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LOS a: Explain market equilibrium, distinguish between long-term and short-term effects of outside shocks, and describe the effects of rent ceilings on the existence of black markets in the housing sector and on the market’s efficiency.

Which of the following describes a market for goods or services that operates outside the legal system, trading at prices that exceed legally imposed price ceilings?

A black market is a market where trading takes place for legally prohibited goods or at prices that exceed legally imposed ceiling prices.

A)	bring the total price of a good (including the bribe) higher and closer to the equilibrium price.

B)	bring the total price of a good (including the bribe) lower and closer to the equilibrium price.

C)	allocate a good to the richest individuals in the market.

A price ceiling is an upper limit on the price a supplier can charge. If the ceiling is below the equilibrium price, it can result in bribes as a rationing mechanism, whereas the total price of a good (including the bribe) is brought closer to the equilibrium price.

Compared to normal markets, the existence of fraud and the use of violence in black markets generally leads to:

A)	lower profit rates for sellers.

B)	poorer economic efficiency.

C)	superior economic efficiency.

Fraud and violence lead to a lower level of economic efficiency in black markets. The black markets operate less smoothly. The sellers that are not caught can charge a higher price for the risks they take and earn a higher profit rate.

Which of the following most accurately describes the impact of a price ceiling set below the equilibrium price for a good and a minimum wage set above the equilibrium wage, respectively?

A)	Shortage; increased unemployment.

B)	Shortage; decreased unemployment.

C)	Surplus; increased unemployment.

A ceiling that is below the equilibrium price for a good will result in a shortage characterized by a quantity demanded that is greater than the quantity supplied. A minimum wage leads to increased unemployment as firms tend to substitute capital for labor. Even though there are often a large number of unemployed low-skilled workers who may be willing to work at a wage lower than the minimum wage, firms cannot legally hire them.

Which of the following is least likely to be the long-run effect of a price ceiling that is set below the equilibrium price?

A)	Consumers have to wait to make purchases.

B)	Sellers improve quality.

C)	Sellers take bribes.

Under price ceilings, sellers may reduce the quality of goods to a level that reflects the imposed ceiling price.

The effect of a price ceiling set above the equilibrium price is most accurately described by which of the following statements?

A)	Quantity demanded will exceed quantity supplied.

B)	It will have no effect on equilibrium price and quantity.

C)	Quantity supplied will exceed quantity demanded.

If a price ceiling is above the equilibrium price, it will have no effect on price or quantity.

If a price ceiling is above the equilibrium price in a given market, its effect will most likely be:

A ceiling is only effective if it is below the equilibrium price. If it is above the equilibrium price, then it should have no effect. If the ceiling is below the equilibrium price, it will produce a shortage. In such a case, suppliers do not produce as much as consumers wish to buy at the ceiling price.

Price ceilings restrict the producer from increasing the selling price. The lower price will stimulate demand by consumers at this lower price. However, since producers will not be able to increase price there is little incentive for them to increase supply. Hence, production and supply will be limited at the price ceiling leading to a market shortage.