Chapter 6

Which causes a shortage of a good—a price ceiling or a price floor? Justify your answer with a graph.

A price ceiling prevents the price from being raised to the equilibrium level. Since the price is not high enough, firms will supply less than the quantity demanded, and there will be a shortage.

how does a tax on a good affect the price paid by buyers, the price received by sellers, and the quantity sold?

A tax on a good raises the price buyers pay, lowers the price sellers receive, and reduces the quantity sold.

What mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium?

If quantity supplied exceeds quantity demanded, so that there is a surplus, sellers may try to appeal to the personal biases of the buyers. If quantity demanded exceeds quantity supplied(shortage), sellers can ration the good according to their personal biases, or make buyers wait in line. Also Black Markets

Give an example of a price ceiling and an example of a price floor.

Price Ceiling: Government requiring Jeeps can be sold for a maximum price at $20,000 when it was originally $30,000 Price Floor: Government requiring gum to be sold for a minimum price at $0.50 when it was originally $0.25

suppose gov removes a tax on buyers of a good and levies a tax on the same size of sellers of the good. How does this change in tax policy affect the price that buyers pay sellers for this good, the amount buyers are out of pocket, the amount sellers receive and the quantity of the good sold?

Removing a tax paid by buyers and replacing it with a tax paid by sellers raises the price that buyers pay sellers by the amount of the tax, has no effect on the amount buyers are out of pocket, has no effect on the amount sellers receive net of any tax payments they make, increases the price received by sellers, and has no effect on the quantity of the good sold.

Explain why economists usually oppose controls on prices.

The burden is shared by the buyers and sellers. Buyers pay more, sellers receive less. The quantity sold decreases.

what determines how the burden of a tax is divided between buyers and sellers?

The burden of a tax is divided between buyers and sellers depending on the elasticities of demand and supply. Elasticity represents the willingness of buyers or sellers to leave the market, which in turns depends on their alternatives. When a good is taxed, the side of the market with fewer good alternatives cannot easily leave the market and thus bears more of the burden of the tax.