The Economic Way of Thinking, 13e (Heyne)
Chapter 6 Unintended Consequences: More Applications of Supply and Demand
1) According to your textbook, the notion of price “gouging” is problematic because
A) the higher prices are normally the result of decreases in supply and increases in demand.
B) economists believe higher prices are always better than lower prices.
C) economists want businesses to make high profits.
D) None of the above.
2) During crisis periods, such as major snowstorms, the prices of basic goods, such as bread and
milk rise. The price increases are clear evidence of
A) price gouging.
B) government regulation.
C) the market making it possible for the people who place the highest monetary value on bread
and milk get bread and milk.
D) corruption.
3) When prices are allowed to fluctuate after a crisis, such as Hurricane Katrina, the high prices
A) provide information to suppliers about where goods and services are most highly desired.
B) are evidence of price gouging.
C) justify government intervention.
D) All of the above.
4) When the market clearing price of gasoline after a hurricane spikes to $6.00 but legislators
enact “anti-gouging” legislation that keeps prices at $4,
A) consumers as a whole will tend to benefit.
B) producers will have less incentive to bring gasoline to the areas where gasoline is most highly
valued.
C) government will ensure that no shortages will develop.
D) gasoline will be easier to purchase.
5) We often witness prices of water, gasoline and construction materials surge in a region just
before a major storm hits. Some call this “price gouging.” In the economic way of thinking,
however, those higher prices are caused by
A) an increase in supply and an increase in demand.
B) an increase in supply and a decrease in demand.
C) a decrease in supply and an increase in demand.
D) a decrease in supply and a decrease in demand.
E) practices that are not connected to underlying supply and demand conditions.
6) “Price gouging,” or significant price spikes, are typical caused by
A) a significant increase in consumer demand.
B) a significant increase in supplier greed.
C) government attempts to impose price caps.
D) no systematic relationship between supply and demand.
7) If one really believes that price spikes known as “price gouging” are due to a surge in greed
among suppliers, then
A) they haven’t quite mastered the economic way of thinking.
B) their comfort in knowing that thousands if not millions of others agree with them is not
sufficient economic evidence to conclude that their claim is correct.
C) their claim implies that significant price decreases are due to a sudden reduction in greed
among suppliers.
D) all of the above are true.
8) When the price of a good spikes dramatically, the information conveyed in the market
demonstrates that
A) greed has increased among the suppliers.
B) greed has increased among the demanders.
C) the good has become more scarce than before.
D) the good has become less scarce than before.
9) When a good suddenly becomes more scarce in a free market, caused by a significant increase
in consumer demand, then
A) it is a clear sign that households have become more greedy.
B) the price will tend to rise rapidly in light of the greater scarcity.
C) suppliers will gain in the exchange and buyers will lose.
D) the law of demand will be contradicted because people will be buying more, not less, at a
higher price.
E) all of the above are true.
10) A maximum price set by law above the market-clearing price is called a
A) price cap.
B) price spike.
C) price floor.
D) price ceiling.
11) Which would be an example of a price ceiling?
A) rent controls.
B) a legally-specified maximum interest rate on student loans.
C) government-mandated lower prices and fees charged by physicians.
D) all of the above.
E) none of the above.
12) An effective price ceiling tends to
A) increase quantity supplied.
B) decrease quantity demanded.
C) leave quantity supplied and demanded unchanged.
D) do none of the above.
13) An effective price ceiling tends to
A) decrease quantity supplied.
B) Increase quantity demanded.
C) discoordinate the plans of buyers and sellers.
D) do all of the above.
14) Price ceilings in the U.S. on retail gasoline sales in the 1970s caused
A) massive and prolonged shortages.
B) increased advertising of gasoline.
C) longer hours of operation at most service stations.
D) poor people to be assured of an adequate supply of gasoline.
15) If a middle-eastern war reduced the quantity of crude petroleum available for export to Japan
and the United States by 40%, and the U.S. government responded by imposing price ceilings on
petroleum,
A) more petroleum would be available for Japanese users.
B) the demand for crude petroleum in the U.S. would increase.
