	C)	Productivity increases in computer chips caused revenues to increase over time because the demand for computer chips is elastic.
	D)	There are limited uses for computer chips so demand is inelastic.

113.	Figure: Demand 2 In the figure where S₁ is the supply of drugs with no prohibition and S₂ is the supply of drugs with prohibition, the area that represents total revenue with drug prohibition is ______, and the area that represents total revenue with no prohibition is ______.
	A)	A + C + D; B + D
	B)	C + D; A + C
	C)	A + C; C + D
	D)	B + D; A + C

114.	Extensive flooding in the Midwest decreases the world supply of corn. If corn is inelastically demanded, what will happen to total revenues from corn production?
	A)	They will rise.
	B)	They will fall.
	C)	They will remain the same.
	D)	They will change in an indeterminate direction.

115.	A new per unit subsidy for almond production in the United States increases the world supply of almonds. If almonds are inelastically demanded, what will happen to total revenues from almond production?
	A)	They will rise.
	B)	They will fall.
	C)	They will remain the same.
	D)	They will change in an indeterminate direction.

116.	A new per unit tax on yacht production decreases the supply of yachts. If yachts are elastically demanded, what will happen to total revenues from yacht production?
	A)	They will rise.
	B)	They will fall.
	C)	They will remain the same.
	D)	They will change in an indeterminate direction.

117.	A new per unit subsidy for hybrid car production increases the supply of hybrid cars. If hybrid cars are elastically demanded, what will happen to total revenues from hybrid car production?
	A)	They will rise.
	B)	They will fall.
	C)	They will remain the same.
	D)	They will change in an indeterminate direction.

118.	The per-unit cost of producing Tic Tac candy does not change with increases in production, which means the:
	A)	demand for Tic Tac candy is elastic.
	B)	demand for Tic Tac candy is inelastic.
	C)	supply of Tic Tac candy is elastic.
	D)	supply of Tic Tac candy is inelastic.

119.	If the supply of a product is inelastic, a large price increase will:
	A)	not have an effect on the quantity supplied.
	B)	only bring about a small increase in quantity supplied.
	C)	cause the supply curve to increase by a nontrivial amount.
	D)	cause a modest decrease in supply.

120.	Which of the following statements is FALSE?
	A)	A perfectly inelastic supply curve is vertical.
	B)	The supply curve is more elastic in the long run than in the short run.
	C)	Products that take a long time to produce, such as decades-aged Scotch whiskey, have supply curves that are less responsive to price changes.
	D)	The supply curve of oil is more inelastic in Texas than it is globally.

121.	If the supply of raw materials is ________, increasing their production leads to ________ per-unit costs.
	A)	inelastic; higher
	B)	perfectly elastic; higher
	C)	perfectly elastic; lower
	D)	inelastic; lower

122.	Figure: Supply Elasticity Refer to the figure. Which one of the four supply curves has the greatest responsiveness to price changes?
	A)	Supply Curve A
	B)	Supply Curve B
	C)	Supply Curve C
	D)	Supply Curve D

123.	Why is the supply curve for oil rather inelastic?
	A)	There are not many widely available good substitutes for oil.
	B)	To increase the production of oil would require a very significant outlay in terms of costs of exploration and drilling.
	C)	The world supply of oil is decreasing.
	D)	The supply curve for oil is always perfectly inelastic.

124.	Why do supply curves tend to be more elastic over time?
	A)	Sellers have time to adjust and increase production.
	B)	Consumers have time to look for substitutes for the good.
	C)	Consumers have time to reduce their consumption of the good.
	D)	All of the answers are correct.

125.	The supply curve for oil is ________ because ________.
	A)	elastic; per unit costs do not increase when the quantity supplied increases
	B)	elastic; oil exploration and drilling is not expensive relative to revenues earned
	C)	inelastic; per-unit costs rise quickly when the quantity supplied increases
	D)	inelastic; oil exploration and drilling is not expensive relative to revenues earned

126.	A perfectly elastic supply curve is:
	A)	downward sloped.
	B)	vertical.
	C)	upward sloped.
	D)	horizontal.

Use the following to answer questions 127-128:

Figure: Elasticity of Supply

127.	(Figure: Elasticity of Supply) Refer to the figure. Which supply curve is the most inelastic?
	A)	S₁
	B)	S₂
	C)	S₃
	D)	S₄

128.	(Figure: Elasticity of Supply) Refer to the figure. Which supply curve is the most elastic?
	A)	S₁
	B)	S₂
	C)	S₃
	D)	S₄

129.	In which situation would you expect supply to be less elastic?
	A)	when looking at the long run
	B)	when looking at the global supply
	C)	when there are constant unit costs as the quantity produced increases
	D)	when looking at local supply

130.	Figure: Price Elasticity of Supply Refer to the figure. Compared to S₁, S₂ is more:
	A)	elastic since quantity supplied increases more with an increase in price.
	B)	elastic since quantity supplied increases less with an increase in price.
	C)	inelastic since quantity supplied increases more with an increase in price.
	D)	inelastic since quantity supplied increases less with an increase in price.

131.	Because producing more oil requires a significant increase in exploration and drilling costs, the supply curve for oil is:
	A)	relatively elastic.
	B)	relatively inelastic.
	C)	perfectly elastic.
	D)	unit elastic.

132.	The supply curve for manufactured goods is usually more elastic than raw materials because production of manufactured goods can often be:
	A)	increased at higher cost per unit by building more factories.
	B)	increased at lower cost per unit by building more factories.
	C)	decreased at the same cost per unit by building more factories.
	D)	increased at the same cost per unit by building more factories.

133.	A perfectly inelastic supply curve is a:
	A)	vertical line indicating that a very large increase in price will increase the quantity supplied.
	B)	vertical line indicating that even a very large increase in price won’t increase the quantity supplied.
	C)	horizontal line indicating that a very small increase in price will increase the quantity supplied.
	D)	horizontal line indicating that even a very small increase in price won’t increase the quantity supplied.

134.	All of the following would cause the supply curve to be more elastic EXCEPT:
	A)	production of the good requires only a small share of the market for inputs.
	B)	the good is primarily for local supply.
	C)	the good is a manufactured good.
	D)	there is potential difficulty to increasing the production of the good at constant unit cost.

135.	When production of a good can be expanded without significantly increasing the overall demand for its inputs:
	A)	supply for this good will tend to be more inelastic.
	B)	supply for this good will tend to be more elastic.
	C)	price for the good will be constant.
	D)	the elasticity of supply of the product will equal the elasticity of supply of the inputs.

136.	Supply tends to be ________ in local markets, and ________ in global markets.
	A)	elastic; inelastic
	B)	inelastic; elastic
	C)	unit elastic; perfectly inelastic
	D)	perfectly inelastic; unit elastic

137.	Which of the following explains why local supply tends to be more elastic than global supply?
	A)	As price increases in a certain locale, it is often costly to transport more goods to that particular area, and hence supply is more elastic.
	B)	Local suppliers are small in relation to the global market.
	C)	The statement is false; local supply tends to be less elastic than global supply.
	D)	As price increases in a certain locale, goods can be brought in from other areas, which is not possible on a global scale.

138.	If the price of cocoa rises by 20 percent, the quantity supplied of cocoa rises by 4 percent. What is the elasticity of supply?
	A)	5
	B)	2
	C)	0.2
	D)	0.008

139.	If the elasticity of supply is 2.0, what happens to quantity supplied following a 7 percent increase in price? Quantity supplied increases:
	A)	3.5 percent.
	B)	2.9 percent.
	C)	14 percent.
	D)	9 percent.

140.	If the price of Good Y falls from $10 to $8, and the quantity supplied of it falls from 1,000 units to 600 units, the price elasticity of supply is:
	A)	2.67.
	B)	–2.67.
	C)	2.25.
	D)	–2.25.

141.	If the price elasticity of supply is 4, an increase in the price of Good X by 5 percent causes the quantity supplied of it to:
	A)	rise 20 percent.
	B)	fall 20 percent.
	C)	rise 1.25 percent.
	D)	fall 1.25 percent.

142.	If the price elasticity of supply is 0.75, then when the price of Good Y falls by 10 percent, the quantity supplied of Good Y:
	A)	rises by 7.5 percent.
	B)	rises by 133 percent.
	C)	falls by 7.5 percent.
	D)	falls by 133 percent.

143.	If the price of cocoa rises by 10 percent and the elasticity of supply is 0.5, then the quantity supplied:
	A)	increases by 5 percent.
	B)	increases by 20 percent.
	C)	decreases by 5 percent.
	D)	decreases by 20 percent.

144.	If the price of coffee falls by 10 percent and the quantity supplied of coffee falls by 1.5 percent, then the elasticity of supply of coffee is:
	A)	10.
	B)	1.5.
	C)	0.15.
	D)	6.67.

145.	The elasticity of supply measures:
	A)	how responsive price is to a change in the quantity supplied of a good or service.
	B)	how much value suppliers place on each unit of the good or service.
	C)	the rate of change of supply in relation to demand.
	D)	how responsive the quantity supplied is to a change in the price of a good or service.

146.	The supply of ancient Egyptian papyrus manuscripts is probably:
	A)	elastic.
	B)	inelastic.
	C)	unit elastic.
	D)	hyperelastic.

147.	Which of the following mostly likely has a perfectly inelastic supply curve?
	A)	seeds for fruit trees
	B)	health insurance
	C)	prehistoric cave paintings
	D)	Star Wars movies

148.	Istanbul’s Dolmabaçe Palace, built near the end of the Ottoman Empire, rests on a former garden that was created in the eighteenth century at great expense by filling in a bay. (Dolmabaçe means “filled-in garden” in Turkish.) What does the Dolmabaçe Palace teach us about the elasticity of supply of land?
	A)	It is perfectly elastic.
	B)	It is not perfectly elastic, but close to it.
	C)	It is perfectly inelastic.
	D)	It is not perfectly inelastic, but close to it.

149.	For a price increase from $100 to $110, supply is the most elastic when quantity supplied:
	A)	increases from 20 to 30.
	B)	increases from 20 to 40.
	C)	does not change.
	D)	increases from 20 to 22.

150.	The elasticity of supply measures:
	A)	how quickly a surplus is eliminated.
	B)	how quantity supplied responds to price changes.
	C)	the profit margin of sellers’ products.
	D)	the costs of changing production methods.

151.

Table: Supply Curve

Supply Curve			Q at P = $90		Q at P = $100
	A	100		101
	B	100		103
	C	100		105
	D	100		104

In the table, which supply curve is most price elastic over the range of prices considered?

supply curve A

supply curve B

supply curve C

supply curve D

152.	The elasticity of supply measures:
	A)	the percent change in quantity demanded divided by the percent change in price.
	B)	the percent change in quantity supplied.
	C)	the percent change in price.
	D)	how responsive the quantity supplied is to a change in price.

153.	The fundamental determinant of the elasticity of supply is:
	A)	how many substitute goods exist.
	B)	the price of the good.
	C)	how quickly the per-unit cost of production increases with an increase in production.
	D)	the rate of change of quantity demanded as compared to the quantity supplied.

154.	The supply of a good tends to be more elastic if:
	A)	a change in the price of the good causes only a small change in the quantity supplied.
	B)	the good is considered a necessary good.
	C)	production can be expanded without causing a big increase in the price of its inputs.
	D)	an increase in production has only a minimal impact on demand for the good.

155.	The supply of ______ tends to be more elastic.
	A)	luxury goods
	B)	raw materials
	C)	necessary goods
	D)	manufactured goods

156.	Because of aging requirements it takes many years to make good Scotch. If a technology were invented that made it possible to create good Scotch literally overnight, how would the short-run supply of good Scotch change?
	A)	It would become more elastic.
	B)	It would become less elastic.
	C)	Its elasticity would remain the same.
	D)	It is impossible to say anything about the change.

157.	U.S. Highway 12 is part of a crucial two-lane artery from the seaports in Washington State to the tar sands in Canada. Extracting oil from the tar sands requires very large equipment and transporting it takes up both lanes of U.S. Highway12. In August of 2010, Idaho granted ConocoPhilips a road permit that allowed it to transport four oil-processing units. Without this permit, ConocoPhilips would have had to transport those units a much longer distance to get them to their destination. If permits for this highway were not allowed, how would that affect the elasticity of which curve in the market for oil?
	A)	The supply curve would become more elastic.
	B)	The supply curve would become less elastic.
	C)	The demand curve would become more elastic.
	D)	The demand curve would become less elastic.

158.	In Medieval Europe, there were two basic types of waterwheel. In an undershot wheel, water flows below the wheel to turn it. In an overshot wheel, water flows over the top of the wheel to turn it. Because the overshot wheel cooperates better with gravity, it is more efficient than an undershot wheel but it also requires a hill. Which wheel has a more inelastic supply curve and why?
	A)	An undershot wheel, because Europe is much smaller than the rest of the world.
	B)	An undershot wheel, because it was less efficient than the overshot wheel.
	C)	An overshot wheel, because it was more efficient than the undershot wheel.
	D)	An overshot wheel, because it was more difficult to find locations to build them.

159.	In The Beautiful Tree, Dr. James Tooley describes how he found, in developing country after developing country, countless private schools aimed at educating the poor’s children. The schools are completely self-funded, relying on tuition to pay salaries and upkeep. Although the teachers are effective, the schools are very basic: large playgrounds and modern building construction are very rare. Based on this information, what is the elasticity of the supply of schools?
	A)	Elastic, because these schools only exist in the short run.
	B)	Elastic, because these schools are relatively easy to establish.
	C)	Inelastic, because these schools are located all over the world.
	D)	Inelastic, because these schools must negotiate with teacher unions.

160.	Figure: Supply Elasticity Refer to the figure. It shows two different supply curves. Based on the graph, which statement is TRUE?
	A)	The same price increase would cause a bigger increase in the quantity supplied along curve A.
	B)	The same price increase would cause a bigger increase in the quantity supplied along curve B.
	C)	Curve A reflects a less responsive supply.
	D)	If comparing responsiveness from a common point, like the intersection, we can conclude that supply curve B is more elastic.

161.	If the price of aluminum increases 4 percent, and the quantity supplied increases by 1 percent, what is the price elasticity of supply?
	A)	–4.0
	B)	4.0
	C)	0.25
	D)	3.0

162.	If the price of oil increases from $80 to $90 per barrel, the quantity supplied increases from 100 to 105 million barrels per day. What is the price elasticity of supply using the midpoint method?
	A)	0.41
	B)	0.22
	C)	0.15
	D)	0.05

163.	Economic theory suggests that permanent gun buyback programs:
	A)	succeed in reducing the number of guns in circulation.
	B)	make guns less valuable.
	C)	increase the quantity of low-quality guns in circulation but decrease the quantity of high-quality guns in circulation.
	D)	increase the number of guns in circulation.

164.	Economic theory suggests that gun buyback programs:
	A)	are effective in reducing the number of guns on city streets.
	B)	do not reduce the number of guns on city streets.
	C)	are most effective if the supply curve of guns is perfectly elastic.
	D)	reduce the demand for new and better-functioning guns.

165.	Gun buyback programs will be less effective if the:
	A)	supply of guns is more elastic.
	B)	supply of guns is more inelastic.
	C)	demand for guns is more elastic.
	D)	demand for guns is more inelastic.

166.	When the supply curve in the Sudanese slave trade is perfectly ________, every slave bought by the redeemers results in/is ________ held in captivity.
	A)	inelastic; more slaves
	B)	inelastic; one less slave
	C)	inelastic; redeemed at a lower price than expected
	D)	elastic; redeemed at a higher price than expected

167.	Evidence from the Sudan indicates that the supply of slaves is likely:
	A)	perfectly elastic.
	B)	perfectly inelastic.
	C)	more elastic than inelastic.
	D)	more inelastic than elastic.

Use the following to answer questions 168-170:

Figure: Slave Redemption

168.	(Figure: Slave Redemption) Refer to the figure. Assume the graph illustrates the Sudanese slave trade. When slave redeemers enter the market, the price of slaves:
	A)	increases to $40.
	B)	decreases to $17.
	C)	stays unchanged at $40.
	D)	exceeds $40.

169.	(Figure: Slave Redemption) Refer to the figure. Assume the graph illustrates the Sudanese slave trade. When slave redeemers enter the market, the total number of freed slaves is ________ and the net number of freed slaves is ________.
	A)	1,500; 500
	B)	1,000; 400
	C)	1,100; 100
	D)	500; 1,000

170.	(Figure: Slave Redemption) Refer to the figure. Assume the graph illustrates the Sudanese slave trade. When slave redeemers enter the market, the number of slaves remaining in captivity is:
	A)	100.
	B)	400.
	C)	500.
	D)	1,100

171.	Figure: Slave Redemption with Perfectly Elastic Supply Refer to the figure. Assume the graph illustrates the Sudanese slave trade. If the supply curve is perfectly elastic as it is in the graph, a rise in the demand for slaves (from D₁ to D₂) causes:
	A)	the number of people in slavery to fall to zero after the redemption program.
	B)	the price of slaves to remain unchanged.
	C)	900 additional people to enter slavery temporarily before they are released.
	D)	the supply of slaves in Sudan to decrease.

Use the following to answer questions 172-173:

Figure: Slave Redemption and Elasticity

172.	(Figure: Slave Redemption and Elasticity) Refer to the figure. Assume the graph illustrates the Sudanese slave trade. How many new slaves are captured after the redemption program is installed?
	A)	1,400
	B)	800
	C)	400
	D)	1,000

173.	(Figure: Slave Redemption and Elasticity) Refer to the figure. Assume the graph illustrates the Sudanese slave trade. How many slaves are freed after the redemption program?
	A)	1,000
	B)	400
	C)	600
	D)	1,400

174.	Which of the following statements about the price elasticity of supply in the Sudanese slave trade is correct?
	A)	When the supply curve is more elastic, every slave bought by the redeemers is one fewer slave held in captivity.
	B)	When the supply curve is perfectly inelastic, every slave bought by the redeemers is one fewer slave held in captivity.
	C)	When the supply curve is less elastic, every slave bought by the redeemers is one additional enslaved person.
	D)	When the supply curve is more inelastic, every slave bought by the redeemers is one additional enslaved person.

