Price controls generally serve a positive economic function, as they compensate for the market’s inability to regulate wages in certain sectors of the economy.
False (Price controls such as minimum wage laws are rarely the win-win propositions that legislators often claim they are.)
Rent control is an ineffective way for local city governments to provide affordable housing to low-income residents.
True (Attempts to make housing more affordable through rent control end up making housing harder to obtain. More often than not, rent-controlled apartments are passed from generation to generation, and people who can afford to live elsewhere choose not to. This was clearly not the original purpose of rent-control laws.)
Identify some of the ways businesses will adapt to a minimum wage in the long run.
Correct Answer(s) 1.) move their business to countries not bound by minimum wage law (For a large firm, the logistical costs of offshoring may be
outweighed by the savings in labor costs.) 2.) use machinery instead of workers (Whereas before the minimum wage a human worker might have been cheaper than machinery, with a minimum wage the machinery may be more economical.) 3.) reduce work hours (Fewer hours worked on an hourly wage means lower labor costs.)
Incorrect Answer(s) 1.) offer better customer service to make up for the higher labor costs (Employers will often reduce customer service because of the increased cost of the workers
who perform it.)
(Due to the increase in the cost of labor created by the minimum wage, employers will inevitably attempt to cut costs to maintain profits. This results in changes to the way labor is utilized within the business, either by cutting hours or cutting labor altogether.)
Unlike price ceilings, price floors lead to very positive effects when properly implemented.
False (Price floors create many unintended effects that are rarely acknowledged by policymakers.)
Fill in the blanks to complete the passage regarding the development of illegal markets in response to price ceilings.
Black markets are illegal markets that emerge in response to price controls.
A few buyers are able to obtain the good at the open-market price; the rest must resort to illegal means. The additional demand is met by underground suppliers selling at much higher prices.
(People who continue to demand a good might choose to engage in illegal activity and purchase it in underground markets for a higher price. The black-market dealers will help reduce the shortage, but the government will not sanction their actions.)
Suppose the government enacts a price floor on milk, which leads to a surplus in the market. How will the government then attempt to equalize supply and demand?
Correct Answer(s) 1.)stimulating additional demand for milk (This is more complicated than it sounds and results in even more unintended negative consequences.) 2.) restricting the supply of milk (This is
problematic because reducing supply will prevent dairy farmers from making enough profit on their milk.)
Incorrect Answer(s) 1.) requiring suppliers to donate all surplus milk to developing countries (While the government will attempt to restrict supply, they do not dictate what sellers do with the milk they have not sold.) 2.) The government has no option except to remove the price floor on milk. (The government can intervene on either the supply side or the demand side.)
(The
unintended effects of price floors put pressure on governments to rectify the issue of surpluses. The strategies implemented often create even more negative consequences.)
If minimum wage laws are generally nonbinding and do not affect the equilibrium wage, then what is the purpose of implementing a minimum wage?
Correct Answer(s) 1.) It holds out
the promise for low-income voters of a betterment in their situation. (Nonbinding minimum wage laws are designed by lawmakers to create the “illusion” that the minimum wage is resulting in an increase in wages. This benefits politicians by giving them the support of individuals who are not aware of the real-world effects of the minimum wage.)
Incorrect Answer(s) 1.) It leads employers to create better working conditions out of fear that a binding law may soon be imposed. (Creating better
working conditions will have no effect on whether or not a minimum wage is implemented. Employers do not alter conditions for this reason.) 2.) It works to reduce the existing unemployment rate. (Nonbinding minimum wage laws have no effect on the functioning of the market and would have no impact on current unemployment rates.)
Place the following effects of a long-run binding price ceiling in the order they will occur.
1.) The market is at natural equilibrium where the supply and demand curves cross. 2.) A binding price ceiling is imposed, forcing the open-market price below the natural equilibrium point. 3.) Consumers see they can save on each unit, while producers realize they will earn less. 4.) Quantity demanded increases, while quantity supplied decreases. 5.) The shortage becomes so acute that consumers will choose substitutes.
(Another result, besides consumers' seeking substitutes, is the emergence of a black market.)
After a minimum-wage hike, unemployment is worse in the long run than in the short run.
True (Unemployment becomes worse as both the supply and demand curves flatten over time.)
Fill in the blanks to complete the passage regarding the government’s attempt to reduce a crop surplus that results from price controls.