C) the demand for natural gas in the U.S. would decline.
D) the price of petroleum would rise even higher in Japan.
E) all of the above would be likely to result.
16) When a law freezes residential rents at their existing level for as long as the vacancy rate
remains below some target level,
A) owners will be encouraged to supply additional rental units.
B) rents will be frozen indefinitely, or at least until the law is changed.
C) affordable housing to low-income people will be guaranteed.
D) the vacancy rate will rise.
17) According to your textbook, rent controls on apartments
A) produce fair outcomes.
B) create problems of their own.
C) tend to promote efficiency.
D) do both B and C.
E) do none of the above.
18) If the government were to remove rent controls from the New York City rental market, then
A) all would be harmony.
B) the price paid by buyers would decrease and the quantity of rental units will decrease.
C) the price received by sellers would increase and the quantity of rental units will increase.
D) the price received by sellers would decrease and the quantity of rental units will decrease.
19) When a government mandate sets the rental price of an apartment below the market clearing
level, which of the following result?
A) More apartments are rented.
B) Landlords attempt to make up for the lower rental income by charging more for security
deposits and cleaning fees.
C) Landlords discriminate less.
D) Landlords address their tenant’s requests in a more prompt manner.
20) When a government mandate sets the rental price of an apartment below the market clearing
level, which of the following result?
A) A shortage
B) A surplus
C) Scarcity
D) The outcome is unknowable.
21) Which of the following is most likely to be observed in a community where legal ceilings are
imposed on residential rents?
A) Landlords will do a better job of property maintenance.
B) People moving into the community will have difficulty locating residential space to rent.
C) Poor people will be able to find adequate housing.
D) Tenants will reduce their use of housing space.
E) The people most in need of housing will be able to obtain the space they want.
22) Under a system of rent controls, landlords are more likely to
A) discriminate against middle aged tenants.
B) discriminate against students.
C) discriminate against wealthy tenants.
D) experience high vacancy rates.
E) maintain apartments in better condition.
23) What is the most likely effect of legislated rent controls on the rental vacancy rate in an area
adopting such controls?
A) The vacancy rate will not change because rent controls don’t change the demand (curve) for
housing.
B) The vacancy rate will rise because owners will be less eager to have tenants in their buildings.
C) The vacancy rate will fall because rent controls create a shortage situation.
D) The vacancy rate will become wholly arbitrary and unpredictable because allocation decisions
will have to be made by political rather than economic criteria.
24) Why do people in New York City often read the obituaries to locate an apartment?
A) They are strange.
B) They find it efficient, given the alternatives.
C) The landlords force them to.
D) There is no other source of apartment rental information outside the obituaries.
25) Rent controls unintentionally create
A) scarcity of rental units.
B) surpluses of rental units.
C) shortages of rental units.
D) market-clearing outcomes in the apartment rental market.
26) Suppose the market clearing rent is $500 per month, but a rent control is established at $400
per month. Which is most likely to emerge?
A) The demand for apartments would increase.
B) The supply of apartments would increase.
C) The scarcity of apartments would decrease.
D) The quantity of apartments demanded would exceed quantity supplied.
27) Fill in the blank: If a rent control were set at $200 below the market clearing rent on
apartments, a ________ would tend to occur.
A) fall in demand
B) surplus
C) rise in demand
D) shortage
28) Suppose the market clearing rate for apartments in Yazoo City, Mississippi is $400 per
month, but a rent control is set at $600 per month. Which of the following would tend to occur in
the community?
A) A shortage of apartments
B) An increase in the quantity demanded for apartments
C) Both of the above.
D) Neither of the above.
29) Why do landlords tend to discriminate against a person’s race, religion, or age more when
rent controls are imposed?
A) Landlords are naturally racist and bigoted.
B) Only minority groups will take an interest in apartments with controlled rents.
C) Economists will encourage landlords to discriminate.
D) Rent controls lower the personal costs of discriminatory behavior among landlords.
E) For all of the above reasons.
30) Fill in the blank: Rent controls tend to ________ discrimination among landlords.