175.	If the supply of a good is very elastic, then any increase in demand for the good will have a:
	A)	big impact on the price of the good.
	B)	very small impact on the price of the good.
	C)	very small impact on the equilibrium quantity exchanged.
	D)	limiting effect on the quantity sold.

176.	Gun buyback programs, such as the one instituted in Washington, D.C., tend to not be very effective because:
	A)	the supply of the types of guns exchanged is highly elastic.
	B)	the supply of the types of guns exchanged is not very elastic.
	C)	the programs tend to have a large impact on the price of guns on the street.
	D)	the programs simply end up decreasing the elasticity of supply.

177.	In 1808, when slavery in the United States was still legal, Congress banned the importation of new slaves. Under these circumstances, would a slave redemption campaign have worked well? Why?
	A)	Yes, because the supply of slaves was elastic.
	B)	Yes, because the supply of slaves was inelastic.
	C)	No, because the supply of slaves was elastic.
	D)	No, because the supply of slaves was inelastic.

178.	Suppose that a group of humans build an enormous space ship of fixed size and travel into outer space, never to return. They live on board the ship and allocate all goods on the ship using markets. As the population grows, the price of housing on board the ship will
	A)	remain constant.
	B)	fall rapidly.
	C)	grow more slowly than the quantity of housing supplied.
	D)	grow faster than the quantity of housing supplied.

179.	On June 14, 2011, the Delaware Senate approved a gun buyback program. The yearlong program would authorize the state to pay $100 for every gun turned over to police. What sort of guns should Delaware officials expect to get if this plan becomes law?
	A)	Small guns, usually used as self-defense in bad neighborhoods.
	B)	Heavy guns, usually used by criminals to support their illegal enterprises.
	C)	Nonworking guns, usually kept in someone’s back closet.
	D)	Guns that use a lot of bullets very quickly.

180.	Much of the world’s supply of palm oil (which is used in a variety of products including chocolate and soap) is grown in Indonesia on farms where rain forest once stood. To this day, farmers deforest the local jungle to plant more oil palms (Elaeis guineensis). Suppose an environmental group decided to combat this deforestation by buying local rain forest areas. Would this strategy be more or less successful than slave redemption programs and why?
	A)	Less successful, because farmers would respond by creating more rain forest.
	B)	More successful, because it is more likely to drastically increase the price of rain forests.
	C)	Less successful, because rain forest land has a perfectly inelastic supply curve.
	D)	More successful, because it is much more likely to discourage palm oil consumption.

Use the following to answer questions 181-182:

Figure: Gun Market

181.	(Figure: Gun Market) In the gun market shown, the buyback program purchases ______ guns.
	A)	1,670
	B)	3,730
	C)	6,000
	D)	2,060

182.	(Figure: Gun Market) In the gun market shown, the number of guns in the city that is having the gun buyback program is:
	A)	1,670.
	B)	3,730.
	C)	6,000.
	D)	2,060.

183.	Which statement is TRUE of the Sudanese slave trade and the actions of human rights groups?
	A)	Slave redemption programs are more effective with perfectly elastic supply.
	B)	Slave redemption programs can reduce the net number of slaves held in captivity but only by increasing the number of people who get enslaved.
	C)	Slave redemption programs can reduce the net number of slaves held in captivity by decreasing the demand for slaves.
	D)	Slave redemption programs are ineffective because the demand for slaves is perfectly inelastic, meaning that higher prices of slaves do not affect the quantity demanded.

184.	How does the price elasticity of supply for Henri Matisse paintings compare with the price elasticity of supply for Damien Hirst paintings? Note that Matisse is deceased, whereas Hirst still lives.
	A)	Matisse paintings likely have a higher price elasticity of supply.
	B)	Matisse paintings likely have a lower price elasticity of supply.
	C)	Matisse paintings and Hirst paintings likely have the same price elasticity of supply.
	D)	Matisse paintings and Hirst paintings likely differ in price elasticity of supply in an indeterminate direction.

185.	Suppose that large oil reserves are discovered off the coast of Cuba, and these reserves will increase the world’s supply of oil by 2.5 percent. If the elasticity of demand and supply of oil are 0.50 and 0.40, respectively, what happens to the price of oil?
	A)	It falls by 2.5 percent.
	B)	It falls by 25 percent.
	C)	It falls by 2.78 percent.
	D)	It falls by 36 percent.

186.	If the price elasticity of demand for a product is 1 in absolute value, and the price elasticity of supply of the same product is 1, what is the predicted percent change in price from a 1 percent increase in demand?
	A)	a rise in price of 0.5 percent
	B)	a rise in price of 2 percent
	C)	a fall in price of 0.5 percent
	D)	a fall in price of 2 percent

187.	If the price elasticity of demand for a product is 2 in absolute value, and the price elasticity of supply for the same product is 1, what is the predicted percent change in price from a 5 percent fall in the supply?
	A)	a 1.67 percent fall in price
	B)	a 1.67 percent rise in price
	C)	a 0.6 percent fall in price
	D)	a 0.6 percent rise in price

188.	When a shift in demand or supply occurs, economists can make a quick prediction of the change in price. The denominator of the simple price-change formula is the:
	A)	multiple of the elasticities of supply and demand.
	B)	sum of the elasticities of supply and demand.
	C)	difference between the elasticities of supply and demand.
	D)	percent change in either demand or supply.

189.	The elasticity of demand for oil is about 0.5, and the elasticity of supply is about 0.3. If the Arctic National Wildlife Refuge (ANWR) were drilled and the world supply of oil increased by 3 percent, what is the estimated percent change in the world price of oil?
	A)	–1.25 percent
	B)	–2.50 percent
	C)	–3.75 percent
	D)	Unknown

190.	The case for drilling oil in ANWR is strengthened when the:
	A)	price of oil is lower.
	B)	negative impact of drilling on the environment is greater.
	C)	price of oil is higher.
	D)	elasticity of demand for oil increases.

191.	If the elasticity of demand for oil is 0.5 and the elasticity of supply for oil is 0.3, then a 1 percent increase in the supply of oil would cause the price of oil to:
	A)	increase by 1.25 percent.
	B)	increase by 2.50 percent.
	C)	decrease by 1.25 percent.
	D)	decrease by 2.50 percent.

192.	If the elasticity of demand for cigarettes is 0.75 and the elasticity of supply for cigarettes is 1.25, then a 5 percent decrease in the demand for cigarettes would cause the price of cigarettes to:
	A)	increase by 2.5 percent.
	B)	increase by 5 percent.
	C)	decrease by 2.5 percent.
	D)	decrease by 5 percent.

193.	If both the supply of and the demand for a good are highly elastic, a shift of either curve will always result in
	A)	a decrease in price.
	B)	an increase in price.
	C)	a large change in quantity.
	D)	no change.

194.	The elasticity of demand for oil is –0.5 and the elasticity of supply is 0.20. If the demand for oil increases 10 percent, what happens to the price of oil?
	A)	It increases by 14 percent.
	B)	It decreases by 20 percent.
	C)	It increases by 8 percent.
	D)	It increases by 40 percent.

195.	Assume that demand decreases by 3 percent, the absolute value of price elasticity of demand is 1.0, and price elasticity of supply is 1.0. What is the percentage price change in this case?
	A)	–1.5
	B)	–0.5
	C)	0.5
	D)	1.5

196.	Assume that demand increases by 1 percent, the absolute value of price elasticity of demand is 1.0, and price elasticity of supply is 1.0. What is the percentage price change in this case?
	A)	–1.5
	B)	–0.5
	C)	0.5
	D)	1.5

197.	If the government raises the minimum wage by 6 percent, the number of people employed falls by 2%. What is the elasticity of employment with respect to the minimum wage?
	A)	–3.0
	B)	–0.33
	C)	–12
	D)	–0.0012

198.	The price of Good B increases by 4 percent, causing the quantity demanded of Good A to decrease by 6 percent. The cross-price elasticity of demand is ________, and the goods are ________.
	A)	1.5; substitutes
	B)	–1.5; complements
	C)	0.67; complements
	D)	–0.67; substitutes

199.	The quantity demanded for cosmetic surgery increased by 12 percent following a period of strong economic growth that raised consumer income by 4 percent. What type of good is cosmetic surgery?
	A)	It is a luxury good since the income elasticity of demand exceeds 1.
	B)	It is a normal good since the income elasticity is less than 1.
	C)	It is a necessity since the income elasticity of demand is equal to 1.
	D)	It is a supernormal good since the income elasticity is greater than 2.

200.	Good X and Good Y are related goods. When the price of Good X rises by 20 percent, the quantity demanded for Good Y falls by 40 percent. What is the cross-price elasticity?
	A)	2
	B)	4
	C)	–0.5
	D)	–2

201.	Good X and Good Y are related goods. When the price of Good X rises by 5 percent, the quantity demanded for Good Y rises by 15 percent. Calculate the cross-price elasticity.
	A)	3
	B)	–3
	C)	–0.3
	D)	0.3

202.	If the cross-price elasticity of demand of two goods is negative, we can conclude that the two goods are:
	A)	substitutes.
	B)	complements.
	C)	normal goods.
	D)	inferior goods.

203.	If the cross-price elasticity of demand of two goods is positive, we can conclude that the two goods are:
	A)	normal goods.
	B)	inferior goods.
	C)	substitutes.
	D)	complements.

204.	Tonya consumes 40 steaks a year when her yearly income is $40,000. After her income falls to $35,000 a year, she consumes only 35 steaks a year. Calculate her income elasticity of demand for steaks.
	A)	–1
	B)	1
	C)	–12.5
	D)	12.5

205.	Tonya consumes 10 boxes of ramen noodles a year when her yearly income is $40,000. After her income falls to $30,000 a year, she consumes 40 boxes of ramen noodles a year. Calculate her income elasticity of demand for ramen noodles.
	A)	4.2
	B)	–4.2
	C)	–2.25
	D)	2.25

206.	If the income elasticity of demand of a good is negative, we can conclude that the good is:
	A)	a normal good.
	B)	an inferior good.
	C)	a substitute.
	D)	a complement.

207.	If the income elasticity of demand of a good is positive, we can conclude that the good is:
	A)	a normal good.
	B)	an inferior good.
	C)	a substitute.
	D)	a complement.

208.	Figure: Midpoint Formula Refer to the figure. Based on the midpoint formula, what is the elasticity of demand between $40 and $60?
	A)	1.25.
	B)	2.5.
	C)	0.75.
	D)	4/5.

209.	The owner of an appliance store lowers the price of dishwashers from $400 to $350, which increases the number of dishwashers sold from 1,000 to 1,200. What is the elasticity of demand?
	A)	1.25
	B)	1.4
	C)	1.36
	D)	0.73

210.	The elasticity of demand for cigarettes is more inelastic in the long run than in the short run because it takes a long time for some people to quit smoking.
	A)	True
	B)	False

211.	Demand for necessities is inelastic, while demand for luxuries is elastic.
	A)	True
	B)	False

212.	When a good has fewer substitutes in consumption, is a small part of the consumer’s budget, and a long time has passed, demand for such a good is inelastic.
	A)	True
	B)	False

213.	Demand for necessities is elastic, while demand for luxuries is inelastic.
	A)	True
	B)	False

214.	The flatter the demand curve, the less is the elasticity of demand.
	A)	True
	B)	False

215.	The demand curve is elastic if an increase in price reduces the quantity demanded by only a little.
	A)	True
	B)	False

216.	The demand for oil would become less elastic if the price of oil increases by a significant amount for a long period of time.
	A)	True
	B)	False

217.	If a rising price leads to falling revenues, then demand is elastic.
	A)	True
	B)	False

218.	If a 3.67 percent increase in price causes a 1.97 percent decrease in quantity demanded, then total revenue must fall following an increase in price.
	A)	True
	B)	False

219.	Assume a product has an inelastic demand. If the producer of the good raises the price of the product, that producer’s total revenue will decrease.
	A)	True
	B)	False

220.	Assume a product has a rather elastic demand. If the producer of the good raises the price of the product, that producer’s total revenue will decrease.
	A)	True
	B)	False

221.	When demand is inelastic, total revenue goes down in proportion to a price increase.
	A)	True
	B)	False

222.	The elasticity of demand measures how responsive the price of a good is to a change in the demand.
	A)	True
	B)	False

223.	The demand for cigarettes tends to be very elastic given the addictive nature of cigarettes.
	A)	True
	B)	False

224.	The elasticity of demand measures how responsive consumers are to price changes. For example, when a small decrease in price leads to a large increase in quantity demanded, demand is considered elastic.
	A)	True
	B)	False

225.	The elasticity of demand for a particular good is constant across individuals.
	A)	True
	B)	False

226.	The demand for necessary goods tends to be less elastic.
	A)	True
	B)	False

227.	One of the determinants of the elasticity of demand is whether a good is a luxury or a necessity.
	A)	True
	B)	False

228.	The demand for fruit is more elastic than the demand for apples.
	A)	True
	B)	False

229.	The demand for Pepsi is more elastic than the demand for soda.
	A)	True
	B)	False

230.	Elasticity of demand is the percent change in quantity demanded divided by the percent change in price.
	A)	True
	B)	False

231.	Elasticity of demand is always negative.
	A)	True
	B)	False

232.	The midpoint method of calculating elasticity yields the same results as other methods.
	A)	True
	B)	False

233.	If the price elasticity of demand for cigarettes is –0.50 and the price of cigarettes increases 10 percent, the quantity demanded of cigarettes decreases by 50 percent.
	A)	True
	B)	False

234.	If two linear demand curves run through a common point, then at any given quantity the curve that is flatter is more elastic.
	A)	True
	B)	False

235.	The price elasticity of demand concept applies only when the price of a good increases.
	A)	True
	B)	False

236.	Operating along the elastic portion of a linear demand curve, revenue rises with price.
	A)	True
	B)	False

237.	Operating along the inelastic portion of a linear demand curve, revenue rises with price.
	A)	True
	B)	False

238.	When price increases and demand is elastic, revenue decreases.
	A)	True
	B)	False

239.	Consumers today spend less on food than they did in 1950 because demand for food is highly elastic.
	A)	True
	B)	False

240.	A firm’s revenue is price per unit times the quantity sold, so an increase in price decreases revenue if demand is elastic.
	A)	True
	B)	False

241.	Whether an increase in price leads to an increase or decrease in total revenue depends on the elasticity of supply.
	A)	True
	B)	False

242.	If the price elasticity of demand is 1 in absolute value, then a percentage drop in price will lead to an equal percentage increase in quantity demanded.
	A)	True
	B)	False

243.	Goods tend to be more elastic in the short run than in the long run.
	A)	True
	B)	False

244.	If the price of a good increases from $100 to $110 and quantity demanded decreases from 100 units to 90 units, the demand would be classified as unit elastic.
	A)	True
	B)	False

245.	If the price of a good falls from $20 to $10 and quantity demanded rises from 400 to 500, the demand would be classified as inelastic.
	A)	True
	B)	False

246.	Drug prohibition is likely to increase drug-industry revenue because the demand for drugs is inelastic.
	A)	True
	B)	False

247.	The demand for computer chips is inelastic so total revenue for the computer chip industry has increased with a decrease in the price of computer chips.
	A)	True
	B)	False

248.	The elastic demand curve for drugs makes the war on drugs hard to win.
	A)	True
	B)	False

249.	The war on drugs has caused the price of drugs to increase and this has decreased the total revenue of illegal drug producers.
	A)	True
	B)	False

250.	Suppose that it is extremely inexpensive to acquire additional acres of land to grow bananas. We would then expect that the elasticity of supply of bananas is elastic.
	A)	True
	B)	False

251.	The elasticity of supply measures how sensitive the supply curve is to a change in price.
	A)	True
	B)	False

252.	Similar to the elasticity of demand, the elasticity of supply tends to become more elastic in the long run.
	A)	True
	B)	False

253.	The fundamental determinant of the elasticity of supply is how quickly per-unit costs increase with an increase in production.
	A)	True
	B)	False

254.	If the price of music CDs increases by 10 percent and the quantity supplied increases by 20 percent, the elasticity of supply is equal to 2.0, perhaps indicating the ease of increased production at a relatively constant unit cost.
	A)	True
	B)	False

255.	With certain goods, such as high-quality Scotch whiskey, it is nearly impossible to increase output easily, suggesting a supply elasticity value greater than 1.
	A)	True
	B)	False

256.	Both the elasticities of demand and supply tend to be more elastic in the long-run.
	A)	True
	B)	False

257.	The supply of guitars in Alabama is more elastic than the supply of guitars in the United States.
	A)	True
	B)	False

258.	The supply of U.S. housing is more inelastic if most of the timber in the United States goes to housing construction.
	A)	True
	B)	False

259.	Supply is more elastic if it is easy to expand production at a constant unit cost.
	A)	True
	B)	False

260.	If two linear supply curves run through a common point, then at any given quantity the curve that is flatter is more elastic.
	A)	True
	B)	False

261.	Unlike demand, supply is less elastic in the long run.
	A)	True
	B)	False

262.	If the price of a good increases from $100 to $110 and quantity supplied increases from 500 units to 530 units, the supply would be classified as elastic.
	A)	True
	B)	False

263.	If the price of a good increases from $200 to $250 and quantity supplied increases from 200 units to 400 units, the supply would be classified as elastic.
	A)	True
	B)	False

264.	Government gun buyback programs designed to take guns off the street cause the demand for low-quality guns to increase.
	A)	True
	B)	False

265.	Consistent with economic logic, gun buyback programs have been very effective in reducing the number of guns in a city.
	A)	True
	B)	False

266.	A cross-price elasticity value that is negative will always indicate goods that are substitutes.
	A)	True
	B)	False

267.	A cross-price elasticity value that is positive will indicate goods that are substitutes.
	A)	True
	B)	False

268.