The government’s attempt to stimulate additional demand for agricultural products leads to complex and unintended consequences. The government will often purchase surplus agricultural production and sell it at a lower cost to developing countries rather than letting crops go to waste. People in these countries can then purchase the excess output from developed nations rather than goods from local farmers. (Although governments attempt to mitigate the negative effects of shortages, their strategies for doing so often result in negative consequences for developing countries. While the international community has attempted to regulate these strategies, developed countries continue on this path.)
What are some of the unintended effects of rent control?
Correct Answer(s) 1.) Rent-control laws incentivize the development of upscale housing instead of low-income units. (When rent-control laws impede the market from reaching equilibrium, it incentivizes developers to build more expensive housing, which has a higher profit margin. 2.) Rent control decreases
landlords’ profits and subsequently lower their incentive to invest in property upkeep. (Rent control tends to dissuade landlords from reinvesting in the maintenance of their properties, and subsequently accelerates the degradation of the property.)
Incorrect Answer(s) 1.) More low-income residents are able to find more housing in rent-controlled cities in the long term. (The length of tenant occupancies, and the fact that most rent-controlled units are removed from the program when they
change tenants, decreases the long-term supply of rent-controlled units.) 2.) Rent-controlled units have a high ownership turnover rate. (The advantages of rent control for the tenant incentivize keeping the rental agreement in the family over generations, which reduces the supply of rent-controlled housing in the long run.)
(An additional unintended consequence is the subsidizing of vacation homes for tenants of rent-controlled apartments. Savings from the lowered rent are used to buy a second or even a third home.)
Place the following events in the order they might occur once rent control is implemented in a crowded, impoverished neighborhood.
1.) Apartment rental prices are capped by the local government. 2.) Property owners receive less income from their properties. 3.) Property owners cannot afford to maintain buildings
properly. 4.) Many apartment buildings become dilapidated.
(Mumbai, India, provides a real-world illustration of the disastrous consequences rent control can have.)
Identify the negative consequences of establishing a price floor on milk.
Correct Answer(s) 1.) There will be a surplus of milk. (The higher price will incentivize dairies to
produce more of the good.) 2.) There will be a decrease in the quantity of milk demanded. (The quantity of milk demanded will decrease when the cost of milk reaches a price higher than the equilibrium price.) 3.) Sellers will be tempted to engage in illegal activity to recoup some of their costs due to milk that went unsold. (Sellers that have large quantities of milk that are not being purchased will entice consumers with illegal deals and discounts.)
Incorrect Answer(s) 1.) Consumers will
demand higher-quality milk as they are forced to pay more. (Consumers will begin to decrease their demand for milk altogether and will eventually find alternatives to milk that are not bound by the price floor.)
(Those who impose these price floors fail to acknowledge the unintended effects of their legislation. The government is then pressured to rectify the issues through strategies that produce additional negative effects.)
Let's assume that a state increases its minimum wage from $8 to $11.35, while the equilibrium wage remains at a constant $10. Click on the area of the graph representing the unemployment that sets in when the minimum wage is raised.
(This is the gap between the quantity of work demanded and the quantity supplied at the new minimum wage.) (Since the minimum wage is set above the market price, it creates a bind on the market and prevents it from functioning properly. If the price of labor is unable to reflect supply and demand, a gap between the amount of jobs supplied and those demanded leads to a shortage of jobs and unemployment.)
If a ceiling on the price of bread leads to the disappearance of higher-quality, specialty bread from store shelves, which production decisions might this reflect?
Correct Answer(s) 1.) Production shifts to a use of cheaper ingredients. (This will lead to a decline in the production of fancier breads that require more expensive ingredients.) 2.) Specialty bread is available only direct from the bakery, to avoid transportation costs. (Anyone wanting the specialty bread will have to make a trip to the bakery. That time could be spent doing something else, so the customer has a higher
opportunity cost.) 3.) Marketing is no longer aimed at upscale consumption. (Since a price ceiling rules out upscale consumption, there is no sense in trying to encourage that kind of consumption through branding and shelving of upscale products.)
Incorrect Answer(s) 1.) Customers are rapidly buying the limited number of loaves available. (This may be true, but it is not a production decision. It is a demand phenomenon, not one of supply.)
