Consider the case of a binding price ceiling in the market for college textbooks. Which of the following welfare outcomes does economic theory predict?
a. Producer surplus will decline in the market for college textbooks
b. Total surplus will decline in the market for college textbooks
c. There will be a deadweight loss in the market for college textbooks
d. All of the above
Consider the case of a binding price ceiling in the market for college textbooks. Which of the following welfare outcomes does economic theory predict?
a. Producer surplus will decline in the market for college textbooks
b. Total surplus will decline in the market for college textbooks
c. There will be a deadweight loss in the market for college textbooks
d. All of the above
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Calculating inflation using a simple price index.
Consider a frictional price index, the College student price index (CSPI), based on a survey of annual purchases of a typical college student. Suppose the following table show information on the market basket for the CSPI and the prices for each good in 2012, 2013, and 2014.
| Quantity in Basket | 2012 Price cost | 2013 Price cost | 2014 Price cost | |
| Notebooks | 10 | 2 20 | 1 | 3 |
| Calculators | 1 | 50 50 | 54 | 75 |
| Large coffees | 200 | 1 200 | 1 | 1 |
| Energy drinks | 100 | 2 200 | 3 | 4 |
| Textbooks | 10 | 100 1000 | 120 | 150 |
| Total cost | 1470 | |||
| Price index | 100 |
The cost of each item in the basket and total cost of the basket are shown for 2012. Perform these same calculations for 2013 and 2014 and enter the results into the table.
Suppose the base year for this price index is 2012. Calculate and enter the value of the CSPI for the remaining years in the last row of the table.
Between 2012 and 2013, the CSPI increased by (120%, 20%, 25%, or 150%).
Between 2013 and 2014, the CSPI increased by (120%, 150%, 30%, or 25%).
Which of the following, if true, would illustrate why price indexes such as CSPI might overstate inflation in the cost of going to college?
A. As the price of energy drinks increased relative to the price of coffee 2012 and 2014, students decreased their consumption of energy drinks and increased their consumption of coffee.
B. Professors required each student to buy 10 textbooks, regardless of the price.
C. The quality of textbooks increased dramatically from 2012 to 2014, with textbook companies bundling new online study aids with their books.
