Answers to Study Guide and Price Controls Handout

Study Guide Answers:

1. None because above the equilibrium price.

2. QD increases to 55, QS decreases to 40, resulting in a shortage of 15 bikes.

3. No because of the shortage.

4. QD falls to 40, QS rises to 70, resulting in a surplus of 30 bikes.

5. No impact because equilibrium price is already obeying the law.

6. Shortage, price falls, QD rises, QS falls.

7. Shortage, sellers worse off because the price is lower, some buyers are worse off because they can’t buy the good due to the shortage.

8. No impact because equilibrium price is already obeying the law.

9. Surplus, price rises, QD falls, QS rises.

True/False.

1. False, no impact.

2. False, a shortage.

3. True

4. False, some teens won’t be able to find a job due to the surplus of available workers.

5. False, only if the price floor is set above the equilibrium price.

Multiple Choice

1. B

2. A

3. D

4. B

5. C

6. C

7. E

8. A

9. C

10. E

11. D

12. A

Answers to Price Controls Handout

1. Market for cheese:

a. Binding price floor: set above equilibrium price.  Price rises, quantity of cheese sold falls.  Surplus.

b. Yes because they lost customers, so even though price is higher, they’ve lost too many buyers to sustain their revenue.

c. Farmers benefit.  Government loses.

2. Market for Frisbees:

a. $8, 6 million Frisbees

b. $10, 2 million Frisbees sold

c. Price ceiling of $9 is above the market equilibrium price of $8; therefore, we return to equilibrium because the new price ceiling is ineffective/non-binding.  6 million Frisbees will be sold at $8 each.

3. Market for labor and minimum wage:

a. Employment will decrease, wages of employed workers will increase.

b. Unemployment will increase (surplus of labor).

AP Microeconomics Summer Assignment

AP Microeconomics Summer Assignment

Congratulations, and welcome to the wonderful world of economics!! As a student in next year’s class, you are also the lucky recipient of a summer assignment giving you a preview of the topics we will focus on in the coming school year. Below, you will find the details of this assignment. My email address is rstern2@boston.k12.ma.us should you need to contact me for any reason.

Your task:
• Read the assigned chapters from the book, Naked Economics: Undressing the Dismal Science by Charles Wheelan.
• Answer the accompanying questions about the reading.
• For each section, please write one question related to the reading that you would like answered.

***Make sure to acquire the fully revised and updated 2010 version of the book!!!! ***

Written responses to the questions below must be turned in on Friday, September 16th, 2010.
Responses must be written in complete sentences and must be typed, double-spaced, 12 point Times New Roman font with standard margins. For each response, you must support your answer with specific evidence from the book.

Foreword by Burton G. Malkiel

1. The study of economics has often been criticized for a variety of reasons. What are those reasons?

2. The influence of economics is present in many business, financial, and government communities. What are some institutions and agencies that rely on economics in some significant way?

Introduction

3. Give one example of a politician (in the United States or abroad) who has failed to understand economics and as a result, failed to understand how to solve a problem society faces.

Chapter 1: The Power of Markets

4. What does it mean to “maximize your utility?”

5. What are some “barriers to entry” that make it so only seller can provide a good or service? Why are barriers to entry important?

6. What is meant by “price discrimination?” Why do you think airlines are able to price discriminate?

7. What does Wheelan mean when he says the market economy operates as an “amoral force?”

8. Besides prices, what is another way that firms can compete in order to outperform their competition?

9. According to Wheelan, what makes markets a good way to organize economic activity?

Chapter 2: Incentives Matter

10. What problem do communal resources present, as compared to privately owned resources?

11. Why do incentives matter? Use an example from the book as well as from your own life to explain your response.

12. The law of unintended consequences states that “actions of people – and especially of government – always have effects that are unanticipated or unintended” (The Concise Encyclopedia of Economics). While important to recognize, politicians often fail to understand its significance. Provide one example mentioned in the reading that illustrates this point.

13. “Capitalism can be a brutal, cruel process…But ‘creative destruction’ (Joseph Schumpeter) is a tremendous positive force. Competition means losers, which goes a long way to explain why we embrace it in theory and fight it bitterly in practice.” Explain this statement, and give an example.

