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Price Ceilings, Price Floors, and Black Markets quiz #2

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  • Compared with other methods used to set prices, cost-plus pricing is relatively simple.
    True; cost-plus pricing is straightforward and easy to implement.
  • Setting a price with no variation for product buyers is called a one price policy.
    True; a one price policy means all buyers pay the same price.
  • Is minimum wage a measure of the overall price level?
    Minimum wage is not a measure of the overall price level.
  • Which tax has a ceiling on the amount of annual earnings subject to tax?
    Social Security payroll tax has a ceiling on taxable earnings.
  • The price strategy of unbundling involves what?
    Selling components of a product separately rather than as a package.
  • What is the amount of money a business thinks it should charge for its product or service called?
    It is called the target or intended price.
  • If the government fears there may be a shortage of something, they may choose to ration it.
    True; rationing is used to allocate scarce goods.
  • Who can set price controls on goods?
    Governments set price controls on goods.
  • A price ceiling is a legislated price that is what?
    It is the maximum legal price that can be charged for a good or service.
  • Government intervention that typically results in a surplus of services and goods is called what?
    It is called a price floor.
  • What is the pricing strategy of setting prices low until after a reliable customer base is established, then raising prices?
    This is called penetration pricing.
  • What is a price ceiling?
    A price ceiling is a government-imposed maximum price for a good or service.
  • Who can set price controls on goods?
    Governments set price controls.
  • The highest amount a landlord can charge for rent is an example of what?
    It is an example of a price ceiling.
  • If a price ceiling is not binding, then what happens?
    It has no effect; the market operates at equilibrium.
  • A price ceiling means there will be what in the supply of rental spaces?
    There will be a shortage of rental spaces.
  • In a free market system, price control can include both a floor and a ceiling.
    True; both price floors and ceilings can be imposed.
  • Landlords will not raise rent prices as demand increases because they are restricted by rent control.
    True; rent control prevents landlords from raising rents above the ceiling.
  • If the government removes a binding price floor from a market, then the price paid by buyers will what?
    The price will fall to the equilibrium level.
  • Why do binding price floors cause a deadweight loss?
    They create surpluses, preventing mutually beneficial trades and reducing total surplus.
  • In general, what effect does a quota have on the prices of comparable goods in the domestic market?
    Quotas restrict supply, causing prices to rise.
  • Using the table above, if the government imposes a price floor of \$10, what will the effect be?
    If \$10 is above equilibrium, there will be a surplus; if below, no effect.
  • The presence of a price control in a market for a good or service usually is an indication that what?
    It indicates the government is trying to address affordability or income concerns.
  • What is the deadweight loss associated with the price floor?
    It is the loss of total surplus due to the surplus created by the price floor.
  • An effective price floor will do what?
    It will create a surplus in the market.
  • The graph shows the market for corn with a price ceiling of \$7. What is the effect?
    If \$7 is below equilibrium, there will be a shortage; if above, no effect.
  • A price floor is a minimum price fixed by the government, generally imposed above the equilibrium price.
    True; price floors are effective only when set above equilibrium.
  • A price ceiling is the maximum legal price a seller may charge for a product or service.
    True; price ceilings set the upper limit.
  • Refer to figure 6-2. The price ceiling causes quantity to do what?
    Quantity demanded exceeds quantity supplied, causing a shortage.
  • Minimum-wage laws dictate what?
    They set the lowest legal wage that can be paid to workers.
  • When the government prevents prices from adjusting naturally to supply and demand, it causes what?
    It causes market inefficiencies such as shortages or surpluses.
  • Refer to figure 6-1. A binding price ceiling is shown in which part of the graph?
    It is shown below the equilibrium price.
  • What sets the ceiling for product prices?
    The government sets the ceiling through price controls.
  • If a price floor is not binding then what happens?
    It has no effect; the market operates at equilibrium.
  • A binding price ceiling on apartments (effective rent control) will do what?
    It will cause a shortage of apartments.
  • Income taxes have the effect of what?
    They reduce disposable income and can affect demand.
  • Price floors create what?
    Price floors create surpluses.
  • The imposition of a binding price ceiling on a market causes what?
    It causes a shortage.
  • If a price ceiling is set above the equilibrium price in a market, what happens?
    It has no effect; the market operates at equilibrium.
  • To say that a price ceiling is binding is to say that the price ceiling is what?
    It is set below equilibrium and restricts market price.