(In addition to producing less-expensive bread varieties, producers will reduce the size of each loaf in order to maintain profits. Each of these tactics is implemented as a response to the unintended consequences created by price controls.)
Assuming that the equilibrium wage is $7 and the minimum wage is set at $10, how many workers will be unemployed in the long run?
150 (This is the difference between 175, the number of workers willing to work at the minimum wage in the long run, and 25, the number of workers for which there are jobs in the long run.)
Fill in the blanks to complete the passage regarding a government's attempt to influence the market through price controls.
If the government attempts to help the
disadvantaged by enacting a price ceiling on gasoline, it will result in unintended consequences. By the law of supply and demand, which says that a drop in price will increase the quantity demanded while lowering the quantity supplied, lowering the price of gas will lead to a shortage of the good.
(When this shortage occurs there will be long lines at gas stations, with many people not being able to obtain the good. A black market will arise as a response in
order to help reduce the shortage.)
If, with the demand and supply curves shown, the government implements a price ceiling of $0.50 per loaf, what is the size of the resulting shortage?
90 (The shortage is quantity demanded minus quantity supplied, in this case 130 minus 40.)
How are the short-run consequences of price ceilings on bread magnified in the long run?
Correct Answer(s) 1.) In the long run, bread consumers will choose substitutes to the expensive bread offered in the black market. (The demand will become more elastic as people change their eating habits. Consumers are more flexible in the long run, and more of them will seek substitutes for expensive
black-market bread.) 2.) In the long run, these products become increasingly harder to find. (Producers will adjust their supply and make less of the unprofitable product. In response, consumers will change their eating habits and turn to substitutes, such as bagels and rolls, which are relatively more plentiful.)
Incorrect Answer(s) 1.) In the long run, the price ceiling will no longer exist as the government is forced to abolish it. (There are many cases in which the price ceiling remains
in place for a long time. This leads both the supply and demand curves to become more elastic.) 2.) In the long run, bread consumers will demand more of the bread offered in the black market, which will increase the illegal price for the good. (Consumers will begin to adapt and choose substitutes for the high-priced bread offered in the black market. In the long run, the black-market price will decrease, although it will still be higher than the price ceiling.)
(While consumers will initially take advantage of the low price of bread and increase overall quantity demanded, this will lead to an acute shortage of the product that will eventually result in consumers finding bread substitutes.)
Suppose that prior to Hurricane Sandy, the market price for a generator in New Jersey was $530. After Sandy, the market price rose to $900, as shown in the graph. Click on the area of the graph that represents the resulting shortage if the government were to implement a $700 maximum price-gouging law for generators after the disaster of Hurricane Sandy.
(The shortage reflects a gap between the quantity of generators supplied at $700 and the quantity demanded at that same price.)
(The government’s price maximum of $700 per generator binds the market and prevents it from being governed by the laws of supply and demand. If the
market were functioning properly, the price per generator would be $900. The decrease in quantity supplied when the price is $700 and the increase in quantity demanded for this lower price create a shortage of generators.)
As illustrated here, a binding price ceiling causes a short-run shortage, which then worsens into a long-run shortage. What, in this particular scenario, happens to the black-market price between the short run and the long run?
The black-market price stays more or less the same in the long run as in the short run
(In this case, the effects of increased supply elasticity and increased demand elasticity cancel out.)
(There is no general rule that the black-market price rises in the long run or that it falls in the long run. Whether it moves, and in which direction, depends on how the demand and supply
elasticities interact.)
In the aftermath of a hurricane, an entrepreneur buys generators at $530 each from a store in an area unaffected by the hurricane. He then sells them in the hardest-hit area for $900 apiece. What does the purchase of these generators by hurricane victims, at a 70% markup, say about the equilibrium price of generators following a natural disaster?
Correct Answer(s)1.) A shift in the demand curve will create a new equilibrium point.
2.) Those who voluntarily purchase the generators believe them to be worth the marked-up price.
3.) The effect of price ceilings is to make behavior like the entrepreneur’s illegal.
Incorrect Answer(s) 1.) Any price ceiling imposed on generators in the affected area would create a surplus.
(Although price ceilings make behavior like the
entrepreneur’s illegal, the question remains whether the behavior in fact does any harm to people who make the choice to buy the marked-up goods.)
A state imposes a minimum wage of $10 per hour when the equilibrium price is $7. The resulting labor surplus is greater in the long run than in the short run: long-run unemployment (LR) is greater than short-run unemployment (SR). Why does this occur?