A) increase nonprice
B) increase price
C) decrease nonprice
D) eliminate
31) Rent controls carry long-run unintended consequences, such as
A) a fairer price for people who can’t afford market-determined rents.
B) improved quality of apartment units.
C) fewer apartment units as landlords seek substitute uses of their property.
D) an increase in rental price competition among landlords.
32) What’s a direct long-run effect of imposing rent controls on apartments?
A) A rise in demand for rent controlled apartments
B) A fall in demand for rent controlled apartments
C) A fall in the supply of rent controlled apartments
D) A rise in the supply of rent controlled apartments
33) From the apartment landlord’s perspective, what might be a substitute use of his rental
property?
A) A parking lot
B) An office complex
C) A condominium
D) Any of the above.
E) Definitely none of the above.
34) Your textbook discusses “dry” counties in the U.S. What is a dry county?
A) A county where rainfall is below the national average
B) A county that experiences no rainfall
C) A county in which it is illegal to produce, purchase and sell alcohol
D) A county in which only dry gin is consumed
35) Why are harder forms of liquor produced in “dry” counties in the U.S.?
A) Drinkers in dry counties only prefer liquor to beer and wine.
B) Producers only prefer to drink liquor.
C) Producers find liquor more efficient to produce, given the rules of the game.
D) Trick question: No liquor is produced in “dry” counties.
36) Alcohol prohibition in the United States
A) abolished the production of liquor.
B) abolished the consumption of liquor.
C) abolished the distribution of liquor.
D) accomplished all of the above.
E) accomplished none of the above.
37) The 1920s was a period of alcohol prohibition in the United States. During the 1920s,
A) the purchase and sale of alcohol was illegal.
B) people coordinated their alcohol production and consumption activities in illegal,
underground markets.
C) the supply of alcohol became quite inelastic.
D) all of the above were true.
E) none of the above were true.
38) Fill in the blanks: According to your authors, the prohibition on alcohol in the U.S. primarily
shifted the ________ curve to the ________.
A) supply; right
B) supply; left
C) demand; left
D) demand; right
39) According to your authors, the prohibition on alcohol kept the ________ curve relatively
stable while the ________ curve became more ________.
A) supply; demand; elastic
B) supply; demand; inelastic
C) demand; supply; elastic
D) demand; supply; inelastic
40) According to the economic way of thinking, alcohol prohibition in the U.S.
A) effectively destroyed peoples’ incentives to produce and drink liquor.
B) abolished the supply and demand process in liquor.
C) led to a surge in prices and considerable profit opportunities for people willing to break the
law.
D) failed to make liquor truly illegal.
41) Beer and wine were difficult to find during the prohibition on alcohol, but whisky and gin
were plentiful. Why?
A) Beer and wine were illegal; whisky and gin weren’t.
B) The drinking public only wanted whisky and gin.
C) Criminals found it much more efficient to produce liquor.
D) Police were willing to overlook production and consumption of whisky and gin because they
believed liquor was less dangerous than beer and wine.
E) Government officials were interested in seeing what would happen to rate of alcohol
poisoning in the United States.
42) According to your textbook, the current war on drugs in the United States has similar
consequences to the earlier prohibition on alcohol. The similar consequences include
A) an underground supply and demand process.
B) the production of more powerful and dangerous forms of the illegal products.
C) production and distribution being controlled by people with a comparative advantage in crime
D) All of the above.
E) None of the above.
43) Legal ceilings on the rate of interest charged to individuals
A) guarantee credit is allocated according to need rather than ability to pay.
B) make it easier for people with poor credit ratings to obtain loans.
C) reduce the probability corporations will obtain scarce credit by bidding funds away from
consumers.
D) accomplish all of the above.
E) accomplish none of the above.
44) When law-makers impose ceilings on the amount of annual interest charged by lenders, their
actions have the effect of
A) excluding certain borrowers from the legally regulated credit market.
B) expanding retail sales.
C) increasing the number of loans made.
D) lowering interest rates for most borrowers.
E) redistributing income from creditors to debtors.
45) Suppose the market-clearing interest rate on loans is 12%, but law-makers impose an 8%
interest rate ceiling. The new law will tend to
A) increase the supply of loans.
