chapter: ©2009  Worth Publishers Krugman/Wells 5 CHECK YOUR UNDERSTANDING >> The Market Strikes Back

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.supply to shift left. 2.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.demand to shift right. 2.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.shortage 2.surplus 3.perfect number

NEW CHECK YOUR UNDERSTANDING 1c*) Find the amount of deadweight loss caused by a ceiling of $7. 1.$ $ $25,200 4.$60,000

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.inefficient allocation of goods 2.wasted resources 3.inefficiently low quality 4.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.inefficient allocation of goods 2.wasted resources 3.inefficiently low quality 4.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.inefficient allocation of goods 2.wasted resources 3.inefficiently low quality 4.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.True 2.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.True 2.False

1c) Compared to the free market, price ceilings at a price below the equilibrium price make all producers worse off. 1.True 2.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.

1.Deadweight loss is created. 2.Surplus is transferred from one person to another. 3.indeterminate 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.

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.Deadweight loss is created. 2.Surplus is transferred from one person to another. 3.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.Deadweight loss is created. 2.Surplus is transferred from one person to another. 3.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.Deadweight loss is created. 2.Surplus is transferred from one person to another. 3.indeterminate

3d) Your ice cream cone falls on the ground and your dog eats it. 1.Deadweight loss is created. 2.Surplus is transferred from one person to another. 3.indeterminate

Check Your Understanding 5-2 Question 1 The state legislature mandates a price floor for gasoline of P F 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.Income will increase for all gas station owners. 2.Income will decrease for all gas station owners. 3.Income will increase for some gas station owners and decrease for others. 4.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.inefficiently high quality. 2.wasted resources. 3.inefficient allocation of sales among sellers. 4.illegal activity.

1c) “The price ceiling will only help gas station owners. It will not hurt consumers.” This statement is ______. 1.true. 2.false.

NEW CHECK YOUR UNDERSTANDING 1c*) How much is the deadweight loss caused by the price ceiling at $5? 1.$400 2.$ $ $4000

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.$3 2.$4 3.$5 4.$6 5.$7

1b) With a quota of 6 million, what is the quota rent? 1.$3 2.$4 3.$5 4.$6 5.$7

1c) With a quota of 6 million, what is the deadweight loss? 1.$2 million 2.$3 million 3.$4 million 4.$8 million 5.$16 million

1d) Suppose the quota limit on taxi rides increased to 9 million. What would the quota rent be? 1.$1 2.$2 3.$3 4.$4

1d) Suppose the quota limit on taxi rides increased to 9 million. What would the deadweight loss be? 1.$2 million 2.$1 million 3.$500,000 4.$400,000