Correct Answer(s) 1.) The number of workers who would be available at the new wage is greater in the long run than the short run.
2.) The number of workers needed is smaller in the long run than the short run.
Incorrect Answer(s) 1.) The quantity supplied of labor has stopped exceeding the quantity demanded.
2.) The supply and demand curves have become more inelastic.
If the government imposes rent control under the circumstances shown, what is the resulting short-run shortage?
53 (This is the proper short-run shortage: the difference between short-run quantity supplied and short-run quantity demanded.)
Fill in the blanks to complete the passage regarding price floors and their relationship to supply and demand.
Price floors impose mandatory minimum prices for goods and services. When the price floors are binding, they set a higher price for a good or service than the one dictated by supply and demand, in order to encourage manufacturers to produce more. Another area in which legislators impose price floors is wages. This approach is reflected in minimum wage
laws.
(While consumers like low prices, legislators are pressured by suppliers to establish higher prices, in order to make production more profitable. This prevents the price of the good or service from being established by supply and demand and prevents the market from functioning properly.)
Suppose the government enacts a price ceiling on ice cream. Identify the various potential decisions made by ice cream producers to compensate for the price ceiling and maintain profits.
Correct Answer(s) 1.) discontinuing the production of fancier varieties
2.) lowering the quality of ice cream by using cheaper products
3.) reducing the size of each carton of ice cream
Incorrect Answer(s) 1.) hiring additional workers at a lower wage in order to meet demand
Which statement correctly describes the unemployment situation in South Africa?
Unemployment is high despite economic growth following the end of apartheid(Economic growth has not been fast enough to rein in unemployment.)
For what purpose are price controls generally enacted in the United States?
To alleviate public anxiety regarding perceived burdens on society (The message of price control laws is that goods and services required for a normally happy life should be within the reach of people with limited means.)
Fill in the blanks to complete the passage regarding price gouging and the circumstances surrounding the laws that prevent it, and their effects.
Price gouging protections act as a nonbinding price ceiling under normal market conditions. Price gouging laws typically go into effect following an emergency, usually a natural disaster. These emergencies often cause an increase in the equilibrium price of goods and services.
(Price gouging laws create a shortage by imposing a legal price limit on goods and services that prohibits the new
equilibrium price from being legally recognized.)
Suppose the equilibrium price for medicinal (isopropyl) alcohol is $7 per pint. What would be the lowest possible binding price floor on a pint?
$7.01 (That price is just barely above the equilibrium price.)
If the government imposes rent control under the circumstances shown, what will be the resulting long-run shortage?
101 apartments (This is the proper long-run shortage: the difference between long-run quantity supplied and long-run quantity demanded.)
Identify some ways in which, over the long run, workers adjust after a minimum wage law is enacted.
Correct Answer(s) 1.) Some young people decide to work instead of attending school full-time.
2.) Some retired workers re-enter the labor force.
Incorrect Answer(s) 1.) Workers at the bottom of the pay scale move up to better-paying jobs.
2.) Workers leave the labor force due to too-low wages.
Fill in the blanks to complete the passage regarding government price controls imposed during natural disasters.
If price does not have the ability to adjust when demand increases, there will be a shortage of the product. Devastated communities are negatively affected by price gouging legislation, as they must depend solely on the generosity of others and sluggish government action. Entrepreneurial activity is no longer a
form of mitigating poor conditions.
(Price controls imposed by the government to address the aftermath of natural disasters create unintended consequences that negatively affect desperate communities, as entrepreneurs are forbidden from selling goods and services that reflect the equilibrium price dictated by current conditions.)
What form of illegal activity will take place in response to a shortage of milk caused by price controls?
Black marktes will develop to provide consumers with what they want. (These are illegal markets that arise when price controls are implemented.)
Place the following events in the order they will occur, starting with the implementation of a price floor for heating oil.
1.) The minimum price for heating oil is set at $6 per gallon, which is above the current equilibrium price.
2.) Refineries will produce more heating oil while consumers demand less.
3.) Producers will be stuck with unwanted heating oil.
4.) Producers will be tempted to offer illegal discounts on heating oil.
Fill in the blanks to complete the passage regarding the production of sugar and the influence of American price controls on the price of the good.
