ECO 201 Midterm Exam Study Sheet

Use this in conjunction with the study sheets for Quiz 1 and Quiz 2

Write the following definitions:

Price Ceiling - A price ceiling occurs when the government puts a legal limit on how high the price of a product can be. In order for a price ceiling to be effective, it must be set below the natural market equilibrium.
Example:  Rent control

Price Floor - A price floor is the lowest legal price a commodity can be sold at. Price floors are used by the government to prevent prices from being too low. The most common price floor is the minimum wage--the minimum price that can be payed for labor. Price floors are also used often in agriculture to try to protect farmers.


Quota Effect on Supply and Demand
Tariff Effect on Supply and Demand
Rent Control




Answer the following questions using the charts above where applicable.  (S and D represent the initial supply and demand curves and S1 & S2 and D1 & D2 represent subsequent supply and demand curves.)

1.  Which chart depicts rent control?

A.  A

2.  If supply increases and demand increases, what happens to price and quantity at equilibrium?

C.  Price indeterminable, quantity increases

3.  If supply decreases and demand increases, what happens to price and quantity at equilibrium?

B.  Price increases, quantity indeterminable

the supply curve shifts in and demand curve shifts out, based on a decrease in supply and an increase in demand, respectively

4.  Which chart depicts a price floor situation?

B.  B
A price floor is set above the equilibrium price because the government wants the price of the good high to ensure the producers make a profit, so they stay in business.


5.  If the price of a complement increases, what happens to equilibrium price and quantity of the original good, if it is a normal good?

C.  Price decreases, quantity decreases
First a complement good is a good that goes with another good, like hotdogs and hotdog buns.



6.  If the price of a substitute increases, what happens to equilibrium price and quantity of the original good, if it is a normal good?

A.  Price increases, quantity increases

7.  If the price of an input increases, what happens to equilibrium price and quantity of the original good?


B.  Price increases, quantity decreases


8.  If consumer income increases, what happens to equilibrium price and quantity of the original good, if it is an inferior good?

C.  Price decreases, quantity decreases

9.  If technology increases for a substitute good, what happens to equilibrium price and quantity of the original good, if it is a normal good?

C.  Price decreases, quantity decreases

10.  If there is a freeze and you and the other farmers lost part of your corn crop, what happens to equilibrium price and quantity of corn in the corn market?

B.  Price increases, quantity decreases


11.  The distance AB in chart A above represents

D.  Excess demand

It is excess demand because the quantity demanded is greater than the quantity supplied.
It is also called a shortage.

12.  The distance AB in chart B above represents

B.  Excess supply

13.  In chart C, if a tariff is imposed, what happens to the price and quantity sold?

D.  Price increases, quantity decreases
A tariff is the same thing as a tax.


14.  In chart C, if there is a current tariff of $1 per unit of the good and the initial supply curve with the tariff included is S, S2 in chart C represents

A.  An increase in the tariff amount

15.  A quota can be set so that the effect on price and quantity is the same as with a tariff.

B.  False

16.  The difference between a tariff and a quota is that the government gets the revenue from a tariff and the producers get added profits from a quota.

A.  True