B) decrease the supply of loans.
C) increase the demand for loans.
D) decrease the demand for loans.
E) do none of the above.
46) Other things constant, a lowering of interest rates on used car loans would tend to
A) reduce the demand for used car loans.
B) increase the demand for used car loans.
C) increase the supply of used car loans.
D) reduce the supply of used car loans.
E) do none of the above.
47) A legal ceiling set below the market-clearing interest rate would tend to
A) create a surplus of loans.
B) create a shortage of loans.
C) increase the demand for loans.
D) decrease the supply of loans.
E) do none of the above.
48) Consider the market for consumer loans. A legal ceiling set below the market-clearing
interest rate would tend to
A) increase the quantity demanded for loans.
B) decrease the quantity supplied of loans.
C) create a shortage of loans.
D) do all of the above.
E) do none of the above.
49) A substantial increase in the legal minimum wage will tend to
A) expand employment by increasing purchasing power and hence the demand for output.
B) improve the position of the least skilled persons in the labor force.
C) reduce employment by raising the cost of hiring some employees above their expected worth
to potential employers.
D) reduce the wages of highly skilled and highly paid employees.
50) When unions or legislation makes it necessary for a firm to pay higher wages,
A) efficiency declines.
B) income is transferred from wealthy people to poor people.
C) the marginal value of retained employees falls.
D) the marginal value of retained employees rises.
E) total purchasing power increases.
51) A large increase in the legal minimum wage is most likely to benefit
A) teenagers.
B) unemployed workers.
C) unionized workers.
D) unskilled workers.
E) none of the above because price-fixing hurts everyone.
52) Total employment tends to decrease in response to any increase in the legal minimum wage
because
A) employers can usually find substitutes for unskilled workers.
B) higher wages mean fewer family members will be forced to take jobs.
C) wages must be paid out of profits and profits are limited.
D) workers are often willing to trade jobs for income.
53) Legislation setting high minimum wage rates benefits
A) many people receiving wages far above the minimum by reducing competition from unskilled
workers.
B) no group in the economy, but is nonetheless widely supported out of ignorance.
C) only people who were previously receiving less than the legal minimum.
D) primarily teenagers and unskilled workers.
E) the whole economy by pushing up average income.
54) An effective minimum wage tends to
A) increase the supply of unskilled labor.
B) decrease the demand for unskilled labor.
C) create a surplus of unskilled labor.
D) accomplish all of the above.
E) accomplish none of the above.
55) Suppose the market-clearing wage for pizza delivery workers is $7.00 per hour, but a $10.00
per hour minimum wage is enacted. Other things constant, the higher minimum wage tends to
A) increase the supply of pizza delivery workers.
B) decrease the quantity demanded of pizza delivery workers.
C) create a shortage of pizza delivery workers.
D) accomplish all of the above.
E) accomplish none of the above.
56) An effective minimum wage tends to create unemployment among unskilled workers
because it
A) reduces the demand for their labor services.
B) increases the supply of their labor services.
C) reduces the marginal productivity of their labor services.
D) reduces the quantity demanded for their labor services while increasing the quantity supplied
of their labor services.
E) generates all of the above.
57) An increase in the minimum wage for unskilled labor tends to
A) generate unemployment among unskilled laborers.
B) increase the quantity supplied of unskilled laborers.
C) decrease the quantity demanded for unskilled laborers.
D) encourage employers to seek substitutes for unskilled labor.
E) accomplish all of the above.
58) The number of job seekers in any sector of the economy ordinarily exceeds, by at least a
small amount, the number of jobs available. Thus, employers
A) could increase their net revenue by lowering wages.
B) could increase their net revenue by raising wages.
C) do not pay close attention to marginal cost and marginal revenue in setting wages.
D) face the threat of unionization.
E) want employees to value their current jobs significantly more highly than they value
alternative jobs.
59) Which group below will generally have a more difficult time finding employment if a
nation’s minimum wage were increased?
A) Those with more work experience
B) Those who are among the younger job seekers
C) Those who form the majority race in the population
D) All of the above.