Chapter 3: Government and the Economy

14. What positive and negative externalities are associated with cigarette smoking? Can you make the case that the positives outweigh the negatives?

15. What makes taxation a good solution the problem of negative externalities?

16. List all of the ways that government is essential in order for a market economy to operate successfully.

You are an AP student. Lesson # 1: Do Not Procrastinate!

Wednesday, January 26th, 2011

Answers to the midterm study review guide:

1. B

2. D

3. D

4. E

5. A

6. D

7. D

8. B

9. A

10. C

11. D

12. A

13. A

14. E

15. C

16. B

17. A

18. A

19. B

20. D

21. B

22. C

23. A

24. D

25. C

Friday, October 29th, 2010

Supply, Demand, and Price Controls Study Guide

Use the following supply and demand schedules for bicycles to answer the questions below.

Price                            Quantity Demanded                              Quantity Supplied

300                                          60                                                        30

400                                          55                                                        40

500                                          50                                                        50

600                                          45                                                        60

700                                          40                                                        70

800                                          35                                                        80

In response to lobbying by the Bicycle Riders Association, Congress places a price ceiling of $700 on bicycles.  What effect will this have on the market for bicycles?  Why?

No effect because above the equilibrium price.

In response to lobbying by the Bicycle Riders Association, Congress places a price ceiling of $400 on bicycles.  Use the information provided above to plot the supply and demand curves for bicycles.  Impose the price ceiling.  What is the result of a price ceiling of $400 on bicycles?

$400 price and a shortage.  QD = 55 and QS = 40.  Shortage of 15 bicycles.

Does a price ceiling of $400 on bicycles make all bicycle buyers better off?  Why or why not?

It makes some bicycle buyers better off if they are able to buy a bike at the cheaper price; however, some bicyclists won’t be able to buy a bike due to the shortage.  These buyers are worse off.

Suppose instead Congress imposes a price floor on bicycles of $700.  Use the information provided above to plot the supply and demand curves for bicycles.  Impose the $700 price floor.  What is the result of the $700 price floor?

$700 price and surplus.  QD = 40 and QS = 70.  Surplus of 30 bicycles.

What is the impact on the price and quantity in a market if a price ceiling is set above the equilibrium price?  Why?

No impact (non-binding) because market prices and quantities will still prevail.

What is the impact on the price and quantity in a market if a price ceiling is set below the equilibrium price?

The price will fall, and a shortage will exist.

What are some of the problems created by a binding price ceiling?

Shortages, sellers won’t want to produce as much because the price is lower, and buyers won’t be able to buy as much as they would like at the lower price.

What is the impact on the price and quantity in a market if a price floor is set below the equilibrium price?  Why?

No impact (non-binding) because market prices and quantities will still prevail.

What is the impact on the price and quantity in a market if a price floor is set above the equilibrium price?

Surpluses.  Sellers won’t be able to sell as much as they would like at the higher prices, and buyers won’t be able to buy as much at the higher prices.

True/False.

If the equilibrium price of gasoline is $1.00 per gallon and the government places a price ceiling on gasoline of $1.50 per gallon, the result will be a shortage of gasoline.   False

A price ceiling set below the equilibrium price causes a surplus.  False

A price floor set above the equilibrium price is a binding constraint.  True

The minimum wage helps all teenagers because they receive higher wages than they would otherwise.  False

A price floor in a market always creates a surplus in that market.  False

Multiple Choice Questions.

1.)    For a price ceiling to be a binding constraint on the market, the government must set it

  1. Above the equilibrium price.
  2. Below the equilibrium price.
  3. Precisely at the equilibrium price.
  4. At any price because all price ceilings are binding constraints.

Answer: B

2.)    A binding price ceiling creates

  1. A shortage.
  2. A surplus.
  3. An equilibrium.
  4. A shortage or a surplus depending on whether the price ceiling is set above or below the equilibrium price.