Figure: Elasticity of Swim Trunks

The demand for swim trunks appears in the figure. What is the elasticity of demand for swim trunks? Suppose that your swimwear business is currently overstocked with swim trunks. If you want to sell 18 percent more swim trunks, how much should you cut your price?

269.

The demand curves for Good A and Good B are given by

Q_a = 100 – P_a and Q_b = 50 – 0.2P_b,

where Q_a is the quantity demanded of Good A, P_a is the price of Good A, Q_b is the quantity demanded of Good B, and P_b is the price of Good B.

a. Graph the demand curve for both goods.

b. Which demand curve is more elastic?

c. If the price of both goods increases from $50 to $60, what happens to total revenue in each market?

d. Use the midpoint formula to calculate the elasticity of demand for both goods resulting from the price change in part c.

e. What do your elasticity of demand calculations in part d tell you about the elasticity of demand for Goods A and B?

270.	For each of the following goods would you expect the demand to be elastic or inelastic? Provide explanation for each of your rationales. a. oil b. Coca-Cola c. bread

271.

Consider a market that is described by the equations Q_d = 10 – 0.5P, and Q_s = –2 + 1.5P. What is the equilibrium price? What is the equilibrium quantity? If the supply curve shifts and the new supply equation is –4 + 1.5P, what are the new equilibrium price and the new equilibrium quantity? Calculate the price elasticity of demand. Is the demand curve between price 1 and price 2 inelastic or elastic?

272.

Figure: iPod Consumers

A local electronics store sells iPods for $100 per unit. The manager who took a lesson from his economics course in college decides to offer a 20 percent discount to students who can present their current student ID at purchase. Given the demand curves for regular and student customers, answer the following questions.

a. What will be the total revenue for both groups of customers if the store offers the discount?

b. For which group of customers is the demand more elastic?

c. What is the elasticity of demand between the prices of $100 and $80 in the regular market?

d. What is the elasticity of demand between the prices of $100 and $80 in the student market?

e. If the manager increases the regular price of iPods to $120 and lowers the discount price to $70, how much could the store increase total revenues?

273.	Consider the markets for prescription blood pressure medications and Kraft Macaroni and Cheese. Which of these goods do you think has the more elastic demand? Which is more inelastic? Explain your reasoning.

274.	Explain the change in tactics Nobel Prize–winning economist Gary Becker suggests concerning the method of fighting the war on drugs. What is so attractive about this alternative?

275.

Over the past 50 years, technological innovations have significantly decreased the costs associated with farming and the production of food. At the same time, however, the profits associated with farming have also decreased significantly. Using the concept of elasticity of demand, explain why farmers’ profits have been falling as costs of production have also been falling.

276.	For each of the following goods would you expect the supply to be elastic or inelastic? Provide explanation for each of your rationales. a. oil b. toothpicks c. Picasso paintings.

277.	Summarize the factors that cause goods to have a more inelastic supply.

278.

Consider a market that is described by the equations Q_d = 10 – 0.5P, and Q_s = –2 + 1.5P. What is the equilibrium price? What is the equilibrium quantity? If the demand curve shifts and the new demand equation is 8 – 0.5P, what are the new equilibrium price and the new equilibrium quantity? Calculate the price elasticity of supply. Is the supply curve between price and price 2 inelastic or elastic?

279.	Discuss the effectiveness of the slave redemption programs in Sudan when it is assumed that the elasticity of the supply of slaves is perfectly inelastic. Use a supply and demand diagram to help illustrate your response.

280.

In an effort to decrease carbon emissions in California, the state government decided to implement a “car buyback” program in order to decrease the number of cars on the streets. The California government would offer a $2,000 tax rebate for each car turned in. The cars would then be demolished and the steel recycled. Would a program like this succeed at significantly decreasing the number of cars driven in California? Explain.

281.

Table: Price Elasticities

	Good X	Good Y
Price elasticity of demand	0.5	1
Price elasticity of supply	1	0.5

Refer to the table. Use the information provided to predict the following:

a. The percent change in price (P) when there is a 2 percent rise in the quantity demanded for Good X.

b. The percent change in price (P) when there is a 5 percent fall in the quantity demanded for Good Y.

c. The percent change in price (P) when there is a 5 percent fall in the quantity supplied of Good X.

282.

Table: Elasticities of Good X

	Good X
Price elasticity of demand	2.5
Income elasticity of demand	0.5
Cross-price elasticity of demand with Good Y	1.5
Price elasticity of supply	1

Refer to the table. From the information in the table, what can you say about good X? In particular, is the demand for Good X rather elastic or inelastic? What does this imply about the number of substitutes that exist for Good X? Does Good Y appear to be a substitute for Good X? Does Good X appear to be a normal or inferior good? Finally, is the elasticity of supply for Good X relatively elastic or inelastic?

Answer Key

10.

11.

12.

13.

14.

15.

16.

17.

18.

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20.

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22.

23.

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25.

26.

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90.

91.

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263.

264.

265.

266.

267.

268.

The elasticity of demand is 30/25 ÷ –10/15 = –1.8, or 1.8 in absolute value terms.

Elasticity of demand = percentage change in Q/Percentage change in P, or –1.8 = 18/Percentage change in P. Solving for the Percentage change in P, we get –10. So the price must be cut 10 percent to increase the number of swim trunks sold by 18 percent.

269.

b. The demand for Good A is more elastic.

c. In Market A at a price of $50, quantity demanded is 50, and at a price of $60, quantity demanded is 40. The change in total revenue is 60 × 40 – 50 × 50 = –100.

In Market B at a price of $50, quantity demanded is 40, and at a price of $60, quantity demanded is 38. The change in total revenue is 60 × 38 – 50 ÷ 40 = 280.

d. The elasticity of demand for Good A is –10/45 ÷ 10/55 = –1.22, or 1.22 in absolute value terms. The elasticity of demand for Good B is –2/39 ÷ 10/55 = –0.28, or 0.28 in absolute value terms.

e. An elasticity of demand equal to –1.22 indicates that the demand for Good A is elastic in that range. An elasticity of demand equal to –0.28 indicates that the demand for Good A is inelastic in that range.

270.

a. The demand for oil is inelastic, at least in the short run, because there are few substitutes for oil in its major use, transportation. However, if the price of oil increases by a significant amount for a long period of time, then the demand for oil will become more elastic as substitutes are developed.

b. Some people have an elastic demand for Coca-Cola because for them Pepsi or other soft drinks can be good substitutes for Coca-Cola, whereas other people may have a more inelastic demand for Coca-Cola if they will keep buying Coca-Cola when the price of Coca-Cola increases.

c. The price of bread is too small a portion of budgets to worry very much about its price, so the consumption of bread is inelastic.

271.

10 – 0.5P = –2 + 1.5P

12 = 2P

P = $6 and Q = 7

When the supply curve shifts, new equilibrium is:

10 – 0.5P = –4 + 1.5P

14 = 2P

P = 7, and Q = 6.5

Price elasticity of demand = [(6.5 – 7)/6.75] / [(7 – 6)/6.5] = –0.481, or 0.481 in absolute value terms.

The demand curve is inelastic.

272.

a. Total revenue from regular consumers is $7,000 and total revenue from students at the discount rate is $9,600. Total revenue from all sales would be $16,600.

b. The demand for student customers is more elastic.

c. The elasticity of demand for regular customers is –10/75 ÷ 20/90 = –0.60, or 0.60 in absolute value terms, which is inelastic.

d. The elasticity of demand for student customers is –70/85 ÷ 20/90 = –3.7, or 3.7 in absolute value terms, which is elastic.

e. If the price is increased to $120 for regular customers and decreased to $70 for student customers, total revenue would increase to $18,050, or an additional $1,450.

273.

Prescription blood pressure medications have fewer substitutes; we would expect the elasticity of demand to be less elastic. Kraft Macaroni and Cheese is less of a necessity good and has many more substitutes, so we would expect demand for this good to be more elastic.

274.

Becker suggests that a tax could be set so that it raised seller costs exactly as much as does a prohibition. Since the tax raises costs by the same amount, the quantity of drugs sold would be the same under the tax as under prohibition. The only difference would be that instead of increasing seller revenues a tax would increase government revenues. Many of the unfortunate spillovers of the war on drugs—things like gangs, guns, and corruption—could be greatly reduced under a “legal but taxed” system.

275.

Since food is a necessary good, and in general has no substitutes, demand for food is very inelastic, thus meaning that a relatively large decrease in the price will only lead to a small change in the quantity demanded. The decrease in production costs associated with food production has increased the supply of food over the past 50 years, thus pushing the price of food lower. Since the price of food is falling by a lot, but the quantity is not increasing by much, this has consequently led to a decrease in revenues (and by extension profits) for farmers over the past 50 years.

276.

a. The supply curve for oil is quite inelastic because to produce more requires a significant increase in the costs of exploration and drilling.

b. The supply of toothpicks will be very elastic as toothpick manufacturers can increase the supply of toothpicks without an increase in their costs per toothpick by cutting down just a few more trees and running them through the mill.

c. Picasso paintings will be very inelastic, perhaps perfectly inelastic, as Picasso won’t be painting any more Guernicas no matter how high the price of his paintings rises.

277.

[Note: Students will likely give varying answers; this table replicates examples shown in the text.]

Table 5.3 Primary Factors Determining the Elasticity of Supply

Less Elastic	More Elastic
Difficult to increase production at constant	Easy to increase production at constant
unit cost (e.g., some raw materials)	unit cost (e.g., some manufactured goods)
Large share of market for inputs	Small share of market for inputs
Global supply	Local supply
Short run	Long run

278.

10 – 0.5P = –2+1.5P

12 = 2P

P = $6 and Q – 7

When the demand curve shifts, the new equilibrium is:

8 – 0.5P = –2+1.5P

10 = 2P

P = 5, and Q = 5.5

Price elasticity of supply = [(5.5 – 7)/6.25] / [(5 – 6)/5.5] = 1.32

The supply curve is elastic.

279.

[Note: Students will likely use varying values in the diagram and discussion; this diagram replicates the example shown in the text.]

Before the slave redemption program begins, the price of a slave is $15 and there are 1,000 slaves bought and held in captivity every year (Point a). With the redemption program the demand for slaves increases (shifts outward), which pushes the price of slaves up to $50 (Point b). Now here is the key: at a price of $50 the quantity of slaves demanded by potential slave owners decreases to 200 (Point c). The remaining 800 slaves are bought and freed by the redeemers. Because there is no increase in the quantity supplied in this case, every slave purchased is a slave freed.

280.

We would expect that the majority of cars turned in for the $2,000 tax credit would be low-quality cars—many of which probably don’t even run. Assuming there are a great number of these types of cars, their supply in California would be fairly elastic. The buyback program would increase demand for these types of cars; however, because of the elastic supply, the program would do very little to increase the price of this type of cars. If the price of cars does not increase, the program will not decrease the number of cars on the street in California in any significant way.

281.

a. 2/(1.5) = 1.33% rise in P.

b. 5/(1.5) = 3.33% fall in P.

c. –5/(1.5) = 3.33% rise in P.

282.

Good X has a rather elastic demand curve (we know this because the elasticity of demand is 2.5 in absolute value). Thus it seems to have good substitutes. From looking at the cross-price elasticity value, we know that Good Y is a substitute good for Good X (the cross-price elasticity value is positive). Good X is also a normal good as can be seen from the positive income elasticity of demand value. Finally it has a unit elastic supply curve.

1.	A price ceiling is a(n):
	A)	legally established minimum price that can be charged for a good.
	B)	illegally established minimum price that can be charged for a good.
	C)	legally established maximum price that can be charged for a good.
	D)	illegally established maximum price that can be charged for a good.

2.	Price ceilings create five important effects:
	A)	shortages, reductions in product quality, wasteful lineups, a loss from gains to trade, and a misallocation of resources.
	B)	surpluses, increases in product quality, search costs, gains from trade, and resource attrition.
	C)	excess demand, long lines, poor service, efficiency, and arbitrage.
	D)	shortages, reduced time costs, low vacancy rates, blat, and deadweight loss.

3.	A legal maximum price at which a good can be sold is a price:
	A)	stabilization.
	B)	ceiling.
	C)	support.
	D)	floor.

4.	A price ceiling creates a ________ when it is set ________.
	A)	surplus; below the equilibrium price
	B)	surplus; above the equilibrium price
	C)	shortage; below the equilibrium price
	D)	shortage; above the equilibrium price

Use the following to answer questions 5-7:

Figure: Price Ceiling

5.	(Figure: Price Ceiling) Refer to the figure. When a price ceiling of $10 is instituted by the government, consumers are able to buy how many units of the product?
	A)	290 units
	B)	310 units
	C)	270 units
	D)	40 units

6.	(Figure: Price Ceiling) Refer to the figure. A price ceiling of $10 results in a:
	A)	shortage of 270 units.
	B)	shortage of 40 units.
	C)	surplus of 270 units.
	D)	surplus of 40 units.

7.	(Figure: Price Ceiling) Refer to the figure. If a price ceiling were set at $12, there would be a:
	A)	shortage of 50 units.
	B)	surplus of 40 units.
	C)	shortage of 0 units.
	D)	surplus of 20 units.

8.	Which statement is NOT an effect of a price ceiling?
	A)	surpluses
	B)	misallocation of resources
	C)	loss of gains from trade
	D)	wasteful lineups

9.	When the maximum legal price is below the market price we say that there is a price:
	A)	floor.
	B)	stabilization.
	C)	support.
	D)	ceiling.

10.	Economists call the maximum legal price a price ceiling because the price:
	A)	cannot legally go lower than the ceiling.
	B)	cannot legally go higher than the ceiling.
	C)	must match the legally established ceiling price.
	D)	All of these answers are correct.

11.	Price ceilings would create all of the following effects EXCEPT:
	A)	shortages.
	B)	reductions in product quality.
	C)	a misallocation of resources.
	D)	maximum gains from trade.

Use the following to answer questions 12-13:

Figure: Price Controls

12.	(Figure: Price Controls) Refer to the figure. Which price control would cause a shortage of 20 units of the good?
	A)	a price ceiling of $10
	B)	a price floor of $10
	C)	a price ceiling of $6
	D)	a price floor of $6

13.	(Figure: Price Controls) Refer to the figure. If the government imposes a price ceiling in this market at a price of $6, the result would be a:
	A)	surplus of 20 units.
	B)	surplus of 10 units.
	C)	shortage of 20 units.
	D)	shortage of 10 units.

14.	A price ceiling:
	A)	is a maximum price allowed by law.
	B)	is a minimum price allowed by law.
	C)	has an effect only when it is set above the market price.
	D)	has little effect on market activity.

15.	When the maximum legal price is set below the market price then: I. a price floor is in effect. II. a shortage will develop. III. there will be lost gains from trade. IV. there will be no impact on the quantity demanded or supplied.
	A)	I and II only
	B)	I, II, and III only
	C)	II and III only
	D)	IV only

16.	Price ceilings do not have much effect:
	A)	in times of high inflation.
	B)	ever.
	C)	when market prices are at or below the ceiling.
	D)	in nonmarket economies.

17.	When a price ceiling is in effect:
	A)	suppliers get too strong a signal from demanders about their needs.
	B)	demanders have no incentive to signal their needs to suppliers.
	C)	all of demanders’ needs are met at the lower price, so there is no need to signal anything to suppliers.
	D)	demanders cannot signal their needs to suppliers.

18.	In Ancient Egypt, the “Bronze Law” set maximum prices for wages, preventing them from rising above what rulers perceived as the minimum needed to survive. If this was 10¢ a day for a porter (someone who carries things short distances) and the market wage was 8¢ a day, which of the following would be a plausible consequence of this law?
	A)	Porters would travel less quickly than they otherwise would.
	B)	Porters would transport items they normally would not.
	C)	Unemployment for porters would decrease.
	D)	Nothing unusual would happen.

19.	In the case of a binding price ceiling, the price paid in the market will be:
	A)	more than the free market equilibrium price.
	B)	less than the free market equilibrium price.
	C)	equal to the free market equilibrium price.
	D)	unable to be compared with the free market equilibrium price.

20.	In the case of a nonbinding price ceiling, the price paid in the market will be:
	A)	more than free market equilibrium price.
	B)	less than free market equilibrium price.
	C)	equal to free market equilibrium price.
	D)	unable to be compared with free market equilibrium price.

21.	A binding price ceiling leads to a(n):
	A)	shortage.
	B)	surplus.
	C)	equilibrium quantity.
	D)	quantity of zero units.

22.	A nonbinding price ceiling leads to a(n):
	A)	shortage.
	B)	surplus.
	C)	equilibrium quantity.
	D)	quantity of zero units.

23.	Under a binding price ceiling, one expects the quality of a good to:
	A)	rise.
	B)	remain the same.
	C)	fall.
	D)	change in an indeterminate direction.

24.	When a price ceiling is in effect, quantity ______ will be greater than quantity ______, creating a ______.
	A)	supplied; demanded; surplus
	B)	demanded; supplied; shortage
	C)	supplied; demanded; shortage
	D)	demanded; supplied; surplus

25.	The quantity exchanged of a good ______ under a binding price ceiling.
	A)	rises
	B)	remains the same
	C)	falls
	D)	changes in an indeterminate direction

26.	If quantity supplied equals 40 units and quantity demanded equals 50 units under a price control, then it is a:
	A)	binding price ceiling.
	B)	binding price floor.
	C)	nonbinding price ceiling.
	D)	nonbinding price floor.