60) Which groups tend to have greater difficulties finding employment as a result of the
minimum wage?
A) Minorities
B) Teens
C) Those with little work experience
D) All of the above.
61) A doubling of the current minimum legal wage is likely to confer the most benefit and
impose the least harm on members of which group listed below?
A) Employers who own small businesses
B) Highly skilled workers
C) Shareholders of large corporations
D) Teenagers
E) Unskilled workers
62) Higher relative wages for labor tends to
A) increase the supply of labor.
B) decrease the demand for labor.
C) encourage firms to find substitutes, such as automation.
D) accomplish all of the above.
63) From the perspective of the employer, which of the following might be a substitute for
unskilled labor?
A) Computers
B) Skilled labor
C) Tools
D) Electricity
E) All of the above.
64) If the government offers to pay wheat farmers $1 for every bushel of wheat they market next
year, in addition to the market price, the price of wheat will be
A) higher than it would otherwise have been.
B) lower than it would otherwise have been.
C) one dollar.
D) the same as it would otherwise have been although wheat farmers will be better off.
65) According to your textbook, efforts to free Sudanese slaves by buying them in the open
market actually
A) increased supply of slaves, which lowered slave prices and increased the size of the slave
market.
B) increased demand for slaves, which increased slave prices and increased the size of the slave
market.
C) decreased supply of slaves, which increased slave prices and decreased the size of the slave
market.
D) decreased demand for slaves, which decreased slave prices and decreased the size of the slave
market.
66) Your textbook authors argue that the redemption efforts to free Sudanese slaves
A) generally succeeded until the government stepped in and created unintended shortages.
B) worked poorly because slave surpluses became rampant.
C) unintentionally increased profitability and slave supply.
D) proved that underground markets do not coordinate the plans of participants.
67) Fill in the blanks. According to your textbook, when humanitarian efforts to free Sudanese
slaves were introduced, ________ increased initially, which led to ________ prices. Over time,
the slave trade became ________ profitable and the supply of slaves ________.
A) supply; lower; less; decreased
B) demand; lower; more; decreased
C) demand; higher; more; increased
D) supply; higher; more; increased
68) The economic way of thinking suggests that which group below unintentionally expanded
the number of people captured and sold as slaves in Sudan?
A) The profit-seeking slave traders
B) Western humanitarian organizations that tried to redeem and free Sudanese slaves
C) Government agencies that set price supports on Sudanese slaves
D) The United Nations
69) Suppose the market-clearing price of wheat is $2.50 per bushel. At a price above $2.50,
A) supply would equal demand.
B) quantity supplied would equal quantity demanded.
C) quantity supplied would exceed quantity demanded.
D) quantity supplied would be less than quantity demanded.
70) If a price ceiling on coffee is set below the market-clearing price, then
A) the quantity of coffee demanded will decrease.
B) the quantity of coffee supplied will increase.
C) the quantity demanded for coffee will increase.
D) all of the above will occur.
E) none of the above will occur.
71) If a price ceiling on coffee is set above the market-clearing price, then
A) the quantity of coffee demanded will decrease.
B) the quantity of coffee supplied will increase.
C) the quantity demanded for coffee will increase.
D) all of the above will occur.
E) none of the above will occur.
72) If a price floor on coffee is set above the market-clearing price, then
A) the quantity of coffee demanded will decrease.
B) the quantity of coffee supplied will increase.
C) the quantity demanded for coffee will increase.
D) Both A and B will occur
E) none of the above will occur.
73) Suppose the market-clearing price of wheat is $2.50 per bushel. At a price below $2.50,
A) supply would equal demand.
B) quantity supplied would equal quantity demanded.
C) quantity supplied would exceed quantity demanded.
D) quantity supplied would be less than quantity demanded.
74) Suppose the market-clearing price of wheat is $2.50 per bushel. What would happen if wheat
farmers persuaded the government to set a legally-mandated price support of $3.75 per bushel?
A) The demand for wheat would rise.
B) The quantity demanded of wheat would fall.
C) The supply of wheat would rise.
D) A shortage of wheat would occur.