Answer: A

3.)    Suppose the equilibrium price for apartments is $500 per month and the government imposes rent controls of $250.  Which of the following is unlikely to occur as a result of the rent controls?

  1. There will be a shortage of housing.
  2. Landlords may discriminate among apartment renters.
  3. Landlords may be offered bribes to rent apartments.
  4. The quality of apartments will improve.
  5. There may be long lines of buyers waiting for apartments.

Answer: D

4.)    A price floor

  1. Sets a legal maximum on the price at which a good can be sold.
  2. Sets a legal minimum on the price at which a good can be sold.
  3. Always determines the price at which a good must be sold.
  4. Is not a binding constraint if it is set above the equilibrium price.

Answer: B

5.)    Which side of the market is more likely to lobby government for a price floor?

  1. Neither buyers or sellers desire a price floor.
  2. Both buyers and sellers desire a price floor.
  3. The sellers.
  4. The buyers.

Answer: C

6.)    Which of the following is an example of a price floor?

  1. Rent controls
  2. Restricting gasoline prices to $1.00 per gallon when the equilibrium price is $1.50 per gallon.
  3. The minimum wage
  4. All of the above are price floors.

Answer: C

          Price

                      $1.20

                       $1.00                                                                                                                                         $.80                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            900 1000 1100              Quantity of gasoline

                              (millions of gallons per week)

7.)    The graph above shows the supply and demand curves for gasoline.  Which of the following will occur if the government establishes a price ceiling of $1.20 per gallon?

  1. A shortage of 900 million gallons
  2. A shortage of 200 million gallons
  3. A shortage of 100 million gallons
  4. A surplus of 100 million gallons
  5. Neither a surplus nor a shortage

Answer: E

8.)    Which of the following is true of a price floor?

  1. The intention of the government in creating the price floor is to assist the producers of the good.
  2. To have an impact in the market for the good, the price floor should be set below the existing market price of the good.
  3. An effective price floor will increase the quantity demanded of the good.
  4. The price floor would tend to create a shortage of the good in the market.
  5. The creation of the price floor would not change the quantity supplied of the good if the supply curve were upward-sloping to the right.

Answer: A

9.)    If the minimum wage for teenagers increased to a rate higher than their market equilibrium wage, what would be the effect on their wage and employment?

  1. Wage would increase, there would be no effect on employment.
  2. Wage would increase, and employment would increase.
  3. Wage would increase, and employment would decrease.
  4. Wage would decrease, and employment would increase.
  5. Wage would decrease, and employment would decrease.

Answer: C

10.)                        The market equilibrium price of home heating oil is $1.50 per gallon.  If a price ceiling of $1.00 per gallon is imposed, which of the following will occur in the market for home heating oil?

  1. Quantity supplied will increase.
  2. Quantity demanded will increase.
  3. Quantity supplied will decrease.
  4. Quantity demanded will decrease.

 

  1. II only
  2. I and II only
  3. I and IV only
  4. III and IV only
  5. II and III only

Answer: E

11.)                        An effective price floor introduced in the market for rice will result in

  1. A decrease in the price of rice and an increase in the quantity of rice sold.
  2. A decrease in the price of rice and a decrease in the quantity of rice sold.
  3. A decrease in the price of rice and an excess demand for rice.
  4. An increase in the price of rice and an excess supply of rice.
  5. An increase in the price of rice and an excess demand for rice.

Answer: D

12.)                        Suppose than an effective minimum wage is imposed in a certain labor market above the equilibrium wage.  If labor supply in that market subsequently increases, which of the following will occur?

  1. Unemployment in that market will increase.
  2. Quantity of labor supplied will decrease.
  3. Quantity of labor demanded will increase.
  4. Market demand will increase.
  5. The market wage will increase.

Answer: A

Monday, September 27th, 2010

Reminder AP Micro Students: You have a quiz on PPFs, comparative and absolute advantage on Wednesday!  I will be available after school on Monday from 2-3:30 and on Tuesday from 2:30-3:30 for anyone who would like extra help.