27.	If quantity supplied equals 80 units and quantity demanded equals 85 units under a price control, then it is a:
	A)	binding price ceiling.
	B)	binding price floor.
	C)	nonbinding price ceiling.
	D)	nonbinding price floor.

28.	If quantity supplied equals 85 units and quantity demanded equals 80 units under a price control, then it is a:
	A)	binding price ceiling.
	B)	binding price floor.
	C)	nonbinding price ceiling.
	D)	nonbinding price floor.

Use the following to answer questions 29-30:

Figure: Government Price Controls

29.	(Figure: Government Price Controls) Refer to the figure. The government enacts a price control causing a shortage of 15 units of the good. Therefore, the ________ is set at ________.
	A)	price floor; $31
	B)	price floor; $17
	C)	price ceiling; $10
	D)	price ceiling; $17

30.	(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:
	A)	a shortage of 15 units.
	B)	a surplus of 15 units.
	C)	a supply of 20 units.
	D)	no effect on the market.

31.	At a price ceiling of $6 per sheet of drywall, quantity demanded is 100 and quantity supplied is 75. What will happen in the drywall market if there is an increased demand for drywall in the construction industry?
	A)	Equilibrium will be restored.
	B)	The shortage of drywall will fall below 25 units.
	C)	The shortage of drywall will increase above 25 units.
	D)	The surplus of drywall will increase above 25 units.

32.	The lower the price ceiling is relative to the market equilibrium price, the:
	A)	larger the surplus.
	B)	smaller the surplus.
	C)	smaller the shortage.
	D)	larger the shortage.

33.	A shortage results when:
	A)	a price floor is imposed.
	B)	a price ceiling is imposed.
	C)	there is excess supply without any price controls.
	D)	a price floor is imposed but it is not binding.

34.	Shortages occur when prices are held below the market price, causing the quantity demanded to exceed the quantity supplied. This is a result of price:
	A)	floors.
	B)	ceilings.
	C)	gouging.
	D)	competition.

35.	Setting the maximum legal price above the market price will cause
	A)	a shortage to develop.
	B)	the market to reach an equilibrium outcome.
	C)	quantity supplied to exceed quantity demanded.
	D)	market inefficiencies.

36.	Price controls instituted by President Nixon in 1971:
	A)	generated shortages in the markets for construction, wool, oil, steel bars, toilets, jeans, and others.
	B)	generated shortages, confined mostly to just the markets for gasoline and oil.
	C)	were successfully able to control inflation by 1973.
	D)	were set above the equilibrium prices and made little impact as a result.

Use the following to answer questions 37-38:

Figure: Labor Market 1

37.	(Figure: Labor Market 1) Refer to the figure. If there is a price ceiling set at $6, how much shortage or surplus, if any, is there?
	A)	60 million hours
	B)	80 million hours
	C)	120 million hours
	D)	There is no shortage and no surplus.

38.	(Figure: Labor Market 1) If there is a price floor set at $9, how much deadweight loss is created, if any?
	A)	$15 million
	B)	$30 million
	C)	$60 million
	D)	There is no deadweight loss.

39.	Mobile homes are housing units installed on a permanent foundation owned by a landlord. Although a resident owns the home, she rents the foundation from the landlord. In theory, owners of mobile homes can transfer their home to a different foundation if the rent becomes too steep, but uninstalling, transporting, and reinstalling the mobile home is usually prohibitively expensive. This “lock-in” effect encourages state legislatures to create rent controls for mobile home foundations. Which statement is a plausible, unintended consequence of these laws?
	A)	The price of mobile homes is artificially low.
	B)	There are few new mobile home foundations constructed.
	C)	The price of transporting mobile homes is artificially high.
	D)	There are few new buyers of mobile homes.

40.	Figure: Supply and Demand 1 Refer to figure. If, in this figure, the government enacts a price ______ by setting the good’s price at $6, it will create a ______.
	A)	floor; surplus of 4 units
	B)	ceiling; shortage of 10 units
	C)	floor; surplus of 10 units
	D)	ceiling; shortage of 4 units

41.	Which of the following statements is TRUE?
	A)	A price ceiling is the minimum price allowed by law.
	B)	An increase in market demand does not lead to an increase in quantity supplied under a price ceiling.
	C)	A shortage occurs whenever the price is set above the equilibrium price.
	D)	When quantity supplied exceeds quantity demanded, the market experiences a shortage.

42.	Because of government price controls, a business must now sell soft-serve ice cream at half its original price. This business might respond by:
	A)	offering smaller servings of ice cream.
	B)	skimping on toppings of nuts, fudge sauce, and cherries.
	C)	reducing hours of operation.
	D)	All of the answers are correct.

43.	The price controls of the early 1970s caused:
	A)	lead to be removed from gasoline.
	B)	the disappearance of the full-service gas station.
	C)	gas stations to stay open for more hours.
	D)	an excess supply of gasoline.

44.	Why do you think full-service gas stations have largely disappeared across the United States?
	A)	because the government has issued a ban on such gas stations
	B)	because of price controls on gasoline that were issued in 1973
	C)	because consumers demanded that they should be allowed to pump gas themselves
	D)	None of the answers are correct.

45.	If a seller facing excess demand is unable to raise the price of the good due to a price ceiling, a likely result will be:
	A)	an increase in the quantity supplied of the product.
	B)	an increase in the price of the product.
	C)	a decrease in the quality of the product.
	D)	a further decrease in the price of the product.

46.	If a seller facing excess demand is unable to raise the price of the good due to a price ceiling, the seller might:
	A)	increase the quantity supplied of the product.
	B)	decrease the price of the product.
	C)	increase the quality of the product.
	D)	decrease the level of service for that product.

47.	In situations of excess demand, sellers might lower quality when they are unable to raise prices because they wish to:
	A)	reduce excess demand.
	B)	raise their profit levels.
	C)	decrease surpluses.
	D)	raise their sales.

48.	In situations of excess demand, sellers might decrease service levels when they are unable to raise prices because they wish to:
	A)	reduce excess demand.
	B)	decrease surpluses.
	C)	raise their profit levels.
	D)	raise their sales.

49.	Price ceilings set by the government:
	A)	are desirable because they make markets more efficient.
	B)	can restore a market to equilibrium.
	C)	are generally believed to cause reductions in product quality.
	D)	are imposed to assist the poor without having adverse effects.

50.	Price ceilings reduce quality because:
	A)	buyers are willing to accept a lower quality of goods with lower prices.
	B)	sellers facing excess demand cannot raise prices to increase profit.
	C)	the law would mandate the quality of goods to match the price of the goods.
	D)	None of the answers are correct.

51.	Which observation would be consistent with the impact of price ceilings?
	A)	Books are printed on higher-quality paper.
	B)	Full-service gasoline stations stay open for 24 hours.
	C)	New automobiles are painted with more coats of paint.
	D)	Newspapers switch to a smaller font size in order to decrease bulk.

52.	Which would MOST LIKELY result after setting a price ceiling on automobiles?
	A)	a surplus of automobiles
	B)	more friendly automobile salesmen
	C)	fewer safety features
	D)	an increase in demand for automobiles

53.	If prices are not allowed to rise because of a price ceiling, then:
	A)	suppliers have an incentive to provide a high level of customer service.
	B)	suppliers will compensate for the lower price by increasing the quality of their goods.
	C)	prices do not provide the correct information about consumers’ valuation of the good.
	D)	a shortage will develop, but only temporarily until markets adjust to the lower prices.

54.	When a price ceiling is in effect:
	A)	there is no competition for goods.
	B)	suppliers have an incentive to provide really good customer service.
	C)	demanders compete for goods in short supply by accepting reductions in quality.
	D)	suppliers compete for customers by inefficiently raising quality levels.

55.	The Edict on Maximum Prices, established by the Roman Emperor Diocletian, created price ceilings on various jobs and goods in a failed effort to curb inflation. For example, legal pay for a farm laborer could be no more than 10.8¢ a day (payment set in modern currency). If the market rate of farm labor was 12¢ a day, which would be a plausible consequence of this law?
	A)	farms would produce more food than they otherwise would
	B)	nothing unusual
	C)	a laborer would work less hard than he otherwise would
	D)	an increase in unemployment for farm hands

56.	Typical of price ceilings, the ancient Indian political philosopher known as Kautilya advocated controls to protect against merchant greed, fixing a profit of 5% over the fixed price of local commodities, including textiles. If severe weather were to render the textile market more uncertain (for example, if transportation routes were damaged), what would reasonably happen?
	A)	There would be no effect.
	B)	Textile quality would wastefully increase.
	C)	Fewer merchants would be willing to supply textiles.
	D)	Deadweight loss would fall.

57.	How can sellers increase profits when they face a price ceiling?
	A)	charge a higher price for the good
	B)	charge a lower price for the good to undercut rival sellers
	C)	produce and sell more output
	D)	reduce the quality of the product and provide less customer service

Use the following to answer questions 58-60:

Figure: Effects of Price Ceilings

58.	(Figure: Effects of Price Ceilings) Refer to the figure. At a price ceiling of $2 per unit, consumers are willing to pay a maximum of:
	A)	$2.00.
	B)	$2.50.
	C)	$3.00.
	D)	$4.00.

59.	(Figure: Effects of Price Ceilings) Refer to the figure. At a price ceiling of $2:
	A)	bribes of $1 per unit may be common.
	B)	seller discounts of $1 may be common.
	C)	bribes of $3 per unit may be common.
	D)	seller discounts of $3 per unit may be common.

60.	(Figure: Effects of Price Ceilings) Refer to the figure. Suppose that the data represent the retail gasoline market. At a price ceiling of $2, the total value of wasted time from waiting in line is:
	A)	$5.
	B)	$10.
	C)	$15.
	D)	$20.

61.

Table: Gasoline Market

	Free Market		Price Ceiling
Price per gallon of gas		$4.00		$3.00
Value of time		$20/hour		$20/hour
Waiting time to buy 20 gallons of gas		0		1.5 hours

Use the table. The total cost of purchasing 20 gallons of gas at the free market price and the price ceiling are ________ and ________, respectively.

$100; $80

$80; $90

$60; $75

$40; $60

62.	Which statement(s) about price ceilings are TRUE? I. Price ceilings cause quantity demanded to exceed quantity supplied. II. When including time costs and bribes, consumers pay a total price in excess of the price ceiling. III. All else equal, it is more wasteful to allocate goods based on bribes than on waiting time costs.
	A)	I only
	B)	II and III only
	C)	I and II only
	D)	I, II, and III

Use the following to answer questions 63-64:

Figure: Costs of Price Ceilings

63.	(Figure: Costs of Price Ceilings) Refer to the figure. What is the dollar amount of the value of wasted time if a price ceiling of $4 is implemented?
	A)	$160
	B)	$180
	C)	$320
	D)	$220

64.	(Figure: Costs of Price Ceilings) Refer to the figure. What is the dollar amount of lost consumer surplus if a price ceiling of $4 is implemented?
	A)	$20
	B)	$10
	C)	$90
	D)	$80

65.	Allocating products with long lines, using a first-come, first-served system, is:
	A)	the only way scarce goods can be allocated.
	B)	necessary when waiting is a costless exercise.
	C)	efficient, since people who are willing to wait the longest get the products.
	D)	inefficient, because waiting wastes time.

66.	Which would be the least likely result of a price ceiling imposed in the market for gasoline?
	A)	Buyers line up to buy gasoline.
	B)	Buyers bribe station attendants to fill up their tanks.
	C)	Some buyers will get less gasoline than they want.
	D)	Competition in the market will be eliminated.

Use the following to answer questions 67-68:

Figure: Price Ceiling of Ps

67.	(Figure: Price Ceiling of Ps) Refer to the figure. Suppose a price ceiling of Ps is imposed. As a result:
	A)	The quantity supplied in the market is Q_s.
	B)	Buyers’ willingness to pay for the good is P_d.
	C)	The quantity demanded in the market is Q_d.
	D)	All of the answers are correct.

68.	(Figure: Price Ceiling of Ps) Refer to the figure. Suppose a price ceiling of Ps is imposed. The shaded area may likely represent all of the following EXCEPT:
	A)	value of wasted time.
	B)	the amount that buyers bribe sellers.
	C)	the amount of corruption.
	D)	consumer surplus.

69.	If a price ceiling on gasoline is imposed, the total price of gasoline a buyer pays is likely to equal the legal price:
	A)	minus the value of wasted time.
	B)	minus the value of bribery.
	C)	plus the value of consumer surplus.
	D)	plus the value of corruption.

70.	Shortages in economic markets are inefficient because:
	A)	time spent waiting in line is wasted time, and hence a wasted resource.
	B)	demanders are willing to pay more for the good, but suppliers are unwilling to supply any more of the good even at higher prices.
	C)	the willingness to pay by consumers is less than the controlled price.
	D)	they lead to increases in quality over and above what would be present in an uncontrolled market.

71.	What do price ceilings NOT cause?
	A)	waiting in line
	B)	speculation
	C)	bribes
	D)	search costs

Use the following to answer questions 72-73:

Figure: Supply and Demand 2

72.	(Figure: Supply and Demand 2) If the government sets the price at $8 in this figure, demanders are willing to pay ______ per unit for ______ units.
	A)	$8; 12
	B)	$8; 6
	C)	$14; 12
	D)	$14; 6

73.	(Figure: Supply and Demand 2) If the government sets the price at $8 in this figure, the total value of the wasted time is:
	A)	$36.
	B)	$48.
	C)	$64.
	D)	$8.

74.	A major hurricane damages many oil refineries, which increases the market price of gasoline from $3.50 to $5 per gallon. The Attorney General threatens legal action against gas station owners who raise prices above pre-hurricane levels, causing gas station owners to reluctantly sell gas for $3.50 per gallon. At $3.50 per gallon, shortages cause buyers to wait in line for 2 hours. If the average purchase is 15 gallons and buyers value their time at $20 an hour, is the Attorney General helping?
	A)	No, paying $92.50 at $3.50 per gallon is more expensive than $75 at $5.00 per gallon.
	B)	Yes, paying $52.50 at $3.50 is cheaper than $75 at $5.00 per gallon.
	C)	Yes, gas is cheaper at $3.50 per gallon because the waiting costs keep gas prices low.
	D)	No, $5.00 per gallon would insure that buyers could always buy as much as they want.

75.	The statement that “price controls do not eliminate competition”:
	A)	is false because price controls prevent rich consumers from outbidding poor consumers for goods and services.
	B)	is false because firms are no longer allowed to exploit consumers by charging higher prices after hurricanes or major snowstorms.
	C)	reflects the idea that consumers will compete for price-controlled products by waiting in line and offering bribes to sellers.
	D)	means that sellers will increase the quality of their product when they cannot legally increase their prices.

Use the following to answer questions 76-77:

Figure: Losses from Price Ceilings

76.	(Figure: Losses from Price Ceilings) Refer to the figure. A price ceiling of $1 causes lost consumer surplus equal to area ________, and lost producer surplus equal to area ________.
	A)	c; e
	B)	bc; de
	C)	a; f
	D)	d; b

77.	(Figure: Losses from Price Ceilings) Refer to the figure. At a price ceiling of $1, the area representing the total value of wasted time is ________, and the area of the deadweight loss is ________.
	A)	ab; de
	B)	bd; ce
	C)	abdf; ce
	D)	bc; de

78.	At a price ceiling of $1 per loaf of bread, quantity supplied is 99 loaves, which is less than quantity demanded. What must be true for the 100th loaf of bread?
	A)	Consumers do not value the 100th loaf of bread.
	B)	The cost of producing the 100th loaf of bread is less than $1.00.
	C)	Consumers value the 100th loaf of bread at less than $1.00.
	D)	Consumers value the 100th loaf of bread more than it costs producers to make it.

Use the following to answer questions 79-80:

Figure: Costs of Price Ceilings 2

79.	(Figure: Costs of Price Ceilings 2) Refer to the figure. What is the dollar amount of lost producer surplus after the price ceiling of $4 has been implemented?
	A)	$90
	B)	$10
	C)	$160
	D)	$80

80.	(Figure: Costs of Price Ceilings 2) Refer to the figure. What is the dollar amount of the deadweight loss after the price ceiling of $4 has been implemented?
	A)	$160
	B)	$180
	C)	$20
	D)	$10

81.	Which statement about price ceilings is correct?
	A)	Whether a price ceiling is placed below or above the equilibrium price, it will always cause deadweight loss.
	B)	A price ceiling will only cause deadweight loss if it is placed above the equilibrium price.
	C)	A price ceiling will only cause deadweight loss if it is placed below the equilibrium price.
	D)	Whether a price ceiling is placed below or above the equilibrium price, it will always cause a shortage of the good.

82.	Which statement is TRUE in a market with a price ceiling?
	A)	Buyers and sellers experience unexploited gains from trade.
	B)	Resources are allocated to their most efficient uses.
	C)	The supply of goods is sold by the sellers with the lowest costs.
	D)	The supply of goods is bought by the buyers with the highest willingness to pay.

83.	A deadweight loss is the total of:
	A)	consumer and producer surplus when all mutually profitable gains from trade are exploited.
	B)	consumer and producer surplus when all mutually profitable gains from trade are not exploited.
	C)	lost consumer and producer surplus when all mutually profitable gains from trade are exploited.
	D)	lost consumer and producer surplus when all mutually profitable gains from trade are not exploited.

