Supply, Demand, and Government Policies
Multiple Choice – Section 00: Introduction
1. Which of the following is not correct?
a. Economists have two roles: scientist and policy adviser.
b. As scientists, economists develop and test theories to explain the world around them.
c. Economic policies rarely have effects that their architects did not intend or anticipate.
d. As policy advisers, economists use their theories to help change the world for the better.
2. Which of the following is not an example of a public policy?
a. rent-control laws
b. minimum–wage laws
c. taxes
d. equilibrium laws
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3. Rent-control laws dictate
a. the exact rent that landlords must charge tenants.
b. a maximum rent that landlords may charge tenants.
c. a minimum rent that landlords may charge tenants.
d. both a minimum rent and a maximum rent that landlords may charge tenants.
4. Minimum-wage laws dictate
a. the exact wage that firms must pay workers.
b. a maximum wage that firms may pay workers.
c. a minimum wage that firms may pay workers.
d. both a minimum wage and a maximum wage that firms may pay workers.
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5. Price controls are usually enacted
a. as a means of raising revenue for public purposes.
b. when policymakers believe that the market price of a good or service is unfair to buyers or
sellers.
c. when policymakers tax a good.
d. All of the above are correct.
6. The presence of a price control in a market for a good or service usually is an indication that
a. an insufficient quantity of the good or service was being produced in that market to meet the
public’s need.
b. the usual forces of supply and demand were not able to establish an equilibrium price in that
market.
c. policymakers believed that the price that prevailed in that market in the absence of price
controls was unfair to buyers or sellers.
d. policymakers correctly believed that price controls would generate no inequities of their own
once imposed.
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7. Price controls
a. always produce a fair outcome.
b. always produce an efficient outcome.
c. can generate inequities of their own.
d. All of the above are correct.
8. Policymakers use taxes
a. to raise revenue for public purposes but not to influence market outcomes.
b. both to raise revenue for public purposes and to influence market outcomes.
c. when they realize that price controls alone are insufficient to correct market inequities.
d. only in those markets in which the burden of the tax falls clearly on the sellers.
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Multiple Choice – Section 01 Controls on Prices
1. In a competitive market free of government regulation,
a. price adjusts until quantity demanded is greater than quantity supplied.
b. price adjusts until quantity demanded is less than quantity supplied.
c. price adjusts until quantity demanded equals quantity supplied.
d. supply adjusts to meet demand at every price.
2. In a free, competitive market, what is the rationing mechanism?
a. seller bias
b. buyer bias
c. government law
d. price
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3. Which of the following is not a function of prices in a market system?
a. Prices have the crucial job of balancing supply and demand.
b. Prices send signals to buyers and sellers to help them make rational economic decisions.
c. Prices coordinate economic activity.
d. Prices ensure an equal distribution of goods and services among consumers.
4. A legal maximum on the price at which a good can be sold is called a price
a. floor.
b. subsidy.
c. support.
d. ceiling.
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5. A price ceiling is
a. often imposed on markets in which “cutthroat competition” would prevail without a price ceiling.
b. a legal maximum on the price at which a good can be sold.
c. often imposed when sellers of a good are successful in their attempts to convince the
government that the market outcome is unfair without a price ceiling.
d. All of the above are correct.
6. Which of the following is the most likely explanation for the imposition of a price ceiling on the
market for milk?
a. Policymakers have studied the effects of the price ceiling carefully, and they recognize that
the price ceiling is advantageous for society as a whole.
b. Buyers of milk, recognizing that the price ceiling is good for them, have pressured policymakers
into imposing the price ceiling.
c. Sellers of milk, recognizing that the price ceiling is good for them, have pressured policymakers
into imposing the price ceiling.
d. Buyers and sellers of milk have agreed that the price ceiling is good for both of them and
have therefore pressured policymakers into imposing the price ceiling.
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7. If a price ceiling is not binding, then
a. the equilibrium price is above the price ceiling.
b. the equilibrium price is below the price ceiling.
c. it has no legal enforcement mechanism.
d. None of the above is correct because all price ceilings must be binding.
8. If a price ceiling is not binding, then
a. there will be a surplus in the market.
b. there will be a shortage in the market.
c. the market will be less efficient than it would be without the price ceiling.
d. there will be no effect on the market price or quantity sold.
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9. If a nonbinding price ceiling is imposed on a market, then the
a. quantity sold in the market will decrease.
b. quantity sold in the market will stay the same.
c. price in the market will increase.
d. price in the market will decrease.
10. A price ceiling will be binding only if it is set
a. equal to the equilibrium price.
b. above the equilibrium price.
c. below the equilibrium price.
d. either above or below the equilibrium price.
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11. Which of the following observations would be consistent with the imposition of a binding price
ceiling on a market?
After the price ceiling becomes effective,
a. a smaller quantity of the good is bought and sold.
b. a smaller quantity of the good is demanded.
c. a larger quantity of the good is supplied.
d. the price rises above the previous equilibrium.
12. Suppose the government has imposed a price ceiling on laptop computers. Which of the
following events could transform the price ceiling from one that is not binding into one that is
binding?
a. Improvements in production technology reduce the costs of producing laptop computers.
b. The number of firms selling laptop computers decreases.
c. Consumers’ income decreases, and laptop computers are a normal good.
d. The number of consumers buying laptop computers decreases.
