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chapter:
5
>> The Market Strikes Back
Krugman/Wells
CHECK YOUR UNDERSTANDING
©2009  Worth Publishers
Check Your Understanding 5-1
Question 1
Homeowners near
Middletown University’s
stadium used to rent
parking spaces in their
driveways to fans at a going
rate of $11.
A new town ordinance now
sets a maximum parking fee
of $7. Use the
accompanying supply and
demand diagram to answer
the following questions.
1a) Given the new price of $7 some homeowners now
think it’s not worth the hassle to rent out spaces. This
causes:
1.
2.
supply to shift left.
quantity decreases along the supply curve.
1b) Some fans that used to carpool drive to the game alone
because of the lower price of parking. This causes:
1.
2.
demand to shift right.
quantity demanded increases along the demand
curve.
1c) Given the maximum parking fee of $7, based on questions a
and b you would expect there to be a ________ of parking spaces.
1.
2.
3.
shortage
surplus
perfect number
1c*) Find the amount of deadweight loss caused by a
ceiling of $7.
1.
2.
3.
4.
NEW
$1600
$4400
$25,200
$60,000
CHECK YOUR UNDERSTANDING
Price ceilings can lead to undesirable outcomes. For the scenario
below choose the answer that best describes the undesirable
outcome.
1d) Some fans arrive several hours early in order to find parking.
1.
2.
3.
4.
inefficient allocation of goods
wasted resources
inefficiently low quality
black markets
Price ceilings can lead to undesirable outcomes. For the scenario
below choose the answer that best describes the undesirable
outcome.
1e) Friends of homeowners near the stadium regularly attend games,
even if they aren’t big fans. But some serious fans have given up
because of the parking situation.
1.
2.
3.
4.
inefficient allocation of goods
wasted resources
inefficiently low quality
black markets
Price ceilings can lead to undesirable outcomes. For the scenario
below choose the answer that best describes the undesirable
outcome.
1f) Some homeowners rent spaces for more than $7 but pretend that
the buyers are non-paying friends or family.
1.
2.
3.
4.
inefficient allocation of goods
wasted resources
inefficiently low quality
black markets
Check Your Understanding 5-1
Question 2
2a) Compared to the free market, price ceilings at a price below the
equilibrium price increase quantity supplied.
1.
2.
True
False
1b) Compared to the free market, price ceilings at a price below the
equilibrium price make some people who want to consume the good
worse off.
1.
2.
True
False
1c) Compared to the free market, price ceilings at a price below the
equilibrium price make all producers worse off.
1.
2.
True
False
Check Your Understanding 5-1
Question 3
For the following scenarios, determine if
deadweight loss is created or if surplus is
transferred from one person to another.
You have been evicted from your rent-controlled apartment after
the landlord discovered your pet boa constrictor. The apartment is
quickly rented to someone else at the same price. You and the
new renter don’t have the same willingness to pay.
1.
2.
3.
Deadweight loss is created.
Surplus is transferred from one person to
another.
indeterminate
3bi) You won a ticket to a jazz concert. You can’t go to
the concert and the terms of the ticket do not allow you
to sell the ticket or give it to someone else.
1.
2.
3.
Deadweight loss is created.
Surplus is transferred from one person to
another.
indeterminate
3bii) You won a ticket to a jazz concert. You can’t go to
the concert but the terms of the ticket do allow you to
sell the ticket or give it to someone else.
1.
2.
3.
Deadweight loss is created.
Surplus is transferred from one person to
another.
indeterminate
3c) Your school’s dean of students, who is a proponent
of a low-fat diet, decrees that ice cream can no longer
be served on campus.
1.
2.
3.
Deadweight loss is created.
Surplus is transferred from one person to
another.
indeterminate
3d) Your ice cream cone falls on the ground and your
dog eats it.
1.
2.
3.
Deadweight loss is created.
Surplus is transferred from one person to
another.
indeterminate
Check Your Understanding 5-2
Question 1
The state legislature
mandates a price floor
for gasoline of PF per
gallon. Assess the
following statements
and illustrate your
answer using the
figure provided:
1a) Which of the following is true about the law mandating the price
floor?
1.
2.
3.
4.
Income will increase for all gas station owners.
Income will decrease for all gas station owners.
Income will increase for some gas station owners and decrease for
others.
Income will remain unchanged for all gas station owners.
1b) Some argue that the price floor is a good idea because it will
lead to better service at gas stations. This is an example of
________.
1.
2.
3.
4.
inefficiently high quality.
wasted resources.
inefficient allocation of sales among sellers.
illegal activity.
1c) “The price ceiling will only help gas station owners. It will not
hurt consumers.” This statement is ______.
1.
2.
true.
false.
1c*) How much is the deadweight loss caused by the price ceiling
at $5?
1.
2.
3.
4.
NEW
$400
$2000
$3000
$4000
CHECK YOUR UNDERSTANDING
Check Your Understanding 5-3
Question 1
The government has enacted a quota on taxicab rides of 6 million rides per
year. Use the information about supply and demand given below to answer
the following questions.
1a) With a quota of 6 million, what is the price of a ride?
1.
2.
3.
4.
5.
$3
$4
$5
$6
$7
1b) With a quota of 6 million, what is the quota rent?
1.
2.
3.
4.
5.
$3
$4
$5
$6
$7
1c) With a quota of 6 million, what is the deadweight loss?
1.
2.
3.
4.
5.
$2 million
$3 million
$4 million
$8 million
$16 million
1d) Suppose the quota limit on taxi rides increased to 9 million. What
would the quota rent be?
1.
2.
3.
4.
$1
$2
$3
$4
1d) Suppose the quota limit on taxi rides increased to 9 million. What
would the deadweight loss be?
1.
2.
3.
4.
$2 million
$1 million
$500,000
$400,000