84.	A market with price ceilings fails to maximize all of the following EXCEPT:
	A)	the gains from trade.
	B)	consumer surplus.
	C)	excess supply.
	D)	producer surplus.

85.	A free market maximizes the gains from trade, the sum of consumer and producer surplus, meeting all of the following conditions EXCEPT:
	A)	all buyers who are willing to pay positive prices are able to receive goods from trade.
	B)	the supply of goods is bought by the buyers with the highest willingness to pay.
	C)	the supply of goods is sold by the sellers with the lowest costs.
	D)	there are no unexploited gains from trade between buyers and sellers.

86.	Which of these statements explains why price ceilings result in lost gains from trade?
	A)	Buyers and sellers want to trade, but the threat of fines or jail time prevents them from doing so.
	B)	Sellers want to trade, but buyers prefer the lower prices.
	C)	Buyers want to trade, but sellers are indifferent at the lower prices.
	D)	Neither buyers nor sellers want to trade subject to a price ceiling resulting in lost gains from trade.

87.	Deadweight loss is:
	A)	necessary to ensure that resources are channeled to their highest-valued use.
	B)	the loss to the economy from firms going out of business due to competition.
	C)	usually offset by deadweight gains.
	D)	the total of lost consumer and producer surplus when not all mutually profitable gains from trade are exploited.

88.	When a price ceiling is in effect:
	A)	some mutually beneficial trades between buyers and sellers do not occur.
	B)	no mutually beneficial trades between buyers and sellers occur.
	C)	all mutually beneficial trades between buyers and sellers occur.
	D)	it is impossible to say if any, some, or all beneficial trades between buyers or sellers fail to occur.

89.	In the late 1500s, the city of Antwerp was under siege by the Duke of Parma. The siege caused the price of food to rise so the government of Antwerp established a price ceiling set at a value similar to that before the siege. (This bears a striking resemblance to modern anti-gouging laws used in times of disaster.) Merchants, fearing the Duke’s ability to sink their ships, refused to ferry food into the city that they could only sell at a normal price. Which important effect of a price control BEST describes this story?
	A)	reduction of product quality
	B)	wasteful lines
	C)	a loss in gains from trade
	D)	a misallocation of resources

90.	The U.S. government establishes a price floor of $1,000 on personal computers. The market price for netbooks (personal computers that specialize in Internet and other basic computer functions) is about $500. How would this price control affect the netbook market?
	A)	Consumers would have a harder time finding conventional netbooks since MOST would be too powerful.
	B)	There would be long lines for netbooks.
	C)	Producers would leave the market for netbooks.
	D)	There would be no notable effect.

91.	Deadweight loss occurs when:
	A)	consumer surplus transforms into producer surplus.
	B)	there is a shortage of a good or service.
	C)	consumer and/or producer surplus decrease without the surplus going to anyone.
	D)	the gains from trade are lowered due to shifts in the supply or demand curve.

Use the following to answer questions 92-94:

Figure: Water Market

92.	(Figure: Water Market) Refer to the figure. If a price floor in the diagram gets set at $8 a gallon, how big is the shortage or surplus?
	A)	60,000 gallons in surplus
	B)	120,000 gallons in surplus
	C)	60,000 gallons in shortage
	D)	12,000 gallons in shortage

93.	(Figure: Water Market) Refer to the figure: If a price floor in the diagram gets set at $8 a gallon, what is the deadweight loss?
	A)	$30,000
	B)	$60,000
	C)	$240,000
	D)	$480,000

94.	(Figure: Water Market) Refer to the figure. If a price floor in the diagram gets set at $8 a gallon, what is the quality waste?
	A)	$90,000
	B)	$180,000
	C)	$480,000
	D)	$960,000

95.	Price ceilings:
	A)	increase the gains from trade because lower prices encourage consumers to buy more.
	B)	reduce the size of the market, shrinking both consumer and producer surplus.
	C)	help reduce the deadweight losses owing to taxation.
	D)	increase market output to the point where consumer surplus equals producer surplus.

Use the following to answer question 96:

Figure: Supply and Demand 3

96.	(Figure: Supply and Demand 3) Refer to the figure. If the government sets a price ceiling at $8 in this figure, it will create a deadweight loss of:
	A)	$6.
	B)	$36.
	C)	$9.
	D)	$24.

97.	Do price ceilings misallocate resources?
	A)	Yes, because people who value the good the most are unable to bid it away from low-valued uses.
	B)	Yes, because people who value the good the least are unable to afford the good.
	C)	No, because the good is still allocated based on willingness to pay.
	D)	No, because the rich and poor alike stand an equal chance of getting the good.

98.	In 1972–1973, the swimming pools in California were heated but homes in New Jersey were cold, is an example of a(n):
	A)	misallocation of resources caused by price controls.
	B)	market failure caused by speculators.
	C)	market inefficiency caused by monopoly oil companies.
	D)	excess supply of oil caused by the business cycle.

99.	When an effective price ceiling causes a shortage, some of the buyers who value the good the most may not be able to get the good. Why does this occur?
	A)	The highest-value users cannot outbid the lower-valued users and so the seller cannot distinguish between them.
	B)	The highest-value users are eliminated from the market due to the price ceiling.
	C)	The price ceiling causes the price to rise so high that even the highest-value users cannot afford the good.
	D)	The government purchases most of the goods.

100.	When a price ceiling is binding, the goods that are on sale are allocated to buyers using a method:
	A)	of random allocation.
	B)	whereby the highest bidder wins.
	C)	whereby the lowest bidder wins.
	D)	whereby buyers purchase lottery tickets to see who will be able to buy the product.

101.	Price controls cause resources to be ________ not just geographically, but also across different ________ of those resources.
	A)	overutilized; types
	B)	properly allocated; demands
	C)	cheaper; uses
	D)	misallocated; uses

102.	Price controls cause resources to be misallocated by:
	A)	distorting the signals of suppliers’ willingness to supply and eliminating the incentives for demanders to pay.
	B)	distorting the signals of demanders’ willingness to pay and eliminating the incentives for suppliers to supply.
	C)	distorting the incentives for suppliers to supply and eliminating the signals of demanders’ willingness to pay.
	D)	distorting the incentives for demanders to pay and eliminating the signals of suppliers’ willingness to supply.

103.	Figure: Value of Uses The sections labeled A, B, and C represent, respectively, the:
	A)	highest-valued uses, lower-valued uses, least-valued uses.
	B)	highest-valued uses, least-valued uses, lower- valued uses.
	C)	least-valued uses, lower-valued uses, highest-value uses
	D)	lower-valued uses, highest-valued uses, least-valued uses.

Use the following to answer questions 104-105:

Figure: Price Ceilings and Consumer Surplus

104.	(Figure: Price Ceilings and Consumer Surplus) Refer to the figure. There is a price ceiling of $20. What is the value of consumer surplus if all units of the good are allocated to the highest valued uses?
	A)	$40
	B)	$120
	C)	$200
	D)	$210

105.	(Figure: Price Ceilings and Consumer Surplus) Refer to the figure. There is a price ceiling of $20. What is the value of consumer surplus if all the goods are allocated randomly?
	A)	$120
	B)	$180
	C)	$80
	D)	None of the answers are correct.

Use the following to answer questions 106-108:

Figure: Price Ceilings and Valuation of Uses

106.	(Figure: Price Ceilings and Valuation of Uses) Refer to the figure. The single highest value a user is willing to pay is how many dollars for the product?
	A)	$15
	B)	$25
	C)	$45
	D)	$35

107.	(Figure: Price Ceilings and Valuation of Uses) Refer to the figure. Suppose a price ceiling of $15 goes into effect. If the goods are allocated only to the highest-value uses, the total consumer surplus in the market would be:
	A)	$3,000.
	B)	$500.
	C)	$2,500.
	D)	$1,000.

108.	(Figure: Price Ceilings and Valuation of Uses) Refer to the figure. Suppose a price ceiling of $15 goes into effect. If the highest-value use and the lowest-value use are equally likely to be satisfied, then the average value of the product is:
	A)	$45.
	B)	$30.
	C)	$25.
	D)	$35.

Use the following to answer questions 109-111:

Figure: Price Ceilings and Consumer Valuation

109.	(Figure: Price Ceilings and Consumer Valuation) Refer to the figure. Suppose a price ceiling of $3 goes into effect. If the goods sold are allocated only to the highest-value users, the total consumer surplus in the market would be:
	A)	$180.
	B)	$30.
	C)	$120.
	D)	$150.

110.	(Figure: Price Ceilings and Consumer Valuation) Refer to the figure. Suppose a price ceiling of $3 goes into effect. If the goods sold are allocated to buyers randomly, what is the total consumer surplus in this market?
	A)	$90
	B)	$120
	C)	$30
	D)	$150

111.	(Figure: Price Ceilings and Consumer Valuation) Refer to the figure. Suppose a price ceiling of $3 goes into effect. What is the loss of consumer surplus due to the random allocation of price-controlled goods compared to the allocation only to the highest-value users?
	A)	$90
	B)	$60
	C)	$150
	D)	$30

112.	Figure: Price Ceilings and Lost Consumer Surplus Refer to the figure. The figure measures the consumer surplus associated with a price ceiling, assuming:
	A)	the worst-case scenario.
	B)	the best-case scenario.
	C)	random allocation of the product between highest-valued and lowest-valued users.
	D)	total consumer surplus is maximized in the market.

Use the following to answer questions 113-114:

Figure: Price Ceilings and Random Allocation

113.	(Figure: Price Ceilings and Random Allocation) Refer to the figure. When a controlled price is imposed and the quantity of goods is allocated randomly between the highest valued uses and lowest valued uses, total consumer surplus under random allocation is represented by area:
	A)	A.
	B)	B.
	C)	C.
	D)	D.

114.	(Figure: Price Ceilings and Random Allocation) Refer to the figure. When a controlled price is imposed and the quantity of goods is allocated randomly between the highest-valued uses and lowest-valued uses, loss due to random allocation instead of allocation to the highest-valued use is represented by area:
	A)	A.
	B)	B.
	C)	C.
	D)	D.

115.	The effects of price ceilings:
	A)	are limited to the price-controlled market.
	B)	weaken over time.
	C)	extend beyond the price-controlled market.
	D)	encourage the entry of new firms.

116.	During the energy crisis of the 1970s, President Nixon ordered gas stations to close between 9:00 PM Saturday and 12:01 AM Monday, in an attempt to prevent wasteful and unnecessary Sunday driving. This policy:
	A)	proved effective in reducing the shortage of gasoline.
	B)	gave people the incentive to fill up their tanks earlier in the week.
	C)	indirectly caused many churches to close on Sunday.
	D)	All of the answers are correct.

117.	Which of the following events occurred during the 1973–1974 oil crisis in the United States?
	A)	Gas stations were ordered to be closed between 9 PM on Saturday and 12:01 AM on Monday.
	B)	Daylight savings time was implemented.
	C)	There were shortages of steel drilling equipment.
	D)	All of the answers are correct.

118.	Which events occurred during the 1973–1974 oil crisis in the United States? I. Gas stations were ordered to be closed between 9 PM on Saturday and 12:01 AM on Monday. II. The government decided to allocate oil by command. III. The 55 mph speed limit was repealed. IV. Daylight savings time was implemented.
	A)	I and IV only
	B)	I, II, and III only
	C)	I, II, and IV only
	D)	I, III, and IV only

119.	Economists blame the long lines at gasoline stations in the United States during the 1970s as well as the long delays in construction projects on:
	A)	consumers who bought gas too frequently.
	B)	the Organization of Petroleum Exporting Countries (OPEC).
	C)	major oil companies operating in the United States.
	D)	U.S. government regulation of gasoline prices.

120.	Which of the following best represents the misallocation of resources that would occur under a price ceiling on bottled water following a major hurricane?
	A)	Bottles of water sit on the shelves because nobody can afford it.
	B)	A family in a distant state takes time off work to bring bottled water to the hurricane-ravaged area.
	C)	A family in a distant state gives bottled water to its dog, but a family in the hurricane area cannot find bottled water to drink.
	D)	Families in the hurricane area brush their teeth with bottled water but cannot find enough to drink.

121.	Flexible prices ensure that:
	A)	resources are allocated to their highest-valued uses.
	B)	suppliers will always profit from necessity goods.
	C)	self-interested individuals will not interfere with the efficiency of the market.
	D)	prices will always be minimized.

122.	When a price ceiling is in effect, goods and services:
	A)	are still allocated efficiently.
	B)	are not necessarily supplied by their lowest-cost producer.
	C)	do not necessarily flow to their highest-valued use.
	D)	are neither necessarily supplied by their lowest-cost producer nor do they flow to their highest-valued use.

123.	If a price ceiling on gasoline results in long lines at the gas station and a rich businessman and an elderly retiree both need gasoline, who would have the higher-valued use for gasoline, and who would have the lower opportunity cost of waiting in line?
	A)	The businessman would have the higher-valued use and the lower opportunity cost.
	B)	The businessman would have the higher-valued use and the retiree would have the lower opportunity cost.
	C)	The retiree would have the higher-valued use and the lower opportunity cost.
	D)	The retiree would have the higher-valued use and the businessman would have the lower opportunity cost.

124.	If there are 100 tickets to a concert and 200 fans who would like to go to the concert, each placing a slightly different value on the tickets, is it more efficient to hold an auction for the tickets or to hold a random drawing for the tickets?
	A)	hold an auction
	B)	hold a random drawing
	C)	Both are equally efficient.
	D)	It is impossible to say which is more efficient.

125.	Universal price controls in the Soviet Union:
	A)	led to widespread prosperity.
	B)	harmed powerful interests in the short run.
	C)	caused never-ending shortages and misallocations.
	D)	meant no one ever had to wait in line.

126.	Price ceilings:
	A)	improve the allocation of resources because consumers with the greatest need for the product are more likely to afford the product.
	B)	misallocate resources because consumers who buy the product may not be the ones who value it the most.
	C)	misallocate resources because they allow consumers to compete against one another by offering sellers higher prices.
	D)	improve the allocation of resources because consumers are prevented from bidding up the price of products.

127.	Impeding price signals by imposing price ceilings can have serious consequences. Which of the following is such a consequence?
	A)	improved product quality
	B)	gains from trade
	C)	surpluses
	D)	misallocation of resources

128.	For a given demand curve, the high-valued uses are at the _____, and the low-valued uses are at the _____.
	A)	top; bottom
	B)	bottom; top
	C)	top; top
	D)	bottom; bottom

Use the following to answer questions 129-130:

Figure: Supply and Demand 4

129.	(Figure: Supply and Demand 4) Refer to the figure. If the good is purchased by those with the highest willingness to pay, what is the value of consumer surplus in the figure at the price ceiling of $8?
	A)	$54
	B)	$136
	C)	$36
	D)	$45

130.	(Figure: Supply and Demand 4) Refer to the figure. If the good is randomly allocated between those with the highest and lowest willingness to pay, what is the value of consumer surplus at the price ceiling of $8?
	A)	$54
	B)	$136
	C)	$36
	D)	$45

131.	Figure: Price Ceiling in a Generic Market Refer to the figure. If the government imposes a price ceiling at the price of $4.00, the result would be a:
	A)	surplus of 40 units.
	B)	shortage of 40 units
	C)	surplus of 20 units.
	D)	shortage of 20 units.

132.	Which President ended the price controls on oil?
	A)	Richard Nixon
	B)	Gerald Ford
	C)	Jimmy Carter
	D)	Ronald Reagan

133.	What happened as a result of the elimination of price controls on oil and gasoline in 1981?
	A)	The supply of gas and oil declined.
	B)	The shortage of gasoline was eliminated nearly overnight.
	C)	The price of oil increased dramatically, and stayed high until the early 1990s.
	D)	The shortage of gasoline was eliminated, but it took several years.

134.	After President Reagan repealed the price controls on gasoline:
	A)	the supply of gasoline fell dramatically.
	B)	the market experienced a period of vast surpluses as a result of the lack of regulation.
	C)	prices rose a little at first, but supply quickly began to increase and prices fell.
	D)	prices rose dramatically as a result of the repealed legislation.

135.	Ultimately, repealing the price controls on gasoline and oil:
	A)	led to permanently higher gasoline prices.
	B)	led to a higher supply of gasoline and lower prices.
	C)	was disastrous since the market collapsed due to a lack of government regulation.
	D)	was not able to eliminate the shortages of gasoline in the United States.

136.	When the price ceilings on oil and gas were lifted in January 1981: I. the price of oil rose immediately. II. the price of oil continued to rise more than 2 years after the controls were eliminated. III. higher prices gave an incentive to suppliers to increase supply, thus leading eventually to lower prices.
	A)	I only
	B)	I and II only
	C)	I and III only
	D)	I, II, and III

137.	The shortage of oil ended when:
	A)	Ronald Reagan eliminated price controls on oil in January 1981.
	B)	the government instituted minimum miles-per-gallon requirements for cars.
	C)	Congress passed the Energy Saver Act of 1985.
	D)	the U.S. Senate began regulating oil industry profits.

138.	Which statement about price controls is most correct?
	A)	Price controls often hurt the people they are designed to help.
	B)	Price controls always help the people they are designed to help.
	C)	Price controls have minimal adverse effects.
	D)	Price controls make economic sense even if they have adverse effects.

139.	Rent controls are:
	A)	an efficient and equitable way to help the poor.
	B)	inefficient, but a pretty good way to solve a serious social problem.
	C)	an inefficient way to help the poor in raising their standard of living.
	D)	an efficient way to allocate housing.

140.	A rent control is a regulation that:
	A)	ensures that there are apartments available for rent.
	B)	controls rents at constant levels.
	C)	upholds rents to above equilibrium levels.
	D)	prevents rents from rising to equilibrium levels.

