Question 1

A shortage occurs when there is an excess supply in a market.

Accepted Answer

This statement is false. A shortage occurs when there is more demand for a product or service than there is supply, resulting in a lack of availability and potentially higher prices.

Question 2

An effective price ceiling will be set above the equilibrium price.

Accepted Answer

An effective price ceiling will be set below the equilibrium price. If the price ceiling is set above the equilibrium price, it will have no impact on the market as the price will already be lower than the ceiling.

Question 3

The benefit of a price floor to ________ is ________.

Accepted Answer

A price floor is a government regulation that sets a minimum price for a good or service. This means that the selling price of the product cannot fall below this price. For producers, this ensures that they receive a fair return on their investment, as the floor price is above the equilibrium price. As a result, producers benefit from a price floor.

Question 4

When supply is fixed, price is supply determined.

Accepted Answer

When supply is fixed, price is primarily determined by changes in demand, as the fixed supply cannot adjust to balance the market.

Question 5

Favored customers receive special treatment from dealers during periods of excess demand.

Accepted Answer

Favored customers are typically given priority access to limited products or services during times of high demand, often through pre-orders or reserved inventory. This is a common practice in many industries, including fashion, technology, and travel.

Question 6

Related to the Economics in Practice on p. 81: The initial price of $0 for the Shakespeare in the Park tickets is akin to the city of New York ________ the tickets.

Accepted Answer

Issuing a price ceiling on the Shakespeare in the Park tickets means that the city of New York is setting a maximum price that can be charged for the tickets, which in this case, is $0. This is similar to a price ceiling, which is a government-imposed limit on the price of a good or service in order to make it more affordable for consumers.

Question 7

Related to the Economics in Practice on p. 81: The true cost of the Shakespeare in the Park tickets is

Accepted Answer

While the ticket may have a face value of $0, individuals waiting in line to obtain the tickets are giving up their time, which has value, to acquire the tickets. Therefore, the true cost of the Shakespeare in the Park tickets is $0 plus the opportunity cost of the time spent in line.

Question 8

The harmful effect of a price ceiling to ________ is ________.

Accepted Answer

A price ceiling is a government-imposed limit on how high a price can be charged for a good or service. If the ceiling is set below the equilibrium price, it creates a shortage of the product because the quantity demanded exceeds the quantity supplied at the lower price. This shortage harms consumers because they have fewer options to purchase the product, and it may lead to black markets or rationing. Producers may also be harmed because they cannot charge higher prices to reflect their costs and may be forced to reduce production or exit the market altogether.

Question 9

With price rationing, those who are both able and willing to pay for a product get it.

Accepted Answer

Price rationing ensures that those who are willing and able to pay for a product can purchase it, which means that those who cannot afford it will not receive the product.

Question 10

Ration coupons are tickets or coupons that give someone a right to purchase a certain amount of a product each time period such as a month.

Accepted Answer

Ration coupons are indeed tickets or coupons that provide the holder with the right to purchase a certain amount of a product during a specific time frame.

Question 11

Goods are allocated in a market system by price rationing.

Accepted Answer

In a market system, goods are allocated based on the price that consumers are willing to pay. This means that goods are rationed based on their price, with those willing to pay more having greater access to the goods.

Question 12

Queuing, or waiting in line, is an alternative rationing mechanism to price rationing.

Accepted Answer

Queuing involves people waiting in line for a product or service, which means that only those who are willing to wait will be able to obtain the good or service. This is an alternative to price rationing, where the price of the good or service is increased to limit demand to those who are willing and able to pay. Both queuing and price rationing are forms of rationing, as they limit the amount of goods or services that people can obtain, but they use different mechanisms to do so.

Question 13

The harmful effect of a price floor to ________ is ________.

Accepted Answer

A price floor, set above the equilibrium price, leads to a surplus because the minimum price is higher than what many consumers are willing to pay, resulting in less quantity demanded and more quantity supplied than at equilibrium. This surplus is harmful to producers as they cannot sell all of their product.

Question 14

Related to the Economics in Practice on p. 77: If the supply of generators increases and the demand for generators increases, the equilibrium price for generators ________ and the equilibrium quantity of generators ________.

Accepted Answer

When both supply and demand for a product increase, the equilibrium quantity will definitely increase because more of the product is being produced and more of it is wanted. However, the effect on price is uncertain without knowing the relative magnitudes of the changes in supply and demand.

Question 15

Nonprice rationing will happen whenever there is excess supply in a market.

Accepted Answer

Nonprice rationing is a method of allocating goods or services without using prices. It is used when there is excess demand, not excess supply. When there is excess supply, prices may be lowered to clear the market.

Question 16

In the short run, nonprice rationing will happen whenever there is excess demand in a market.

Accepted Answer

Nonprice rationing refers to the allocation of goods and services based on criteria other than price, such as waiting in a queue or a lottery. In the short run, when there is excess demand in a market, sellers may use nonprice rationing to allocate their limited supply of goods or services to consumers.

Question 17

In a "black market," goods are traded at market determined prices.

Accepted Answer

In a black market, goods are traded at prices determined by supply and demand, which is the same as market determined prices. However, black markets operate outside of legal channels and regulations.

Question 18

The price system ultimately determines the allocation of resources among producers.

Accepted Answer

The price system plays a crucial role in determining the allocation of resources among producers, as it provides signals about consumer demand and the scarcity of resources. Producers respond to these signals by adjusting their production levels and prices, leading to an efficient allocation of resources based on supply and demand.

Question 19

Related to the Economics in Practice on p. 77: If the supply of generators decreased and the equilibrium price of generators decreases, the demand for generators ________ and total revenue from the sale of generators ________.

Accepted Answer

If the supply of generators decreased, it means that there are fewer generators available in the market. This would lead to a decrease in the quantity supplied of generators at any given price level. As a result, the supply curve shifts to the left. At the same time, the demand for generators may or may not change. However, the decrease in the quantity supplied would lead to an increase in the equilibrium price of generators. This increase in the price would cause a decrease in the quantity demanded of generators. Hence, if the demand for generators stays the same or decreases, the total revenue from the sale of generators will also decrease.

Question 20

The government imposes a price floor on wheat that is below the market price. You are asked to suggest a rationing scheme that will minimize the misallocation of resources. You suggest

Accepted Answer

Since the price floor is set below the market price, it will not be binding. The market will clear at the equilibrium price, which is above the price floor, meaning there will be no excess supply or demand necessitating a rationing system.

Quiz 4: Demand and Supply Applications