4.5 Price Controls – Principles Of Microeconomics

Exercises 4.5

The following TWO questions refer to the supply and demand curves illustrated below.

1. A price ceiling of P3 causes:

a) A deadweight loss triangle whose corners are ABC. b) A deadweight loss triangle whose corners are ACD. c) A deadweight loss triangle whose corners are BEC. d) A deadweight loss triangle whose corners are CDE.

2. A price floor of P1 causes:

a) Excess demand equal to the distance AB. b) Excess supply equal to the distance AB. c) Excess supply equal to the distance DE. d) Excess demand equal to the distance DE.

3. Which of the following statements about price ceilings is TRUE? (Assume the price ceiling is set below the unregulated equilibrium price.)

a) Price ceilings make sellers worse off. b) Price ceilings make buyers better off. c) Both a) and b) are true. d) Neither a) nor b is true).

4. Which of the following statements about minimum wages is true?

a) Minimum wage laws may make some workers better off and others worse off. b) Minimum wage laws make employers worse off. c) Both a) and b) are true. d) None of the above are true.

5. Consider diagram below, which illustrates the market for low-skilled labour.

Suppose that the equilibrium quantity is reduced from Q1 to Q2 units, through the introduction of a price floor. Which of the following correctly describes the resulting decrease in MARKET surplus?

a) Market surplus will decrease by a – c. b) Market surplus will decrease by by e + c. c) Market surplus will decrease by a + b + e + c. d) Market surplus will decrease by b – e.

6. Consider diagram below, which illustrates the market for low-skilled labour.

If the government introduces a minimum wage law set at $9 per hour, then, in the new equilibrium, which of the following statements is TRUE?

I. There will be 11,000 workers willing to work who cannot find work, given the wage. II. The number of workers employed will decrease by 11,000. III. The number of workers that employers are prepared to hire will decrease by 5,000.

a) I only. b) I and II only. c) I, II, and III. d) I and III only.

7. Suppose that the BC government wishes to reduce the quantity of beer sold in the Province by 20%. It has calculated that this goal can be achieved EITHER through a price floor set at $2 per six-pack of beer OR a price ceiling of $20 per six-pack of beer. Assume that the current price of beer is $10 per six-pack. Which of the following statements about these policies is TRUE?

a) The deadweight loss from the price floor will be greater than the deadweight loss from the price ceiling. b) The deadweight loss from the price ceiling will be greater than the deadweight loss from the price floor. c) There is insufficient information to determine which policy will have the large deadweight loss. d) None of the above statements is true.

8. Consider the supply and demand diagram below. Assume no externalities.

If a price floor of $20 is introduced, then which area will represent the deadweight loss?

a) e. b) e + d. c) e + b + d. d) The deadweight loss will be zero.

9. If a price ceiling (set below the initial equilibrium price) is introduced in a market, then:

a) Producer surplus definitely decreases. b) Consumer surplus definitely increases. c) Neither a) nor b) are true. d) Both a) and b) are true.

10. In Canada, the prices of most medical services are regulated by the Provinces (that is, they are subject to price ceilings). This type of regulation is likely to result in which of the following (relative to an unregulated market)?

a) An increase in the quantity of medical services provided. b) Consumption of medical services such that the marginal benefit is less than the marginal cost. c) Lower incomes for providers of medical services. d) Higher tax revenues for Provincial governments.