141.	Rent controls are:
	A)	price floors on rental housing.
	B)	price ceilings on rental housing.
	C)	quality freezes on rental housing.
	D)	quantity freezes on rental housing.

142.	Which is the MOST correct statement about the impact of rent controls?
	A)	The short-run supply curve for apartments is inelastic, so rent controls create larger shortages in the short run than in the long run.
	B)	The short-run supply curve for apartments is inelastic, so rent controls create smaller shortages in the short run than in the long run.
	C)	The long-run supply curve for apartments is inelastic, so rent controls create larger shortages in the long run than in the short run.
	D)	The long-run supply curve for apartments is inelastic, so rent controls create smaller shortages in the long run than in the short run.

143.	Over time, housing shortages caused by rent control ______ because the supply of housing is ______ elastic in the long run.
	A)	increase; less
	B)	increase; more
	C)	decrease; less
	D)	decrease; more

144.	Figure: Short and Long Run Shortages Use the figure. At a rent-controlled price of $800, the short-run shortage of apartments is ________ and the long-run shortage is ________.
	A)	12,000; 4,000
	B)	4,000; 12,000
	C)	8,000; 4,000
	D)	8,000; 12,000

145.	Why is the long-run supply curve of rent-controlled apartments typically more elastic than the short-run supply curve?
	A)	In the long run, fewer new apartments are built, and older apartments are torn down or turned into condominiums.
	B)	In the long run, many more new apartments are built and this increases the supply of rent-controlled apartments.
	C)	In the long run, rent controls are always removed.
	D)	In the long run, the shortage of rent-controlled apartments becomes significantly less.

146.	How did economists try to prove that reductions in new apartment building in Ontario, Canada, during the 1970–1975 period were a result of debates on rent control?
	A)	They showed that the economy was declining during this period.
	B)	They pointed to the fact that the OPEC oil crisis occurred at this time.
	C)	They contrasted the fact that apartment building was declining while new house building was rising, in the same state of the economy.
	D)	They pointed to the fact that rent controls had not been implemented during the OPEC oil crisis.

147.	A rent control is a price:
	A)	floor on car rentals.
	B)	ceiling on car rentals.
	C)	floor on rental housing.
	D)	ceiling on rental housing.

148.	Rent controls create all of the following EXCEPT:
	A)	shortages.
	B)	search costs.
	C)	wasteful quality increases.
	D)	resource misallocations.

149.	New housing takes some time to build, so rent control creates larger shortages in the:
	A)	long run than in the short run because short-run supply is more elastic.
	B)	long run than in the short run because long-run supply is more elastic.
	C)	short run than in the long run because short-run supply is more elastic.
	D)	short run than in the long run because long-run supply is more elastic.

150.	Some economists compare the destructiveness of rent control to that of aerial bombardment because it causes:
	A)	landlords to neglect their buildings, allowing them to deteriorate over time.
	B)	high search costs in apartment hunting.
	C)	there to be unexploited gains from trade.
	D)	apartments to go to renters who do not have the highest-valued use of the apartments.

151.	In your city, it is illegal to charge more than a certain amount of money for an apartment. People have been signing leases for the highest legal amount, but also agreeing to pay a monthly bribe “on the side” to their landlord in order to get the apartment in the first place and to get timely maintenance. What is the effect of the bribes?
	A)	The bribes make it harder to find an apartment.
	B)	The bribes cause there to be unexploited gains from trade.
	C)	The bribes cause apartments to be allocated to renters who do not have the highest-valued use of the apartments.
	D)	The bribes minimize the damage from the rent control.

Use the following to answer questions 152-153:

Figure: Supply and Demand 5

152.	(Figure: Supply and Demand 5) Refer to the figure. In the figure, representing a market for apartments, a rent-controlled price of $800 will cause:
	A)	a short-run shortage of 6,000 apartments.
	B)	a short-run shortage of 8,000 apartments.
	C)	a short-run shortage of 3,000 apartments.
	D)	a short-run surplus of 14,000 apartments.

153.	(Figure: Supply and Demand 5) Refer to the figure. In the figure, representing a market for apartments, with a rent-controlled price of $800, the long-run supply curve will be ______ elastic than the short-run supply curve, causing the _____.
	A)	more; shortage to increase to 6,000 apartments
	B)	more; shortage to decrease to 3,000 apartments
	C)	less; shortage to increase to 6,000 apartments
	D)	less; surplus to decrease to 8,000 apartments

154.	Which statement(s) is TRUE? I. In the long run, rent-control laws create incentives to turn apartments into hotels or parking garages. II. Apartment owners are less likely to do routine maintenance when the government controls apartment rents. III. Rent-controlled apartments are more likely to be allocated by discrimination than non–rent-controlled apartments.
	A)	I, II, and III
	B)	I and II
	C)	I only
	D)	II only

155.	Under a policy of rent control, the short-run shortage ______ the long-run shortage.
	A)	is smaller than
	B)	is larger than
	C)	is equal to
	D)	overshadows

156.	Rent control is an example of a:
	A)	price ceiling
	B)	price floor
	C)	tax
	D)	quota

157.	Vietnam’s foreign minister said, “The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents.” He was referring to the fact that:
	A)	very low rents provided very little income for carrying out warfare.
	B)	very low rents turned portions of city housing into a state of disrepair and slum-like conditions.
	C)	the Americans did not install proper city housing codes in Hanoi.
	D)	bombing a city is always worse than rent control.

158.	Under rent control, tenants can expect:
	A)	lower rent and higher-quality housing.
	B)	lower rent and lower-quality housing.
	C)	higher rent and a shortage of housing.
	D)	higher rent and a surplus of housing.

159.	Which is NOT a result of rent control?
	A)	higher-quality housing
	B)	bribery
	C)	fewer new apartments offered for rent
	D)	less maintenance provided by landlords

160.	Which would be the least likely result of a price ceiling imposed in the market for rental cars?
	A)	slow replacement of old rental cars with new ones
	B)	poor maintenance of the rental cars
	C)	dirtier exteriors and interiors of rental cars
	D)	free gasoline given to people as an incentive to rent a car

161.	Because rent controls on apartments reduce profits:
	A)	developers build and rent more apartments to make up for lost profit.
	B)	condominiums are converted into apartments.
	C)	landlords are less likely to discriminate against minorities in renting out apartments.
	D)	apartment managers will give less consideration to renters’ complaints.

162.	Under rent control, bribery is used to:
	A)	allocate housing to the most deserving tenants.
	B)	make the total price of a rental property (including the bribe) less than the market price that would prevail without rent controls.
	C)	make the total price of a rental property (including the bribe) closer to the market price that would prevail without rent controls.
	D)	allocate the housing to the poorest individuals in the market.

163.	Rent control in New York City has resulted in:
	A)	people living in luxury apartments and paying low rents.
	B)	people having to bribe landlords to get apartments.
	C)	people having difficulty finding apartments.
	D)	All of the answers are correct.

164.	From an efficiency standpoint, rent controls:
	A)	increase efficiency by allowing those households who could not afford high rents before to be able to purchase housing.
	B)	increase efficiency by increasing consumer surplus.
	C)	decrease efficiency because both buyers and sellers would be better off if the price of rents were allowed to rise.
	D)	decrease efficiency because they make it illegal to trade.

165.	Under rent controls:
	A)	some mutually profitable trades are illegal and therefore the benefits are never realized.
	B)	producer surplus is zero.
	C)	the quantity demanded of apartments is typically less than the quantity supplied.
	D)	buyers are better off at the expense of sellers.

166.	Which statement would be the least likely result of rent controls?
	A)	Landlords are more selective with respect to the people they rent apartments to.
	B)	Landlords provide less maintenance on the apartments.
	C)	More new apartments are available for rent.
	D)	More people look for apartments for rent than the number of apartments available.

167.	Which statement(s) is TRUE? I. Rent controls prevent apartments from being allocated to people who value them the most. II. With a system of rent controls, landlords are more likely to make needed repairs to their properties as a way of attracting renters. III. Although inefficient, rent controls are the best way to help the poor afford housing.
	A)	I only
	B)	I and III only
	C)	I, II, and III
	D)	II and III only

168.	An alternative to rent control that has been used in some cities since the 1990s is:
	A)	confiscation of property from landlords.
	B)	policies that prevent evictions.
	C)	rent regulation that limits the rate of increase in rent.
	D)	higher taxes on rental income of landlords.

169.	Which statement(s) is TRUE? I. Regulations that limit the rate of increase in rents are equally as inefficient as rent controls. II. Rent regulations reduce the incentive for landlords to cut back on maintenance. III. Regulations that limit the rate of increase in rents allow the price of rental housing to respond to market forces.
	A)	I only
	B)	I and III only
	C)	I, II, and III
	D)	II and III only

170.	The BEST way to help the poor afford housing is by:
	A)	using rent control.
	B)	raising the minimum wage.
	C)	issuing housing vouchers.
	D)	raising payroll taxes.

171.	Housing vouchers are a better option than rent controls when a government is attempting to make housing affordable for the poor. The reason is that the housing voucher entitles the tenant to:
	A)	live in a rent-controlled apartment.
	B)	free maintenance of their apartment.
	C)	a certain dollar amount off the rent of any apartment they choose.
	D)	live in a luxury apartment of their choice.

172.	An alternative to rent controls that increases the quantity of housing and targets consumers that need low-cost rental property is:
	A)	tax credits.
	B)	vouchers.
	C)	subsidies to landlords
	D)	not available.

173.	If affordable housing is a concern, then a better policy than rent controls may be for the government to provide:
	A)	subsidized housing.
	B)	additional jobs.
	C)	housing vouchers.
	D)	mortgage discounts.

174.	Which statement is FALSE?
	A)	A frost that destroys half the orange crop will create a surplus of oranges.
	B)	It is possible to have a shortage of a good even if its supplies are abundant.
	C)	Politicians often blame speculators and profiteers for rising prices rather than changes in supply and demand.
	D)	To eliminate a shortage, prices must rise.

175.	If price controls are so harmful, why would a country ever impose them?
	A)	No one really knows.
	B)	Price controls are usually thought to be beneficial.
	C)	Politicians have strong incentives to respond to public opinion with price controls when prices increase sharply.
	D)	People usually see the consequences of price controls but think they will be a good policy.

176.	Price controls are usually imposed in response to an:
	A)	expected increase in prices.
	B)	expected decrease in prices.
	C)	unexpected increase in prices.
	D)	unexpected decrease in prices.

177.	The shortages that result from imposing price controls:
	A)	are rarely recognized by the public as a result of the price controls themselves.
	B)	typically lead the public to lobby politicians to repeal the price controls.
	C)	only last for a short while until markets can adjust to the new lower prices.
	D)	create higher prices.

178.	Dramatic price increases, such as those seen in the markets for gas and oil in the 1970s, are typically the result of:
	A)	price gouging by big businesses.
	B)	shortages.
	C)	reductions in supply.
	D)	foreign intervention in markets.

179.	Why do many consumers and politicians advocate for price controls?
	A)	Price controls are the only way for the poor to obtain certain goods when prices rise.
	B)	Most consumers and politicians do not advocate for price controls, because they understand their negative consequences.
	C)	Price controls appear to be a straightforward response to the problem of price increases.
	D)	The gains in consumer surplus typically outweigh the loss in producer profits.

180.	Ancient Athens had strict controls on the price of wheat, and punishment for violation of the price control was death. The speech by a politician imploring a jury to convict an alleged violator of the law survives to this day: “And consider that in consequence of this vocation, very many have already stood trial for their lives; and so great the [earnings] which they are able to derive from it that they prefer to risk their life every day, rather than cease to draw from, the public, their improper profits.” Which of the following is the most likely reason why merchants were willing to risk their lives to charge more than the legal price?
	A)	Merchants were irrationally blinded by greed.
	B)	Merchants were not aware of the law, since it was not publically declared.
	C)	Merchants could not stay in business if they didn’t raise prices.
	D)	Merchants did not like the general public, who approved of these laws, and this is how some chose their revenge.

181.	After a hurricane, the prices of many items rise. How BEST might the government help poor people be able to afford to buy goods and services?
	A)	institute price controls at pre-hurricane prices
	B)	set prices at zero, so consumers can buy what they need without financial distress
	C)	give poor people debit cards for use in purchasing essential items, while leaving prices unregulated
	D)	institute a wage freeze to keep the costs of production from rising too rapidly

182.	An economy with permanent, universal price controls is in essence a:
	A)	market economy.
	B)	social economy.
	C)	free economy.
	D)	command economy.

183.	The blat economy described in the text results when price controls are:
	A)	extensive and cause chronic shortages in the economy.
	B)	extensive but the causes of shortages in the economy are only temporary.
	C)	short-lasting but cause chronic shortages in the economy.
	D)	short-lasting and cause only temporary shortages in the economy.

184.	What does the Russian word blat refer to?
	A)	a Russian brand of vodka
	B)	having connections that enable one to obtain favors
	C)	the amount of time people spend waiting in lines to buy
	D)	things There is no such word.

185.	To what does the Russian concept of blat refer?
	A)	the barter system that developed in Russia as a result of the shortages of goods
	B)	the command economy system that was instituted in Russia
	C)	the act of standing in lines to buy goods
	D)	having connections that one can use to get favors

186.	Which scenario shows how the Russian concept of blat works during a beef shortage?
	A)	a politician acquires some steak through his friendship with the owner of the beef factory
	B)	a beef factory owner hoards some steak at his own house
	C)	a beef factory owner realizes that there is a surplus of plastic wrapping
	D)	more people than usual stand in line to try to buy steak

187.	The chronic shortages of goods in the Soviet Union were:
	A)	caused by the CIA’s manipulation of the Soviet currency.
	B)	limited to luxury items, like yachts and airplanes.
	C)	the result of too much defense spending that hoarded resources away from the production of consumer goods.
	D)	beneficial to the party elite who traded scarce goods for favors and other scarce goods.

188.	What is blat?
	A)	a long line
	B)	the time costs associated with buying price-controlled goods
	C)	the use of political connections to get favors
	D)	a dilapidated rent-controlled apartment.

189.	Likely the most significant example of federal price controls in the United States, in terms of value of regulated market, came in the market for:
	A)	coal.
	B)	housing.
	C)	automobiles.
	D)	oil.

190.	Which is NOT a cost of binding price controls?
	A)	misallocation
	B)	deadweight loss
	C)	search costs
	D)	equity costs

191.	Likely the most significant example of federal price controls in the United States, in terms of value of regulated market, came under President:
	A)	Barack Obama.
	B)	Richard Nixon.
	C)	Bill Clinton.
	D)	Ronald Reagan.

192.	Airlines in the United States were subject to ______ regulation from 1938 to 1978.
	A)	binding price ceiling
	B)	binding price floor
	C)	nonbinding price ceiling
	D)	nonbinding price floor

193.	Which statement(s) is TRUE? Price floors set above the equilibrium price cause: I. shortages. II. surpluses. III. deadweight losses.
	A)	I and III only
	B)	II and III only
	C)	III only
	D)	I is true if demand is elastic; however, II is true if demand is inelastic.

194.	The presence of price floors in a market usually is an indication that:
	A)	there is an insufficient quantity of a good or service being produced.
	B)	the forces of supply and demand are unable to establish an equilibrium price.
	C)	sellers of the good or service outnumber the buyers.
	D)	policymakers believe the price floor does not involve inequities.

195.	A price floor is:
	A)	a maximum price allowed by law.
	B)	a minimum price allowed by law.
	C)	able to produce an efficient outcome.
	D)	a tool used to increase government revenues.

196.	The most common example of a price being controlled above market levels involves a good for which the:
	A)	sellers outnumber the buyers.
	B)	buyers outnumber the sellers.
	C)	market is controlled by a monopolist.
	D)	market is controlled by the government.

197.	When the minimum price that can be legally charged is above the market price, we say there is a price:
	A)	support.
	B)	stability.
	C)	ceiling.
	D)	floor.

198.	Price floors would create all of the following effects EXCEPT:
	A)	surpluses.
	B)	deadweight loss.
	C)	wasteful decreases in product quality.
	D)	misallocation of resources.

199.	A price floor:
	A)	is a maximum price allowed by law.
	B)	is a minimum price allowed by law.
	C)	has an effect only when it is set below the market price.
	D)	has little effect on market activity.

200.	Which would NOT happen as the result of a price floor?
	A)	a surplus of the good
	B)	lost gains from trade
	C)	misallocation of resources
	D)	decreases in product quality

201.	Raising the minimum wage is not an effective way to eliminate poverty because increases in the minimum wage:
	A)	do not increase incomes.
	B)	create incentives for workers to exit the labor force.
	C)	create higher unemployment.
	D)	tend to simply increase birth rates among low-income households.

202.	Which statement(s) is TRUE? I. Price floors are legally established minimum prices for goods and services. II. Price floors create surpluses, whereas price ceilings create shortages. III. Price floors reduce quality of goods and services.
	A)	I and II only
	B)	II only
	C)	I, II, and III
	D)	I only

203.	In the case of a binding price floor, the price paid in the market will be:
	A)	greater than the free market equilibrium price.
	B)	less than the free market equilibrium price.
	C)	equal to the free market equilibrium price.
	D)	unable to be compared with the free market equilibrium price.

204.	In the case of a nonbinding price floor, the price paid in the market will be:
	A)	more than a free market equilibrium price.
	B)	less than a free market equilibrium price.
	C)	equal to a free market equilibrium price.
	D)	unable to be compared with a free market equilibrium price.

205.	A binding price floor leads to a(n):
	A)	shortage.
	B)	surplus.
	C)	equilibrium quantity.
	D)	quantity of zero units.

206.	A nonbinding price floor leads to a(n):
	A)	shortage.
	B)	surplus.
	C)	equilibrium quantity.
	D)	quantity of zero units.

