BR5C: Bridge: Price Ceilings and Price Floors
Question 1
Suppose the government sets the maximum price for a normal doctor’s visit at \$20, but the current market price is \$40. As a result of this government action, doctors will see:
A. fewer patients.
B. the same number of patients.
C. more patients.
Hint
Doctors' services can be represented by the upwards sloping supply curve. If the government dictates a new price for a doctor's appointment, this will correspond with a different quantity of appointments supplied.Answer
A. fewer patients. Since there is a positive relationship between price and quantity supplied, doctors will be willing to provide fewer patient appointments if the government sets a price ceiling below the market equilibrium price.Question 2
Suppose that the city of Rentville sets a price ceiling of \$800 a month on all apartments, although the market equilibrium rent is \$1,000. Which of the following is least likely to occur?
A. A decrease in new apartments being built in Rentville.
B. A shortage of apartments in Rentville.
C. An excess of quantity demanded over quantity supplied in the market for apartments.
D. An increase in the quantity of existing apartments in Rentville.
Hint
Consider how an artificially low price is likely to affect incentives.Answer
D. An increase in the quantity of existing apartments in Rentville. A binding price ceiling does not allow the supply side of the market to fully respond to price incentives. Thus, rent control in Rentville is least likely to encourage an increase in the quantity of existing apartments. Generally, a binding rent control leads to an excess of quantity demanded over quantity supplied and thus a shortage, as fewer new apartments are built.Question 3
If the market equilibrium wage for entry-level fast-food workers is \$10 an hour, while the minimum wage is \$8, what impact does the minimum wage have in this industry?
A. The minimum wage encourages fast-food companies to hire fewer workers.
B. The minimum wage has no effect in this market.
C. The minimum wage increases unemployment among fast-food workers.
D. The minimum wage motivates more fast-food workers to seek jobs.
Hint
A price floor of \$8 mandates that all workers are paid at least \$8.Answer
B. The minimum wage has no effect in this market. In this case, the minimum wages is nonbinding, since the market equilibrium wage of \$10 is above the minimum wage of \$8. Consequently, the minimum wage has no effect in this market.Question 4
What should the government do in order to reduce the effects of a shortage caused by a price ceiling?
A. It should raise the price ceiling.
B. It should lower the price ceiling slightly.
C. It should lower the price ceiling to \$0.
D. It should leave the price ceiling as it is.
Hint
A shortage occurs when quantity demanded exceeds quantity supplied. Note that quantity demanded is equal to quantity supplied when a good's price is at the equilibrium level.Answer
A. It should raise the price ceiling. A price ceiling creates a shortage, i.e., an excess of quantity demanded over quantity supplied, when a good's price is held below the equilibrium price. To bring consumer demand into line with the quantity that producers are willing to supply, the government should raise the price that producers can charge. This will decrease quantity demanded and increase quantity supplied.Question 5
If the government guarantees sugar farmers a price of \$1 per pound when the market equilibrium price is actually \$0.50 per pound, which of the following will occur?
A. A surplus of sugar will occur, increasing inefficiency.
B. A surplus of sugar will occur, decreasing inefficiency.
C. A shortage of sugar will occur, increasing inefficiency.
D. A shortage of sugar will occur, decreasing inefficiency.