1. 4 >> CHECK YOUR UNDERSTANDING The Market Strikes Back
Krugman/Wells
CHECK YOUR UNDERSTANDING

2. Check Your Understanding 4-1 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.

3. 1a) Given the new price of $7 some homeowners now think it’s not worth the hassle to rent out spaces. This causes:
The decrease in price from $11 to $7 causes a decrease in quantity supplied of 400, from 4000 to 3600.
supply to shift left.
quantity decreases along the supply curve.

4. quantity demanded increases along the demand curve.
1b) Some fans that used to carpool drive to the game alone because of the lower price of parking. This causes:
The decrease in price causes an increase in quantity demanded of 400, from 4000 to 4400.
demand to shift right.
quantity demanded increases along the demand curve.

5. 1c) Given the maximum parking fee of $7, based on questions a and b you would expect there to be a ________ of parking spaces.
shortage
surplus
perfect number
At $7, the quantity demanded is 4400 and the quantity supplied is 3600, so there is a shortage of 800 parking spaces.

6. inefficient allocation of goods wasted resources
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.
inefficient allocation of goods
wasted resources
inefficiently low quality
black markets
The time used in arriving early to find parking is a wasted resource.

7. inefficient allocation of goods wasted resources
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.
inefficient allocation of goods
wasted resources
inefficiently low quality
black markets
The parking spaces are allocated inefficiently because some of the fans who enjoy the game the most don’t attend because of the parking situation.

8. inefficient allocation of goods wasted resources
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.
inefficient allocation of goods
wasted resources
inefficiently low quality
black markets
Price ceilings lead to black markets when people try to evade the price ceiling.

9. Check Your Understanding 4-1 Question 2

10. 2a) Compared to the free market, price ceilings at a price below the equilibrium price increase quantity supplied.
True
False
Price ceilings decrease the quantity supplied and increase the quantity demanded.

11. 2b) 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.
True
False
Because the quantity supplied has decreased, some people who are willing to pay the higher equilibrium price are not able to buy the good.

12. 2c) Compared to the free market, price ceilings at a price below the equilibrium price make all producers worse off.
True
False
A lower price reduces producer surplus, the difference between the price of the product and its cost, shown by the supply curve.

13. Check Your Understanding 4-2 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:

14. Income will increase for all gas station owners.
1a) Which of the following is true about the law mandating the price floor?
Income for the station owners who sell QF at price PF will benefit from higher incomes. However, the incomes of those who had made sales QE at the equilibrium price PE have lower incomes.
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.

15. inefficiently high quality. wasted resources.
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 ________.
The price floor causes the gas station owners to compete on quality rather than price.
inefficiently high quality.
wasted resources.
inefficient allocation of sales among sellers.
illegal activity.

16. 1c) “The price ceiling will only help gas station owners
1c) “The price ceiling will only help gas station owners. It will not hurt consumers.” This statement is ______.
Consumers may be tempted to engage in black market activities due to the price floor. They may spend time driving to other states to avoid the price ceiling, which wastes resources.
true.
false.

17. Check Your Understanding 4-3 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.

18. 1a) With a quota of 6 million, what is the price of a ride?$3 $4 $5 $6 $7
The demand price for 6 million rides is $7.

19. 1b) With a quota of 6 million, what is the quota rent?$3 $4 $5 $6 $7
The quota rent is $4, the difference between the demand price of $7 and the supply price of $3 at the 6 million rides that the quota allows.

20. 1c) Suppose the quota limit on taxi rides increased to 9 million
1c) Suppose the quota limit on taxi rides increased to 9 million. What would the quota rent be? $1 $2 $3 $4
The quota rent is the difference between the demand price of $5.50 at 9 million and the supply price of $4.50 at 9 million.