Core Economics 3e

Price Ceilings and Price Floors

Multiple Choice Questions

After watching the Price Ceilings and Price Floors video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Price controls are sometimes used when the natural operation of free markets leads to:

positive externalities.

undesirable outcomes.

an efficient distribution of goods.

a trade deficit.

Question

2. An effective (or binding) price ceiling is a situation in which:

the government sets the maximum price for a good above its free market equilibrium price.

government sets the maximum price for a good below its free market equilibrium price.

competing firms collude to set the price of a good above its free market equilibrium price.

consumer unions bargain to set the price of a good below its free market equilibrium price.

Question

3. When price ceiling for a good is set below the free market equilibrium the result is a(n):

supply.

equilibrium.

surplus.

shortage.

Question

4. If an effective price ceiling is raised:

shortage increases.

shortage decreases.

surplus increases.

surplus decreases.

Question

5. The price floor in the figure has caused a(n):

excess demand.

equilibrium.

surplus.

shortage.

Question

6. What might be done with the surplus caused by a government agricultural price support program?

Some of the surplus might be used for school lunches and in other government institutions; other parts of the surplus might be destroyed.

The farmers producing the surplus might be asked to sell the excess above the market price.

The surplus could be used as seed for the next year’s crop.

The surplus might be sold to other countries above the world market price.

Question

7. One of the costs associated with a minimum wage is that it creates a:

shortage of workers.

shortage of employers.

surplus of workers.

surplus of employers.

True/False Questions

After watching the Price Ceilings and Price Floors video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Price controls provide only benefits but no costs to society.

True

False

Question

2. A price ceiling is a government-mandated maximum price at which a good can be sold.

True

False

Question

3. If a price floor is effective, all suppliers benefit from equilibrium prices below the free market prices.

True

False

Short Answer/Discussion Questions

After watching the Price Ceilings and Price Floors video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Explain how an effective (binding) price ceiling can incur costs and benefits for an economy.

Suggested solution: An effective price ceiling caps the price below the free market equilibrium price. This results in a shortage, an imbalance between the market’s quantity demanded and quantity supplied. Consequently, some consumers will be able to buy the product at a below equilibrium price (benefits), and other willing buyers will not have access to the product because of insufficient quantity supplied at that price (costs). (Answers may vary.)

Question

2. How might the market imbalances caused by an anti-price gouging law be dealt with?

Suggested solution: Anti-price gouging laws cause an insufficient supply (shortage) in the market. (Such laws are frequently imposed in the case of natural disasters when the markets are disrupted by the disaster.) Providing incentives for firms to increase supply can reduce this shortage. Such incentives could include subsidies or tax breaks designed to offset higher costs associated with increasing supply in a disaster ravaged area. Another approach might be to segment the market by capping the price of existing supplies in the market, and allowing higher prices to be charged for new supplies. (Answers may vary.)

Question

3. What are the costs and benefits of a minimum wage?

Suggested solution: The benefits of a minimum wage are that certain employees enjoy a higher wage than they would have received without the price floor. The costs are in the form of other workers who can’t find jobs because the minimum wage prices them out of the market.