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13. Suppose the government has imposed a price ceiling on sliced sandwich bread. Which of the
following events could transform the price ceiling from one that is binding to one that is not
binding?
a. An increase in the price of flour, which is used to make bread.
b. A decrease in the price of lunch meat.
c. A decease in the price of unsliced bread, which people consider as a substitute for sliced
bread.
d. An decrease in the price of peanut butter and jelly.
14. If the government removes a binding price ceiling from a market, then the price paid by buyers
will
a. increase, and the quantity sold in the market will increase.
b. increase, and the quantity sold in the market will decrease.
c. decrease, and the quantity sold in the market will increase.
d. decrease, and the quantity sold in the market will decrease.
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15. If the government removes a binding price ceiling from a market, then the price received by
sellers will
a. decrease, and the quantity sold in the market will decrease.
b. decrease, and the quantity sold in the market will increase.
c. increase, and the quantity sold in the market will decrease.
d. increase, and the quantity sold in the market will increase.
16. When a binding price ceiling is imposed on a market,
a. price no longer serves as a rationing device.
b. the quantity supplied at the price ceiling exceeds the quantity that would have been supplied
without the price ceiling.
c. all buyers benefit.
d. All of the above are correct.
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17. When a binding price ceiling is imposed on a market to benefit buyers,
a. no buyers actually benefit.
b. some buyers benefit, but no buyers are harmed.
c. some buyers benefit, and some buyers are harmed.
d. all buyers benefit.
18. Which of the following would be the least likely result of a binding price ceiling imposed on the
market for rental cars?
a. an accumulation of dirt in the interior of rental cars
b. poor engine maintenance in rental cars
c. free gasoline given to people as an incentive to a rent a car
d. slow replacement of old rental cars with newer ones
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19. Which of the following would be the most likely result of a binding price ceiling imposed on the
market for rental cars?
a. frequent rental programs such as “Rent nine times and the tenth rental is free!”
b. enhanced maintenance programs to promote the high quality of the cars
c. free gasoline given to people as an incentive to a rent a car
d. slow replacement of old rental cars with newer ones
20. A price ceiling is binding when it is set
a. above the equilibrium price, causing a shortage.
b. above the equilibrium price, causing a surplus.
c. below the equilibrium price, causing a shortage.
d. below the equilibrium price, causing a surplus.
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21. A binding price ceiling
(i) causes a surplus.
(ii) causes a shortage.
(iii) is set at a price above the equilibrium price.
(iv) is set at a price below the equilibrium price.
a. (ii) only
b. (iv) only
c. (i) and (iii) only
d. (ii) and (iv) only
22. A nonbinding price ceiling
(i) causes a surplus.
(ii) causes a shortage.
(iii) is set at a price above the equilibrium price.
(iv) is set at a price below the equilibrium price.
a. (i) only
b. (iii) only
c. (i) and (iii) only
d. (ii) and (iv) only
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23. To say that a price ceiling is binding is to say that the price ceiling
a. results in a surplus.
b. is set above the equilibrium price.
c. causes quantity demanded to exceed quantity supplied.
d. All of the above are correct.
24. To say that a price ceiling is binding is to say that the price ceiling
a. results in a shortage.
b. is set below the equilibrium price.
c. causes quantity demanded to exceed quantity supplied.
d. All of the above are correct.
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25. To say that a price ceiling is nonbinding is to say that the price ceiling
a. results in a surplus.
b. is set above the equilibrium price.
c. causes quantity demanded to exceed quantity supplied.
d. All of the above are correct.
26. A shortage results when a
a. nonbinding price ceiling is imposed on a market.
b. nonbinding price ceiling is removed from a market.
c. binding price ceiling is imposed on a market.
d. binding price ceiling is removed from a market.
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27. The imposition of a binding price ceiling on a market causes
a. quantity demanded to be greater than quantity supplied.
b. quantity demanded to be less than quantity supplied.
c. quantity demanded to be equal to quantity supplied.
d. the price of the good to be greater than its equilibrium price.
28. If a price ceiling is a binding constraint on a market, then
a. the equilibrium price must be below the price ceiling.
b. the quantity supplied must exceed the quantity demanded.
c. sellers cannot sell all they want to sell at the price ceiling.
d. buyers cannot buy all they want to buy at the price ceiling.
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29. Suppose the government wants to encourage Americans to exercise more, so it imposes a
binding price ceiling on the market for in–home treadmills. As a result,
a. the demand for treadmills will increase.
b. the supply of treadmills will decrease.
c. a shortage of treadmills will develop.
d. All of the above are correct.
30. If a binding price ceiling is imposed on the baby formula market, then
a. the quantity of baby formula demanded will increase.
b. the quantity of baby formula supplied will decrease.
c. a shortage of baby formula will develop.
d. All of the above are correct.
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31. Suppose the equilibrium price of a physical examination (“physical“) by a doctor is $200,
and the government imposes a price ceiling of $150 per physical. As a result of the price
ceiling, the
a. demand curve for physicals shifts to the right.
b. supply curve for physicals shifts to the left.
c. quantity demanded of physicals increases, and the quantity supplied of physicals decreases.
d. number of physicals performed stays the same.
32. Suppose the equilibrium price of a physical examination (“physical“) by a doctor is $200, and the
government imposes a price ceiling of $150 per physical. As a result of the price ceiling,
a. the quantity of physicals demanded increases.
b. there is shortage of physicals.
c. the quantity of physicals supplied decreases.
d. All of the above are correct.