207.	The quantity exchanged of a good ______ under a binding price floor.
	A)	rises
	B)	remains the same
	C)	falls
	D)	changes in an indeterminate direction

208.	When a price floor is in effect:
	A)	demanders get too strong of a signal from suppliers about product availability.
	B)	suppliers have no incentive to signal product availability to demanders.
	C)	all of the suppliers’ product is purchased at the lower price, so there is no need to signal anything to demanders.
	D)	suppliers cannot signal their product availability to demanders.

209.	If an American teenager will work for $5 an hour and an employer is willing to pay that wage, but the minimum wage is $7.25 an hour and the employer is not willing to pay that much, the teenager goes unemployed and the market experiences:
	A)	lost gains from trade.
	B)	wasteful increases in quality.
	C)	resource misallocations.
	D)	reductions in product quality.

210.	In Puerto Rico in 1938, the market wage was 3¢ to 4¢ per hour when Congress passed a law raising it to 25¢ per hour. Workers in Puerto Rico were:
	A)	happy with their raise.
	B)	hoping for a higher minimum wage.
	C)	devastated.
	D)	indifferent.

211.	Which statement(s) is NOT true? I. The increase in the minimum wage in Puerto Rico in 1938 did not affect Puerto Rico’s unemployment rate. II. About 15% of all hourly workers in the United States earn the minimum wage. III. Raising the minimum wage is an effective method to combat poverty. IV. Raising the minimum wage decreases employment of low-skilled workers.
	A)	I and II only
	B)	II and III only
	C)	I and IV only
	D)	IV only

Use the following to answer questions 212-213:

Figure: Minimum Wage

212.	(Figure: Minimum Wage) Refer to the figure. At a minimum wage of $8, firms are willing to hire ________ workers.
	A)	45
	B)	25
	C)	35
	D)	more than 45

213.	(Figure: Minimum Wage) Refer to the figure. How many workers are unemployed at a minimum wage of $8?
	A)	10
	B)	20
	C)	25
	D)	35

214.	Figure: Unskilled Labor Market Based on the figure, what is the number of unemployed workers if a minimum wage of $6 is set in this market for unskilled labor?
	A)	40
	B)	55
	C)	20
	D)	95

215.	The Federal minimum wage causes unemployment MOSTLY among:
	A)	middle-class workers.
	B)	young unskilled workers.
	C)	college graduates.
	D)	highly skilled workers.

216.	For a price floor to prevent market forces from finding the equilibrium price, it must be set:
	A)	above the equilibrium price, causing a market shortage.
	B)	below the equilibrium price, causing a market shortage.
	C)	below the equilibrium price, causing a market surplus.
	D)	above the equilibrium price, causing a market surplus.

217.	A price floor causes:
	A)	excess demand.
	B)	a shortage.
	C)	a surplus.
	D)	quantity demanded to exceed quantity supplied.

218.	The minimum wage is an example of a(n):
	A)	price ceiling.
	B)	price floor.
	C)	wage subsidy.
	D)	efficient policy.

219.	Figure: Labor Market Refer to the figure. Which statement is correct?
	A)	A price floor set at W₁ would cause a labor surplus best labeled by A.
	B)	A price floor set at W₁ would cause a labor surplus best labeled by B.
	C)	A price floor set at W₂ would cause a labor surplus best labeled by A.
	D)	A price floor set at W₂ would cause a labor surplus best labeled by B.

220.	If a minimum wage is posted in the labor market:
	A)	the demand for labor would increase.
	B)	the supply of labor would decrease.
	C)	a surplus of labor would develop.
	D)	All of the answers are correct.

221.	An increase in the minimum wage would likely increase unemployment among which group of workers?
	A)	college graduates
	B)	unskilled workers
	C)	female workers
	D)	older workers

222.	Figure: Labor Market 2 Refer to the figure. In the figure, there will be 6 unemployed workers at a minimum wage of:
	A)	$4.
	B)	$6.
	C)	$8.
	D)	$7.

223.	The higher the minimum wage is above the equilibrium wage, the:
	A)	greater is the number of low-skilled unemployed workers.
	B)	smaller is the labor surplus among teenagers.
	C)	smaller is the number of low-skilled unemployed workers.
	D)	more likely it is for students to stay in high school and receive their diploma.

224.	Minimum wage laws cause ______ low-skilled employment.
	A)	an increase in
	B)	a decrease in
	C)	no change in
	D)	an indeterminate change in

225.	In the case of a binding price floor, economists expect the quality level of a good to:
	A)	rise.
	B)	remain the same.
	C)	fall.
	D)	change in an indeterminate direction.

226.	We commonly associate ______ with agricultural products.
	A)	price ceilings
	B)	price floors
	C)	unregulated markets
	D)	rent control

227.	If, under price control, quantity supplied equals 50 units and quantity demanded equals 40 units, then the price control is a __________.
	A)	binding price ceiling
	B)	binding price floor
	C)	nonbinding price ceiling
	D)	nonbinding price floor

228.	Figure: Minimum Wage for Country A Refer to the figure. The deadweight loss from the $8 minimum wage is area:
	A)	bc.
	B)	ad.
	C)	ce.
	D)	bd.

229.	Ben is willing to work for $4/hour and an employer is willing to hire Ben for $7/hour. Which statements is TRUE?
	A)	A minimum wage of $7.50/hour would prevent this mutually beneficial exchange.
	B)	Minimum wages do not prevent mutually beneficial exchanges.
	C)	A minimum wage of $4.50/hour would prevent this mutually beneficial exchange.
	D)	A minimum wage of $3.50/hour would prevent this mutually beneficial exchange.

Use the following to answer questions 230-231:

Figure: Price Floor

230.	(Figure: Price Floor) Refer to the figure. How much unemployment results from the imposition of a price floor set at $10?
	A)	100 units
	B)	310 units
	C)	50 units
	D)	210 units

231.	(Figure: Price Floor) Refer to the figure. What are the lost gains from trade as a result of the imposition of the price floor?
	A)	Areas (B + C)
	B)	Area D
	C)	Areas (C + F)
	D)	Areas (B + E)

232.	Figure: Deadweight Loss Refer to the figure. What areas represent the deadweight losses in the labor market as a result of the imposition of a minimum wage at $4?
	A)	Areas (C + F)
	B)	Areas (B + C)
	C)	Area D
	D)	There is no deadweight loss in this market as a result of the $4 minimum wage.

233.	The U.S. Congress first instituted the minimum wage in:
	A)	1914.
	B)	1974.
	C)	1938.
	D)	1925.

234.	If the minimum wage is lowered and closer to the market level, the:
	A)	gains from trade would decrease, compared to a higher minimum wage.
	B)	gains from trade would increase, compared to a higher minimum wage.
	C)	lost gains from trade would increase, compared to a higher minimum wage.
	D)	deadweight loss would increase, compared to a higher minimum wage.

235.	The influence of the minimum wage in the American economy is very small because MOST workers earn:
	A)	more than the minimum wage.
	B)	less than the minimum wage.
	C)	more or less than the minimum wage.
	D)	near the minimum wage.

236.	Which of these cases would likely result from an increase in minimum wage?
	A)	an increase in the price of hamburgers
	B)	an increase in unemployment among teenagers
	C)	incomes increase for those who keep minimum-wage jobs
	D)	All of the answers are correct.

237.	Figure: Labor Market 3 Refer to the figure. In the diagram, a minimum wage of $7 causes a deadweight loss of:
	A)	W + X.
	B)	X + Z.
	C)	V + Y.
	D)	Y + W.

238.	Puerto Rico’s minimum wage increased dramatically as result of the 1938 Fair Labor Standards Act. This legislation:
	A)	caused many Puerto Rican firms to go bankrupt, sending unemployment soaring.
	B)	is a case in point that minimum wage increases have different effects in non-capitalist countries.
	C)	provided a counterexample to the claim that minimum wage increases cause unemployment.
	D)	had little effect on Puerto Rican labor markets because the minimum wage increase was quite modest.

239.	Price floors encourage firms to provide ________ quality.
	A)	too little
	B)	too much
	C)	the right amount of
	D)	no

240.	The deregulation of the airline industry caused:
	A)	lower prices and more flights.
	B)	higher prices and fewer flights.
	C)	higher prices and more flights.
	D)	lower prices and fewer flights.

241.	The price floor regulation of the airline industry:
	A)	was the leading factor in the development of low-cost airlines.
	B)	led to a misallocation of resources by preventing the entry of innovative airlines.
	C)	allowed the middle class the opportunity to fly at reduced rates.
	D)	was based on the principle of low prices and low quality.

242.	What would be the LEAST likely result of a price floor in the market for airline travel?
	A)	rapid replacement of old airliners with new aircraft
	B)	narrow seats and basic meals like peanuts or chips with a coffee or soda
	C)	special incentives like airline mileage clubs to attract customers
	D)	excellent engine maintenance

243.	Deregulation of the airline markets reduced waste, increased efficiency, and:
	A)	eliminated competition.
	B)	improved allocation of resources.
	C)	raised prices.
	D)	caused an increase in costs.

244.	Figure: Airline Industry Refer to the figure. Suppose that airlines are regulated and prices are kept above the market level. According to the figure, the areas A and B represent, respectively, the:
	A)	deadweight loss and quality waste.
	B)	deadweight loss and consumer surplus.
	C)	quality waste and deadweight loss.
	D)	quality waste and consumer surplus.

245.	Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:
	A)	various options.
	B)	more quantity.
	C)	more discount.
	D)	higher quality.

246.	If firms are unable to lower prices because of a legally mandated price floor, then:
	A)	firms are better off (higher profits) at the expense of consumers.
	B)	firms will often compete by offering higher-quality goods than consumers are willing to pay for.
	C)	consumers will decrease their demand due to the high prices.
	D)	quantity supplied will be less than quantity demanded.

247.	An employer has work that can be done in the same time by one high-skilled worker paid $50 an hour or by eight low-skilled workers paid $5 an hour each and the minimum wage is $7.25 an hour. In this scenario, who benefits from the minimum wage, the high-skilled worker or the low-skilled workers? (Hint: Who would you hire for the job?)
	A)	the high-skilled worker
	B)	the low-skilled workers
	C)	both benefit equally
	D)	It is impossible to say who benefits more.

248.	Price floors on airlines:
	A)	kept ticket prices much lower than unregulated ticket prices.
	B)	caused airlines to compete by offering customers higher-quality services, such as better meals and wider seats.
	C)	reduced the quality of airline services (for example, less frequent flights, peanuts instead of meals).
	D)	gave airlines an incentive to lower ticket prices to increase ticket sales.

249.	A “quality waste” refers to:
	A)	an increase in quality under a price ceiling.
	B)	an increase in quality under a price floor.
	C)	a decrease in quality under a price ceiling.
	D)	a decrease in quality under a price floor.

250.	In 1974, there were ________ airline firms operating in the United States.
	A)	10
	B)	79
	C)	38
	D)	16

251.	Southwest Airlines was able to enter the national market in 1978 as a result of:
	A)	winning a series of lawsuits.
	B)	accumulating market share.
	C)	airline deregulation.
	D)	establishment of new price controls.

252.	Which is not an effect of a price floor?
	A)	misallocation of resources
	B)	deregulation
	C)	surpluses
	D)	wasteful increases in quality

253.	One of the virtues of the market process is that it is open to new ideas, innovations, and:
	A)	reallocation of property.
	B)	central planning by government.
	C)	profits.
	D)	experiments.

254.	Deregulation of the airline industry has led to:
	A)	an increase in the quality and safety of air travel.
	B)	increases in the costs of production in air travel.
	C)	more firms providing air travel services.
	D)	fewer firms providing air travel services.

255.	Which statement is correct regarding the restrictions on entry into the airline industry?
	A)	Resources were equally allocated because new airlines were kept out of the industry.
	B)	Resources were misallocated because low-cost airlines were kept out of the industry.
	C)	Resources were efficiently allocated because high-cost airlines were kept out of the industry.
	D)	Resources were reallocated because only low-cost airlines were allowed to enter the industry.

256.	Deregulation improves the allocation of resources by:
	A)	allocating more resources to the firms.
	B)	decreasing the number of firms in the market.
	C)	allowing low-cost, innovative firms to enter the market.
	D)	creating more market opportunities to the firms.

257.	Airline regulation from 1938 to 1978 was successful in keeping prices high because:
	A)	it controlled price, but not entry into the airline market.
	B)	it controlled both price and entry into the airline market.
	C)	it listened to the requests of suppliers during this time at the expense of consumers.
	D)	of declining production costs.

258.	Labor unions are composed of high-skilled workers, but generally support minimum wage laws that typically affect only low-skilled workers. Their support makes more sense by considering that low-skilled labor is a ______ for high-skilled labor, and minimum wages ______ the quantity demanded of low-skilled labor.
	A)	complement; increase
	B)	complement; decrease
	C)	substitute; increase
	D)	substitute; decrease

259.	When price floors are in effect, goods and services:
	A)	are still allocated efficiently.
	B)	are not necessarily supplied by their lowest-cost producer.
	C)	do not necessarily flow to their highest-valued use.
	D)	are neither necessarily supplied by their lowest-cost producer nor do they flow to their highest-valued use.

260.	Regulation of airline fares under the Civil Aeronautics Board:
	A)	meant the government prevented the entry of new competitors to maintain high ticket prices.
	B)	led to greater innovation in the airline industry at the cost of higher ticket prices.
	C)	created incentives for optimal resource allocation.
	D)	made it possible for lower-income Americans to afford air travel for the first time.

261.	In a market the equilibrium price is $20. A price ceiling of $15 creates a bigger shortage than a price ceiling of $10.
	A)	True
	B)	False

262.	A price ceiling is a legal maximum on the price of the good or service.
	A)	True
	B)	False

263.	Most economists favor price controls as a way of allocating resources.
	A)	True
	B)	False

264.	A price ceiling is a minimum price below the market price that can be legally charged.
	A)	True
	B)	False

265.	A price ceiling set below the equilibrium price always results in a shortage.
	A)	True
	B)	False

266.	If a price ceiling is below equilibrium price, the willingness to pay for the quantity provided will be above equilibrium price.
	A)	True
	B)	False

267.	President Richard Nixon froze all prices and wages in 1971, which led to shortages of goods throughout the economy.
	A)	True
	B)	False

268.	Businesses may respond to price ceilings by closing down, reducing product quality, and by accepting bribes to sell their product.
	A)	True
	B)	False

269.	Rent control laws are most commonly a form of price ceiling.
	A)	True
	B)	False

270.	Minimum wage laws are an example of price ceilings.
	A)	True
	B)	False

271.	Minimum wage laws are sometimes a price floor and sometimes a price ceiling.
	A)	True
	B)	False

272.	Price ceilings are always good for consumer welfare.
	A)	True
	B)	False

273.	Suppose that supply is fixed at 100 units and demand is Q = 500 – P. A price ceiling of $100 creates a shortage of 400 units.
	A)	True
	B)	False

274.	Price ceilings cause the quantity demanded to be less than the quantity supplied.
	A)	True
	B)	False

275.	Even though shortages typically result from the imposition of price ceilings, the overall gains in economic efficiency outweigh the costs.
	A)	True
	B)	False

276.	Price controls such as those instituted by President Richard Nixon in 1971 led to severe shortages in many markets across the United States.
	A)	True
	B)	False

277.	When he was president, Richard Nixon froze all prices and wages in the United States.
	A)	True
	B)	False

278.	If price ceilings do not allow prices to rise, then demanders will be unable to signal their needs to suppliers.
	A)	True
	B)	False

279.	Once one accounts for time costs and bribes, it may be more expensive to make purchases at the government-controlled price than at the free-market price.
	A)	True
	B)	False

280.	Suppose a $3 per gallon price ceiling is imposed on gasoline, and the equilibrium price of gasoline is $2 per gallon. Such a price ceiling would lead to long lines at gas stations.
	A)	True
	B)	False

281.	One benefit of shortages is that they eliminate competition since buyers cannot compete for goods by paying higher prices.
	A)	True
	B)	False

282.	Once search and waiting costs are taken into account, price ceilings can cause consumers to spend more for a good than if prices were unregulated.
	A)	True
	B)	False

283.	The producer and consumer surplus lost as a result of price ceilings is often referred to as deadweight loss.
	A)	True
	B)	False

284.	The minimum wage causes unemployment mainly among poor, unskilled workers.
	A)	True
	B)	False

285.	The quantity traded with a binding price ceiling is lower than the quantity traded without a price ceiling, which means that price ceilings create lost gains from trade.
	A)	True
	B)	False

286.	If price controls are imposed, gains from trade, including consumer and producer surplus, are likely to increase.
	A)	True
	B)	False

287.	When prices are not allowed to rise, there is no incentive for suppliers to ship resources to where they are needed most.
	A)	True
	B)	False

288.	Under airline regulation, within-state flights were cheaper than interstate flights of comparable length.
	A)	True
	B)	False

289.	Prices ceilings misallocate resources because with them resources are not necessarily allocated to their highest-valued use.
	A)	True
	B)	False

290.	When price ceilings are effective, gains from trade are usually lower than if the available goods are allocated to the highest value uses.
	A)	True
	B)	False

291.	Effective price ceilings cause misallocation of resources because scarce resources are usually not allocated to their highest-value uses.
	A)	True
	B)	False

292.	Housing shortages caused by rent controls are larger in the long run because the supply of housing is more elastic in the long run.
	A)	True
	B)	False

293.	When a crisis in the Middle East reduces the supply of oil, the price system rationally responds by reallocating oil from highest-value uses to lower-valued uses.
	A)	True
	B)	False

294.	During the 1970s, the 11-tier oil production definitions came into play because of firms’ attempts to bypass regulations and produce decontrolled oil.
	A)	True
	B)	False

295.	Rent controls create large shortages in the long run rather than the short run because the long-run supply curve for apartments is inelastic.
	A)	True
	B)	False

296.	The long-run supply curve for rent-controlled apartments is generally more inelastic than the short-run supply curve.
	A)	True
	B)	False

297.	The poor state of the economy was the dominant factor that caused the fall in the number of new apartments built in Ontario, Canada, during the first half of the 1970s.
	A)	True
	B)	False

298.	People typically blame price controls for the problems caused by price controls.
	A)	True
	B)	False

299.	The Soviet Union’s experience with price controls demonstrated that, with careful planning, shortages and surpluses were a rare event.
	A)	True
	B)	False

300.	When the maximum price that can be legally charged is above the market price we say that there is a price floor.
	A)	True
	B)	False

301.	A price floor is a legal maximum on the price of a good or service.
	A)	True
	B)	False

302.	If a price floor is above the equilibrium price it will have no effect in the market.
	A)	True
	B)	False

303.	If a price floor is below the equilibrium price, a shortage will result.
	A)	True
	B)	False

304.	The minimum wage is an example of a price floor in the labor market.
	A)	True
	B)	False

305.	A minimum wage mostly creates unemployment among older workers.
	A)	True
	B)	False

306.	Although a minimum wage increases unemployment, it doesn’t create a deadweight loss.
	A)	True
	B)	False

307.	A price floor makes it illegal for firms to compete for more customers by lowering prices, causing firms to compete by offering customers higher quality.
	A)	True
	B)	False

308.	The Civil Aeronautics Board regulated airline fares above the free-market rates, which led airlines to compete by offering fancy meals, wide seats, and frequent flights.
	A)	True
	B)	False

309.	Price floors and price ceilings both result in lost gains from trade and decreases in the quality of the product.
	A)	True
	B)	False

310.	Regulation of entry in the airline industry increased costs and reduced innovation.
	A)	True
	B)	False

311.	Price floors set above equilibrium encourage quality waste and wasteful lines.
	A)	True
	B)	False

312.	If the equilibrium wage is $10 an hour and the government sets a minimum wage of $8, there will be a shortage of labor.
	A)	True
	B)	False

313.	Minimum wage laws are an example of price floors.
	A)	True
	B)	False

314.	In the presence of a price floor, some suppliers are willing to take a lower price for their goods, but these trades never take place because they are illegal. This illustrates the problem of misallocation of resources.
	A)	True
	B)	False

315.	Briefly discuss the U.S. experience with price ceilings during the early 1970s. What effects of the price ceilings became apparent during this period, and how did that period eventually end?