The story of American sugar production illustrates the real-world consequences of price controls. Various price supports have been implemented over the years to maintain high production of domestic sugar. This has led U.S.-produced sugar to become two to three times more expensive than the world price. The result
is overproduction and waste as U.S. farmers are incentivized to produce more sugar than is needed in regions that are not suited for growing the crop.
(Although Coca-Cola has switched to using a sugar alternative in their U.S. product due to high costs, the company continues to make their Latin American product with sugar, as it is much cheaper in those countries.)
If a ceiling on the price
of bread leads to the disappearance of higher-quality, specialty bread from store shelves, which production decisions might this reflect?
Correct Answer(s) 1.) Production shifts to a use of cheaper ingredients.
2.) Marketing is no longer aimed at upscale consumption.
3.)Specialty bread is available only direct from the bakery, to avoid transportation costs.
Incorrect Answer(s) 1) Customers are rapidly buying the
limited number of loaves available.
(In addition to producing less-expensive bread varieties, producers will reduce the size of each loaf in order to maintain profits. Each of these tactics is implemented as a response to the unintended consequences created by price controls.)
As illustrated here, a binding price ceiling causes a short-run shortage, which then worsens into a long-run shortage. What, in this particular scenario, happens to the black-market price between the short run and the long run?
The black-market price stays more or less the same in the long run as in the short run. (There is no general rule that the black-market price rises in the long run or that it falls in the long run. Whether it moves, and in which direction, depends on how the demand and supply elasticities interact.)
Fill in the blanks to complete the passage regarding the closure of a South African clothing factory and how it related to employment issues within the country.
The severe unemployment crisis plaguing South Africa is reflected in the events surrounding the shutdown of a clothing factory in the city of Newcastle. Once authorities arrived to close the
factory due to a minimum wage violation, the female factory workers vehemently protested, climbing on tables and cutting boards to express their anger. The unemployment rate was so high that these women would have rather been paid dismal wages than find themselves out of work.
(The effects of South Africa’s acute joblessness can also be seen in the crime, inequality, and social discord that afflict the nation.)
If minimum wage laws are generally nonbinding and do not affect the equilibrium wage, then what is the purpose of implementing a minimum wage?
Correct Answer(s) 1.) It holds out the promise for low-income voters of a betterment in their situation.
Incorrect Answer(s) 1.) It leads employers to create better working conditions out of fear that a binding law may soon be imposed.
2.) It
works to reduce the existing unemployment rate.
Place the following effects of a long-run binding price ceiling in the order they will occur.
1.) The market is at natural equilibrium where the supply and demand curves cross.
2.) A binding price ceiling is imposed, forcing the open-market price below the natural equilibrium point.
3.)
Consumers see they can save on each unit, while producers realize they will earn less.
4.) Quantity demanded increases, while quantity supplied decreases.
5.) The shortage becomes so acute that consumers will choose substitutes.
(Another result, besides consumers' seeking substitutes, is the emergence of a black market.)
How are the short-run consequences of price ceilings on bread magnified in the long run?
Correct Answer(s) 1.) In the long run, these products become increasingly harder to find. (Producers will adjust their supply and make less of the unprofitable product. In response, consumers will change their eating habits and turn to substitutes, such as bagels and rolls, which are relatively more plentiful. )
2.) In the long run, bread consumers will choose substitutes to the expensive bread offered in
the black market. (The demand will become more elastic as people change their eating habits. Consumers are more flexible in the long run, and more of them will seek substitutes for expensive black-market bread.)
Incorrect Answer(s) 1.) In the long run, the price ceiling will no longer exist as the government is forced to abolish it. (There are many cases in which the price ceiling remains in place for a long time. This leads both the supply and demand curves to become more elastic.)
2.) In the long run, bread consumers will demand more of the bread offered in the black market, which will increase the illegal price for the good. (Consumers will begin to adapt and choose substitutes for the high-priced bread offered in the black market. In the long run, the black-market price will decrease, although it will still be higher than the price ceiling.)
(While consumers will initially take advantage of the low price of bread and increase overall quantity demanded, this will lead to an acute shortage of the product that will eventually result in consumers finding bread substitutes. )
Why are price floors implemented by governments?
They are a response to political pressure from suppliers to keep prices high. (Although consumers like low prices, producers of goods and services urge political leaders to keep prices high.)