Name: 
 

Economics Review Guide           Prices and Decision Making  (Chapter 6)



True/False
Indicate whether the sentence or statement is true or false.
 

 1. 

Market equilibrium is the situation in which the quantity of output supplied is equal to the quantity demanded.
 

 2. 

The amount of a price change is affected by the elasticity of both the supply and demand curves.
 

 3. 

If the price of an item is too high in a competitive market, a shortage appears until the price goes down.
 

 4. 

Perfect competition is not necessary for the theory of competitive pricing to be practical.
 

 5. 

Economists often use an academic model to help analyze behavior and predict outcomes.
 

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

 6. 

In a market economy, a high price is a signal for
a.
producers to supply more and consumers to buy less.
b.
producers to supply less and consumers to buy more.
c.
government to intervene to protect consumers.
d.
producers to supply less and consumers to buy less.
 

 7. 

At a given price, a surplus occurs when
a.
the quantity demanded is more than the quantity supplied.
b.
the quantity demanded is the same as the quantity supplied.
c.
the quantity supplied is less than the quantity demanded.
d.
the quantity supplied is greater than the quantity demanded.
 

 8. 

The federal minimum wage law demonstrates
a.
market equilibrium.
b.
a societal choice for economic equity over efficiency.
c.
the function of equilibrium price in a competitive market.
d.
government intervention to ensure the equilibrium price.
 

 9. 

Prices enable a market economy to adjust to unexpected events by
a.
maintaining consumption and production at stable levels.
b.
government rationing.
c.
ensuring that producers always earn a profit.
d.
adjusting consumption and production.
 

 10. 

All of the following are characteristics of allocation by rationing EXCEPT
a.
lack of fairness.
c.
efficiency.
b.
high administrative cost.
d.
diminished incentive for workers.
 

 11. 

If a competitive market is at equilibrium, and if there is a sudden increase in demand, then a temporary
a.
surplus will occur and the price will increase.
b.
shortage will occur and the price will fall.
c.
surplus will occur and the price will fall.
d.
shortage will occur and the price will increase.
 

 12. 

The theory of competitive pricing
a.
is an imperfect model of market performance.
b.
is a set of ideal conditions and outcomes.
c.
is ineffective when large swings in price occur.
d.
demonstrates the need for subsidies and price ceilings.
 

 13. 

Deficiency payments are part of a federal program to assist
a.
farmers.
c.
consumers.
b.
senior citizens.
d.
college students.
 

 14. 

Which of the following is NOT a reason why prices effectively perform the allocation function?
a.
Competitive markets find their own prices without interference.
b.
Prices favor neither the producer nor the consumer.
c.
Prices remain surprisingly stable despite unexpected events.
d.
Prices are easily understood.
 

 15. 

When economic or political conditions are unstable,
a.
the price of gold rises to $850 per ounce.
b.
the supply of gold decreases.
c.
the price of gold decreases.
d.
the demand for gold increases.
 

Completion
Complete each sentence or statement.
 

 16. 

____________________ serve as signals to both producers and consumers.
 

 

 17. 

____________________ prices are signals for businesses to produce more and for consumers to buy less.
 

 

 18. 

Problems with ____________________ include fairness, high administrative costs, and diminished incentives to work and produce.
 

 

 19. 

In the 1930s the U.S. government sought to solve the problem of agricultural surpluses by giving farmers a ____________________ to cover the difference between the market price and target price.
 

 

 20. 

Governments interfere in the market economy to help achieve the social goals of ____________________ and security.
 

 

 21. 

During times of emergency, the government may establish ____________________ in order to ensure the fair distribution of certain products.
 

 

 22. 

A shortage or surplus signals producers to adjust their output until the ____________________ is reached, the point at which the quantity supplied equals the quantity demanded.
 

 

 23. 

Sometimes governments impose a ____________________ to artificially control how high prices will go.
 

 

 24. 

Producers do not like to see a ____________________ in the market because that means they could have sold more product if they had supplied more.
 

 

 25. 

The minimum wage is the ____________________ for wages in the United States.
 

 

Matching
 
 
Match each statement with the correct item below.
a.
quantity demanded is greater than quantity supplied
b.
prices are relatively stable, and quantity supplied is equal to quantity demanded
c.
check sent to producers that makes up the difference between the actual market price and the target price
d.
monetary value of a product
e.
quantity supplied is greater than quantity demanded at a given price
f.
price that produces neither a surplus nor a shortage
g.
set of assumptions and/or relationships that can be used to help analyze behavior and predict outcomes
h.
ticket that entitles the holder to a certain amount of a product
i.
a socially desirable price determined by factors other than the market
j.
maximum legal price that can be charged for a product
 

 26. 

price
 

 27. 

price ceiling
 

 28. 

ration coupon
 

 29. 

market equilibrium
 

 30. 

equilibrium price
 

 31. 

target price
 

 32. 

economic model
 

 33. 

deficiency payment
 

 34. 

shortage
 

 35. 

surplus
 
 
Match each statement with the correct item below.
a.
system under which the government or another agency decides everyone's fair share of a product
b.
the minimum wage, the lowest legal price that can be paid to most workers, is an example of this
c.
partial refund of the original price of a product
d.
where these occur, resources slowly shift to other markets where equilibrium prices prevail
e.
price that “clears the market”
f.
unsold product that causes suppliers to reduce their prices
g.
serves as an allocation signal when established by supply and demand
h.
loan that has neither a penalty nor an obligation to repay if not paid back
i.
condition that leaves suppliers wishing they had more product to sell
 

 36. 

surplus
 

 37. 

shortage
 

 38. 

rebate
 

 39. 

price ceiling
 

 40. 

nonrecourse loan
 

 41. 

price
 

 42. 

rationing
 

 43. 

price floor
 

 44. 

equilibrium price
 

Short Answer - (5 points each)
 

 45. 

Drawing Inferences and Conclusions How do price ceilings, price floors, deficiency payments, and other artificial controls over price undermine the effectiveness of the price system?
 

 46. 

Recognizing Ideologies What does the implementation of price controls, such as deficiency payments and price floors, demonstrate about our society?
 
 
APPLYING SKILLS
Using Tables:
Study the table and answer the questions below.
Annual Supply and Demand for VCRs
(in Thousands)
Price
Quantity Demanded
Quantity Supplied
$100
23
3
$110
22
4
$120
20
5
$130
18
10
$140
16
12
$150
14
14
$160
10
18
$170
6
26
$180
3
30
$190
2
34
 

 47. 

What is the equilibrium price for VCRs?
 

 48. 

If only one firm supplied all VCRs and that firm decided to produce 16,000 of them at $160, what would be the result?
 

 49. 

What would be the result of a $110 price ceiling on VCRs?
 

Essay - Choose ONE (10 points)
 

 50. 

Determining Cause and Effect What are two examples of how the government has set prices? Describe the results of each.
 

 51. 

Synthesizing Information List and explain three advantages of the allocation of goods through prices.
 



 
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