Answers to handout entitled, “Practice Problems: Production Possibilities and Trade” (what you were working on in class):

1. a. Wheat: neither,  Cloth: Country B because it can produce 300 yards of cloth, and Country A can only produce 100 yards of cloth.

b. Country A has the comparative advantage in wheat, Country B has the comparative advantage in cloth.

c. Country B should import wheat because it produces (and will export) cloth.

d. Country B is importing wheat.  Since two yards of cloth is less than Country B’s opportunity cost of producing wheat (3 yards of cloth), Country B gains from trade.

2. Absolute advantage shows who has the ability to produce using the least amount of inputs (or greater amount of outputs).  Comparative advantage shows who has the ability to produce using the lower opportunity cost.  Use comparative advantage for determining trade patterns.

SKIP # 3.

4. THIS IS AN IB PROBLEM.  Given that Diane has the comparative advantage in calculations, and it takes Diane 12 hours to complete the calculations, it will take 12 hours to complete calculations.  Given that Gary has the comparative advantage in slides, and it takes Gary 10 hours to complete the slides, it will take 10 hours to complete the slides.  The total amount of hours to complete the project is 22 hours.

Answers to the Multiple Choice and True/False homework assignment:

1. D

2. A

3. D

4. A

5. D

6. A

7. C

8. B

9. C

10. SKIP

11. A

12. D

13. A

14. B

15. C

16. A

17. False (absolute should be comparative)

18. False (absolute should be comparative)

19. True

Summer Assignment

Congratulations, and welcome to the wonderful world of economics!!  As a student in next year’s class, you are also the lucky recipient of a summer assignment giving you a preview of the topics we will focus on in the coming school year.  Below, you will find the details of this assignment.  In order for me to make sure you have received this assignment, please SEND AN EMAIL TO ME LETTING ME KNOW THAT YOU UNDERSTAND THE DIRECTIONS AND ACCEPT THE RESPONSIBILITY OF COMPLETING THE ASSIGNMENT AS INDICATED.  THIS EMAIL SHOULD BE SENT NO LATER THAN FRIDAY, JUNE 18TH, 2010.  My email address is rstern2@boston.k12.ma.us .
Your task:
• To read the assigned chapters from the book, Naked Economics: Undressing the Dismal Science by Charles Wheelan.
• Answer the accompanying questions about the reading.
***Make sure to acquire the fully revised and updated 2010 version of the book!!!! ***
Written responses to the questions below must be turned in on Friday, September 10th, 2010.  Responses must be written in complete sentences and must be typed, double-spaced, 12 point Times New Roman font with standard margins.  For each response, you must support your answer with specific evidence from the book.
Before you begin reading and answering the following chapters and questions, please make sure to read the Introduction.
Chapter 1: The Power of Markets
1. How does Wheelan explain who feeds Paris and why the chicken crossed the road?
2. What is meant by “price discrimination?”  Provide one example from the chapter and one of your own.
3. What does Wheelan mean when he says the market economy operates as an “amoral force?”
4. According to Wheelan, why do attempts to fix prices (set legal prices) hardly ever work?
Chapter 2: Incentives Matter
1. “Capitalism can be a brutal, cruel process.  But ‘creative destruction’ (Joseph Schumpeter) is a tremendous positive force.  Competition means losers, which goes a long way to explain why we embrace it in theory and fight it bitterly in practice.”  Explain this statement, and give an example.
2. Can you think of any important incentives in your own life that have gotten you to do something or stop doing something?  Perhaps related to your school work?  Homework?  Chores?  Behavior?
Chapter 12: Trade and Globalization
1. Why do nations trade?
2. Should we (the rich and industrialized nations of the world) hold the poorest developing nations to the same environmental standards as we hold ourselves?  Why or why not?
3. Explain this statement: “Productivity is what makes us rich.  Specialization is what makes us productive.  Trade allows us to specialize.”
4. Wheelan makes the argument that “Protectionism saves jobs in the short run” but ultimately causes more harm than good.  Is there a non-economic argument (perhaps political, moral, or ethical) that helps to understand why governments sometimes impose trade sanctions on places like Gaza, Cuba, and Iran?
You are an AP student.  Lesson # 1: Do Not Procrastinate!