Question

1) An example of price controls given in your text concerns minimum wage increases. On a supply and demand diagram (with wages on the vertical axis and number of workers on the horizontal), would minimum wage be considered a price ceiling or a price floor?

A. Price ceiling

B. Price floor

C. Neither

D. Cannot tell

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2) When will a minimum wage be an effective price control? When it is a _________.

A. Maximum "price" that is above equilibrium price

B. Maximum "price" that is below equilibrium price

C. Minimum "price" that is above equilibrium price

D. Minimum "price" that is below equilibrium price

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3) Many major U.S. cities have adopted rent controls for some housing. An effective rent control is what kind of price control?

A. A price ceiling with a maximum price above equilibrium price

B. A price floor with a minimum price above equilibrium price

C. A price ceiling with a maximum price below equilibrium price

D. A price floor with a minimum price below equilibrium price

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4) Which of the following statements about the effects of rent control is true?

A. A maximum price will always cause a surplus of a good to be produced.

B. A maximum price will always cause a shortage of a good to be produced.

C. A maximum price will cause a surplus of a good to be produced only if the maximum price is above the equilibrium price.

D. A maximum price will cause a shortage of a good to be produced only it the maximum price is below the equilibrium price.

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2) It is claimed that price floors and price ceilings both reduce the actual quantity exchanged in a market. Use a diagram or diagrams to support this conclusion, and explain the common sense behind it.

3) Explain why an effective minimum wage law that is not changed over time may eventually become ineffective as demand for workers increases.

4) Last October, the highest-paying passenger on United Flight 815 from Chicago to Los Angeles paid $1,248.51. The lowest-paying passenger on the same flight paid $87.21. Can we say anything about the likely elasticities of demand of the two customers? Use the concepts of marginal analysis and opportunity cost to explain why it might make sense for United Airlines to charge some lucky soul so little.

5) Why are college textbooks so expensive when other books that cost the same to produce have a lower price?

Answer 1

1. B.)) Price floor

A minimum wage is the lowest remunerationthat employers can legally pay their workers. Equivalently, it is the price floor below which workers may not sell their labor.

Price ceilings prevent a price from rising above a certain level where as Price floors prevent a price from falling below a certain level.

2. C..)) Minimum "price" that is above equilibrium price.

When the minimum wage is set above the equilibrium market price, then it is effective price control.

3. A)) A price ceiling with a maximum price above equilibrium price

Rent control acts as a price ceiling by preventing rents either from being charged above a certain level or from increasing at a rate higher than a predetermined percentage.

Price ceilings only become a problem when they are set below the market equilibrium price.

4. D.)) A maximum price will cause a shortage of a good to be produced only it the maximum price is below the equilibrium price.

Rent control is effective because price control leads to a shortage of quantity supplied but where it was led to decrease in both quantity and quality.the price ceiling automatically lowers the price what it would be in the free market.