CHAPTER 18: ELASTICITIES, PRICE-DISTORTING POLICIES, AND NON-PRICE RATIONING

Question 1

Q: What does price responsiveness (elasticity) affect in a market?

Answer 1

A: It affects how the total surplus is divided between consumers and producers.

Question 2

Q: How is surplus divided when demand and supply have similar slopes?

Answer 2

A: Surplus is shared roughly equally between consumers and producers.

Question 3

Q: Who gets more surplus if demand is less price responsive (flatter supply curve)?

Answer 3

A: Producers get a larger share of the surplus.

Question 4

Q: Who benefits more if supply is less price responsive (flatter demand curve)?

Answer 4

A: Consumers get a larger share of the surplus.

Question 6

Q: Which side of the market tends to capture more surplus?

Answer 6

A: The side that is less sensitive (less responsive) to price changes.

Question 8

Q: What is a price floor?

Answer 8

A: A legal minimum price set above the market equilibrium price.

Question 10

Q: What happens to demand when a price floor is set above equilibrium?

Answer 10

A: Demand decreases.

Question 12

Q: What happens to supply when a price floor is set above equilibrium?

Answer 12

A: Supply increases.

Question 13

A: Supply increases.

Question 14

Q: What results from a price floor causing higher supply and lower demand?

Answer 14

A: A surplus of goods producers cannot sell.

Question 15

A: A surplus of goods producers cannot sell.

Question 16

Q: If prices can’t adjust due to a price floor what determines which goods are sold?

Answer 16

A: Other rationing mechanisms outside of price.

Question 18

Q: What do firms do when there is a surplus and limited customers?

Answer 18

A: They increase costly effort to compete for customers.

Question 20

Q: How does increased effort affect firms’ costs?

Answer 20

A: It raises their marginal costs.

Question 22

Q: What happens to supply as firms increase effort to eliminate surplus?

Answer 22

A: The supply curve shifts until the surplus disappears.

Question 24

Q: How does demand elasticity affect the drop in output and effort cost?

Answer 24

A: More elastic demand causes a bigger drop in output and higher effort costs.

Question 26

Q: How does less elastic demand affect output and effort cost?

Answer 26

A: Output drops less and effort costs are lower.

Question 28

Q: What causes deadweight loss in the presence of a price floor?

Answer 28

A: Increased costly effort by firms and reduced consumer and producer surplus.

Question 30

Q: How does producer surplus change with a price floor?

Answer 30

A: It shrinks significantly due to increased costs and reduced sales.

Question 32

Q: How does consumer surplus change with a price floor?

Answer 32

A: Consumer surplus decreases because higher prices reduce consumption.

Question 34

Q: What determines the size of the deadweight loss caused by a price floor?

Answer 34

A: The extent to which increased producer costs affect overall benefits.

Question 36

Q: What happens when the government buys surplus under a price floor?

Answer 36

A: Producer surplus increases but consumer surplus still decreases.

Question 37

A: Producer surplus increases but consumer surplus still decreases.

Answer 37

but consumer surplus still decreases.

Question 38

Q: Does the government purchasing program eliminate deadweight loss?

Answer 38

A: No it causes a net loss because government costs are high.

Answer 39

it causes a net loss because government costs are high.

Question 40

Q: How can consumers benefit from the government buying surplus goods?

Answer 40

A: If the government distributes goods to consumers who value them most.

Question 41

A: If the government distributes goods to consumers who value them most.

Question 42

Q: What is the minimum deadweight loss from a government purchasing program?

Answer 42

A: The deadweight loss is at least the government's net loss beyond the gain in producer surplus.

Question 43

A: The deadweight loss is at least the government's net loss beyond the gain in producer surplus.

Question 44

Q: What is a price ceiling?

Answer 44

A: A legal maximum price set below the market equilibrium.

Question 46

Q: What happens to demand when a price ceiling is set below equilibrium?

Answer 46

A: Demand increases.

Question 48

Q: What happens to supply when a price ceiling is set below equilibrium?

Answer 48

A: Supply decreases.

Question 49

A: Supply decreases.

Question 50

Q: What results from a price ceiling causing higher demand and lower supply?

Answer 50

A: A shortage of goods.

Question 52

Q: How are goods allocated when a shortage occurs due to a price ceiling?

Answer 52

A: Goods must be rationed since demand exceeds supply.

Question 53

A: Goods must be rationed since demand exceeds supply.

Question 54

Q: What happens to consumer behavior under a price ceiling shortage?

Answer 54

A: Consumers expend effort to secure goods reducing demand to equal supply.

Question 55

A: Consumers expend effort to secure goods reducing demand to equal supply.

Answer 55

reducing demand to equal supply.

Question 56

Q: How does consumer surplus change under a price ceiling?

Answer 56

A: It falls significantly due to the shortage and effort costs.

Question 57

A: It falls significantly due to the shortage and effort costs.

Question 58

Q: How does producer surplus change under a price ceiling?

Answer 58

A: Producer surplus decreases because of lower prices and reduced sales.

Question 59

A: Producer surplus decreases because of lower prices and reduced sales.

Question 60

Q: What causes deadweight loss (DWL) under a price ceiling?

Answer 60

A: Reduced trade and the effort consumers expend to obtain goods.

Question 62

Q: What is the minimum deadweight loss under a price ceiling?

Answer 62

A: At least the loss from reduced trade excluding any benefits from effort costs.

Question 63

A: At least the loss from reduced trade excluding any benefits from effort costs.

Question 64

Q: Why do politicians implement price regulations despite inefficiencies?

Answer 64

A: Because benefits go to a small organized group

Question 65

A: Because benefits go to a small organized group

Answer 65

organized group

Question 66

Q: What is meant by "concentrated benefits"?

Answer 66

A: Benefits received by a small well-organized group.

Question 67

A: Benefits received by a small well-organized group.

Answer 67

well-organized group.

Question 68

Q: What are "diffuse costs"?

Answer 68

A: Costs spread across a large unorganized group.

Question 69

A: Costs spread across a large unorganized group.

Answer 69

unorganized group.

Question 70

Q: Give an example of concentrated benefits and diffuse costs.

Answer 70

A: Farm price supports benefit a few farmers but cost many consumers

Question 71

A: Farm price supports benefit a few farmers but cost many consumers