316.

Assume that a market is defined by two equations: the demand equation is Q_d = 60 – 5P, and the supply equation is Q_s = 5P. Now suppose that a price ceiling is instituted at $3. Use this information to answer the questions below.

a. What is the equilibrium price and quantity in this market?

b. What is the amount of the shortage at the price ceiling?

c. What is the total value of time wasted by consumers standing in line?

317.	Illustrate on a supply and demand diagram how price ceilings may distort the market outcome and specify what secondary effects price ceilings can create.

318.

A market’s demand and supply curves are given by:

Q_d = 400 – 3P

Q_s = 100 + 2P

where Q_d is quantity demanded, Q_s quantity supplied, and P is the price.

a. Suppose the government enacts a price ceiling of $60. What is the quantity demanded and supplied? Is the market characterized by a shortage?

b. Suppose that supply conditions in the market change to Q_s = 80 + 2P. Given the price ceiling of $60, what happens to quantity demanded and quantity supplied? Is the market characterized by a shortage? How much are consumers willing to pay per unit for the quantity transacted?

319.

When the price of gasoline rose to $4 per gallon in the summer of 2008, many people were outraged at how gas companies were “price gouging” individuals, and called for price controls on gasoline. If the government had agreed to legally cap the price of gasoline, would this have lowered the cost to consumers? Explain.

320.	Using a supply and demand diagram as a reference, discuss the way a price ceiling causes a reduction in gains from trade.

321.

Many times after natural disasters such as hurricanes, prices are controlled so that it is illegal to charge any price greater than “pre-hurricane” levels. For consumers who value these goods very highly, is this a good policy? If prices were allowed to increase, what do you think would happen to supply of these highly valued goods? Explain.

322.

Figure: Allocating Goods under Price Ceilings

Refer to the figure. Using the information provided in the graph, answer the following questions:

a. If the goods were allocated only to those users who had the highest-value uses, find the total dollar amount of consumer surplus.

b. If the goods are allocated randomly between the high-value uses and the low-value uses, then what is the average value of the good?

c. If goods are allocated randomly, what is the total dollar amount of consumer surplus?

323.

Figure: Random Allocation under Price Ceilings

Refer to the figure. The government enacted a price ceiling of $6 per unit. Using the information provided in the graph, calculate the following:

a. If the goods are allocated randomly between the high-value uses and the low-value uses, what is the total amount of consumer surplus in dollars?

b. What is the lost amount of consumer surplus when goods are allocated randomly, when compared to a situation in which the goods are allocated only to the highest-value uses?

324.	Rent controls are typically implemented as a means of helping low-income families afford housing. Is this a good way to help poor families in general? Explain why or why not.

325.	Do shortages caused by rent controls tend to be larger in the short run or the long run? Use a supply and demand diagram to help illustrate your answer.

326.	Rent controls have five important effects on the market for apartments. Please list and provide an example of each effect.

327.	Specify the argument in favor of rent controls and the arguments against rent controls. Explain what other possible policies can create affordable housing.

328.	Would you expect shortages due to rent controls to be more or less severe in the short run or in the long run? Does the elasticity of supply have a role to play?

329.	Illustrate on a demand and supply diagram how the existence of a price floor would distort the market outcome, and specify what effect (i.e., shortage or surplus) the price floor may create.

330.

The demand and supply of labor are given by:

Q_d = 1,000 – 10W

Q_s = 800 + 40W

where Q_d is the quantity demanded of labor, Q_s is the quantity supplied of labor, and W is the hourly wage.

a. What is the equilibrium wage and level of employment?

b. Suppose the government mandates a minimum wage of $7. How many workers will firms employ?

c. How many workers are unemployed because of the minimum wage of $7?

331.

Currently, the federal minimum wage is set at $7.25 per hour. A survey conducted by Newsweek magazine (June 27, 2011) indicated that many Americans would be willing to work for far less than the minimum wage—some as low as 25¢ per hour! What would happen if the U.S. government eliminated the minimum wage, and instead let wages be set by the marketplace?

332.

Graphically illustrate supply and demand in a market where a price floor has been instituted above the equilibrium price. Is there a shortage or a surplus of this good because of the price floor? On your graph, shade in the area of lost gains from trade and explain why this results in market inefficiency.

Answer Key

1.	C
2.	A
3.	B
4.	C
5.	C
6.	B
7.	C
8.	A
9.	D
10.	B
11.	D
12.	C
13.	C
14.	A
15.	C
16.	C
17.	D
18.	D
19.	B
20.	C
21.	A
22.	C
23.	C
24.	B
25.	C
26.	A
27.	A
28.	B
29.	C
30.	D
31.	C
32.	D
33.	B
34.	B
35.	B
36.	A
37.	A
38.	B
39.	B
40.	B
41.	B
42.	D
43.	B
44.	B
45.	C
46.	D
47.	B
48.	C
49.	C
50.	B
51.	D
52.	C
53.	C
54.	C
55.	C
56.	C
57.	D
58.	C
59.	A
60.	B
61.	B
62.	C
63.	A
64.	B
65.	D
66.	D
67.	D
68.	D
69.	D
70.	A
71.	B
72.	D
73.	A
74.	A
75.	C
76.	A
77.	B
78.	D
79.	B
80.	C
81.	C
82.	A
83.	D
84.	C
85.	A
86.	A
87.	D
88.	A
89.	C
90.	A
91.	C
92.	A
93.	A
94.	B
95.	B
96.	C
97.	A
98.	A
99.	A
100.	A
101.	D
102.	B
103.	A
104.	C
105.	A
106.	C
107.	C
108.	B
109.	D
110.	A
111.	B
112.	B
113.	B
114.	A
115.	C
116.	B
117.	D
118.	C
119.	D
120.	C
121.	A
122.	C
123.	B
124.	A
125.	C
126.	B
127.	D
128.	A
129.	A
130.	C
131.	B
132.	D
133.	B
134.	C
135.	B
136.	C
137.	C
138.	A
139.	C
140.	D
141.	B
142.	B
143.	B
144.	B
145.	A
146.	C
147.	D
148.	C
149.	B
150.	A
151.	D
152.	C
153.	A
154.	A
155.	A
156.	A
157.	B
158.	B
159.	A
160.	D
161.	D
162.	C
163.	D
164.	C
165.	A
166.	C
167.	A
168.	C
169.	D
170.	C
171.	C
172.	B
173.	C
174.	A
175.	C
176.	C
177.	A
178.	C
179.	C
180.	C
181.	C
182.	D
183.	A
184.	B
185.	D
186.	A
187.	D
188.	C
189.	D
190.	D
191.	B
192.	B
193.	B
194.	C
195.	B
196.	A
197.	D
198.	C
199.	B
200.	D
201.	C
202.	A
203.	A
204.	C
205.	B
206.	C
207.	C
208.	D
209.	A
210.	C
211.	C
212.	B
213.	B
214.	A
215.	B
216.	D
217.	C
218.	B
219.	C
220.	C
221.	B
222.	C
223.	A
224.	B
225.	A
226.	B
227.	B
228.	C
229.	A
230.	A
231.	C
232.	D
233.	C
234.	B
235.	A
236.	D
237.	B
238.	A
239.	B
240.	A
241.	B
242.	B
243.	B
244.	C
245.	D
246.	B
247.	A
248.	B
249.	B
250.	A
251.	C
252.	B
253.	D
254.	C
255.	B
256.	C
257.	B
258.	D
259.	B
260.	A
261.	B
262.	A
263.	B
264.	B
265.	A
266.	A
267.	A
268.	A
269.	A
270.	B
271.	B
272.	B
273.	B
274.	B
275.	B
276.	A
277.	A
278.	A
279.	A
280.	B
281.	B
282.	A
283.	A
284.	A
285.	A
286.	B
287.	A
288.	A
289.	A
290.	A
291.	A
292.	A
293.	B
294.	A
295.	B
296.	B
297.	B
298.	B
299.	B
300.	B
301.	B
302.	B
303.	B
304.	A
305.	B
306.	B
307.	A
308.	A
309.	B
310.	A
311.	B
312.	B
313.	A
314.	B
315.	In August 1971, President Richard Nixon froze all wages and prices. Shortages began to appear soon after in industries like lumber, steel, aluminum, paper, clothing, etc. Since prices could not be raised, sellers began to lower the quality of products and service. For example, the full service gas station disappeared during this time. The most serious shortage was the shortage of oil. Goods are typically allocated randomly during a shortage and gas was no exception. In 1974, Business Week reported that while consumers waited three hours in line for gasoline in some states, consumers were getting easy access to gas in other states. When the shortages grew worse, President Nixon even ordered the closures of schools and factories. Daylight savings time and the 55 mph limit were instituted (this was repealed in the 1990s). Price controls for most goods were lifted by 1974, but price controls on oil lingered to a certain extent. Eventually President Ronald Reagan lifted all controls on oil prices when he took office in 1981.
316.	a. Equilibrium P = $6, and equilibrium Q = 30 units. b. Q_d = 60 – 5(3) = 45. Q_s = 5(3) = 15. Shortage = 30 units. c. The price associated with a Q_d of 15 units can be found by substituting the quantity back into the demand equation. 15 = 60 – 5P. P = $9. Therefore the total value of time wasted standing in line is $6 × 15 = $90.
317.	When the maximum price that can be legally charged is below the market price we say that there is a price ceiling. Price ceilings create five important effects: shortages, reduction in product quality, wasteful lineups and other costs of search, a loss of gains from trade, and a misallocation of resources.
318.	a. Q_d = 400 – 3(60) = 220; Q_s = 100 + 2(60) = 220. The market is in equilibrium so there is no shortage. b. Q_d = 400 – 3(60) = 220; Q_s = 80 + 2(60) = 200. There is a shortage of 20 units. The quantity transacted is 200. Willingness to pay for 200 units: 200 = 400 – 3P; 3P= 200; P = 200/3 = $66.67.
319.	No, this would not have decreased the total cost to consumers. Since the price ceiling on gasoline would have caused a shortage of gasoline, consumers would have had to expend additional time waiting in line or possibly even additional money on bribes, etc. Price controls do not eliminate competition; they merely change the form of competition. Therefore in the end, these price controls would not have been successful in lowering costs to consumers.
320.	The diagram is a copy of Figure 8.3 in the text. The student should identify the price ceiling, the shortage, and the losses in consumer and producer surplus. The student should identify these areas on the diagram indicating the loss in gains from trade.
321.	For consumers who value these goods (like bottled water and generators) very highly, this is not a good policy. The price controls create large shortages of these goods, and many times these consumers are unable to (legally) obtain these goods since they are unable to signal their high value by offering to pay more. In addition, with prices fixed at artificially low levels, there is no incentive for suppliers of these goods to increase supply. If prices were allowed to rise, this would entice new (or existing) suppliers to enter this market and hence the supply of these goods would rise; price controls; however, remove the incentive to respond rationally.
322.	a. Consumer surplus, if the goods were allocated to only the highest-value uses, would be the total area (A + B + C + D) = $1,560 b. $13 = (20 + 6)/2 c. Consumer surplus, if the goods were allocated randomly, would be the total area (C + D) = $840. Alternatively, consumer surplus is also (13 – 6)120 = $840
323.	a. Consumer surplus, if the goods are allocated randomly, would be the total of areas C + D. This is $12,000. b. A + B are lost if the goods are allocated randomly. This is $8,400.
324.	No, this is not a good means of helping. In general, rent controls create shortages that make it hard for poor families to even find suitable housing. In addition, it leads to decreases in the quality of housing, as owners attempt to offset losses from the lower prices by cutting their costs. With rent controls also come high search costs—these search costs can be especially costly for the people that landlords think are not “ideal renters” (unfortunately, many minorities or low-income households fall into this category). In short, most of the time rent controls typically end up making poor families worse off.
325.	Rent control creates larger shortages in the long run than in the short run. The short-run shortage is small since the apartment units are already built. In the long run, fewer new units are built and old apartments are converted into condominiums or torn down, so the shortage grows over time.
326.	1) Shortage: Since the rent-controlled price is below the equilibrium price, the quantity demanded of apartments will exceed the quantity supplied. The shortage will worsen over time as apartments are converted into office space, parking garages, and condominiums. Some apartments may even be abandoned or set on fire as a way to collect insurance money. 2) Reductions in quality: Because rent control reduces profits, landlords cut back on routine maintenance. Tenant complaints can more easily be ignored when there is a long line of potential renters who are seeking apartments. 3) Wasteful lineups and search costs: People may have to wait months to find a suitable apartment because of the shortage. When an apartment becomes available, landlords might require tenants to spend thousands of dollars purchasing worthless furniture. Some people may be discriminated against when trying to get an apartment. Landlords might prefer tenants without children or tenants without foreign accents. When resources are not allocated based on willingness to pay, they will frequently get allocated based on other criteria, such as skin color, nationality, and so on. 4) Lost gains from trade: At the rent-controlled price, there are numerous people willing to pay more for an apartment than the minimum required by a landlord, but these trades will not take place because the price cannot be bid above the controlled price. 5) Misallocation of resources: People living in rent-controlled apartments may prefer a bigger or smaller apartment but are reluctant to move because of the difficulty in finding available apartments. People with the highest willingness to pay may not be those who are actually renting the apartments.
327.	Without rent controls some people may not be able to afford appropriate housing. If rent controls are the only way to help the poor, then this would be an argument in favor of price controls. However, rent controls create shortages and lower the quality of apartments, which are rarely the best way to help the poor. A better policy than rent controls is for the government to provide housing vouchers, which would give qualifying consumers a voucher that can be applied to any unit of housing. Unlike rent controls, which create shortages, vouchers increase the supply of housing. Unlike rent controls, vouchers can also be targeted to consumers who need them.
328.	Since apartments cannot easily be moved, landlords are generally “stuck” and supply is more inelastic in the short run. They cannot easily pick up their apartments or convert them to other uses in the short run, so immediately after the institution of rent controls, shortages are less severe. In the long run, however, fewer new buildings are built and older buildings are either torn down or converted to condominiums, thereby increasing the severity of the shortage in the long run and resulting in a more elastic long-run supply.
329.	When the minimum price that can be legally charged is above the market price, we say that there is a price floor. Price floors create four important effects: surpluses, a loss of gains from trade, wasteful increases in quality, and a misallocation of resources.
330.	a. Q_d = Q_s, 1,000 – 10W = 800 + 40W, W = $4. The level of employment is 1,000 – 10 × 4 = 960. b. Q_d = 1,000 – 10 × 7 = 930. c. Unemployed = Q_s – Q_d = (800 + 40 × 7) – (1,000 – 10 × 7) = 150.
331.	Most likely the wage for low-skilled jobs/workers would fall immediately. Employment would increase as the quantity of workers hired rose as a result of the lower wages. In the long run, lower domestic wages may even entice more U.S. companies to locate more factories in the United States as a result of the lower wages, ultimately increasing demand for labor in the United States and raising wages.
332.	A price floor instituted above the equilibrium price will result in a surplus of the good. This results in lost gains from trade and market inefficiency because there are some suppliers of the good who would be willing to trade at a lower price (and, of course, buyers willing to pay a lower price). But these mutually beneficial trades do not happen because they are illegal.

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