Chapter 6 eco study guide

Which of the following causes a surplus of a good?

Binding price floor

The price paid by buyers in a market will decrease if the government

decreases a tax on the good sold in that market

A binding price ceiling is shown in

graph (b) only.

Which of the following is not a rationing mechanism used by landlords in cities with rent control?

Price

Rent control

b. serves as an example of a price ceiling.

A surplus results when a

binding price floor is imposed on a market

The price ceiling

makes it necessary for sellers to ration the good using a mechanism other than price

A payroll tax is a

tax on the wages that firms pay their workers.

The term tax incidence refers to

the distribution of the tax burden between buyers and sellers

The Earned Income Tax Credit, a government program that supplements the incomes of low-wage workers, is an example of a

wage subsidy.

When the price ceiling is enforced in this market and the supply curve for gasoline shifts from S1 to S2 ,

a shortage will occur at the new market price of P2

In graph (b), there will be

a surplus.

Under rent control, bribery is a potential mechanism to

bring the total price of an apartment (including the bribe) closer to the equilibrium price

If a tax is levied on the sellers of fish, then

buyers and sellers will share the burden of the tax

A tax on the buyers of smart watches encourages

buyers to demand a smaller quantity at every price

If the government imposes a price ceiling at $15, it would be

nonbinding if market demand is Demand A and binding if market demand is Demand B

Which of the following statements is not correct?

When the price is $6, there is a surplus of 8 units

Suppose the equilibrium price of a stick of deodorant is $4, and the government imposes a price floor of $5 per stick. As a result of the price floor, the

quantity demanded of deodorant decreases, and the quantity of deodorant that firms want to supply increases

The amount of the tax per unit is

$14

The vertical distance between points A and B represents the tax in the market The price that buyers pay after the tax is imposed is

$24

Following the imposition of a price floor $2 above the equilibrium price, irate buyers convince Congress to repeal the price floor and to impose a price ceiling $1 below the former price floor. The resulting market price is

$3

What is the amount of the tax per unit?

$4

The per-unit burden of the tax on buyers is

$8

Which of the following is not a result of rent control?

. Higher quality housing

Suppose that the demand for picture frames is highly inelastic, and the supply of picture frames is highly elastic. A tax of $1 per frame levied on picture frames will increase the price paid by buyers of picture frames by

. between $0.50 and $1.

If the government levies a $700 tax per motorcycle on sellers of motorcycles, then the price paid by buyers of motorcycles would

. increase by less than $700

When a tax is placed on the sellers of a product, buyers pay

. more, and sellers receive less than they did before the tax.

The following table contains the demand schedule and supply schedule for a market for a particular good. Suppose sellers of the good successfully lobby Congress to impose a price floor $2 above the equilibrium price in this market. . How many units of the good are purchased after the imposition of the price floor?

5

In this market, over what range of prices would a price ceiling set by the government be binding?

A price ceiling must be set below the equilibrium price to be binding. Therefore, a price ceiling will be binding in this market if it is set anywhere below $3.

. If the government set a price ceiling at $15, would there be a shortage or surplus, and how large would be the shortage/surplus?

A price ceiling set at $15 would not be binding, so there would be neither a shortage nor a surplus

If the government set a price ceiling at $2, would there be a shortage or surplus, and how large would be the shortage/surplus?

A price ceiling set at $2 would be binding and would result in a shortage of 7 units.

. If the government set a price ceiling at $50, would there be a shortage or surplus, and how large would be the shortage/surplus?

A price ceiling set at $50 would result in a shortage of 10 units.

Suppose that demand in the market for good X is given by the equation Q^D= 30-P and that supply in the market for good X is given by the equation Q^s= 2P If the government set a price ceiling at $8, would there be a shortage or surplus, and how large would be the shortage/surplus?

A price ceiling set at $8 would result in a shortage of 6 units

If the government set a price ceiling at $8, would there be a shortage or surplus, and how large would be the shortage/surplus?

A price ceiling set at $8 would result in a shortage of 8 units.

. In this market, over what range of prices would a price floor set by the government be binding?

A price floor must be set above the equilibrium price to be binding. Therefore, a price floor will be binding in this market if it is set anywhere above $3.

. If the government set a price floor at $15, would there be a shortage or surplus, and how large would be the shortage/surplus?

A price floor set at $15 would result in a surplus of 6 units

If the government set a price floor at $9, would there be a shortage or surplus, and how large would be the shortage/surplus?

A price floor set at $9 would not be binding, so there would be neither a shortage nor a surplus.

Suppose a tax of $2 per unit is imposed on this market. How much will buyers pay per unit after the tax is imposed?

Between $5 and $7

Suppose a tax of $2 per unit is imposed on this market. What will be the new equilibrium quantity in this market?

Between 60 units and 100 units

. Suppose a tax of $98 per unit is imposed on this market. Which of the following is correct?

Buyers will bear more of the burden of the tax than sellers will

Suppose a $3 per-unit tax is imposed on the sellers of this good. What price will buyers pay for the good after the tax is imposed?

Buyers will pay $11.50.

. Which of the following is not correct?

Taxes levied on sellers and taxes levied on buyers are not equivalent

Suppose a $3 per-unit tax is imposed on the sellers of this good. How much is the burden of this tax on the sellers in this market?

The burden of the tax on sellers is $1.50

Suppose sellers of cologne are required to send $1.50 to the government for every bottle of cologne they sell. Further, suppose this tax causes the price paid by buyers of cologne to rise by $0.90 per bottle. Which of the following statements is correct?

The effective price received by sellers is $0.60 per bottle less than it was before the tax

In which market will the majority of the tax burden fall on buyers?

The market shown in graph (b)

Suppose demand for a product is given by the equation Q^D = 120 - 4P and supply for the product is given by the equation Q^s= 4P Suppose the government sets a price ceiling at $12 for this product. Is this price ceiling binding, and what will be the size of the shortage/surplus in this market?

The price ceiling will be binding, and there will be a shortage of 24 units

. Suppose the government sets a price floor at $13 for this product. Is this price floor binding, and what will be the size of the shortage/surplus in this market?

The price floor will not be binding and, therefore, there will be no shortage or surplus in this market resulting from the price floor

If the government set a price ceiling at $40, would there be a shortage or surplus, and how large would be the shortage/surplus?

There would be a shortage of 20 units.

If the government set a price ceiling at $9, would there be a shortage or surplus, and how large would be the shortage/surplus?

There would be a shortage of 6 units

. Suppose buyers of fountain drinks are required to send $0.50 to the government for every fountain drink they buy. Further, suppose this tax causes the effective price received by sellers of fountain drinks to fall by $0.25 per fountain drink. Which of the following statements is correct?

This tax causes the demand curve for fountain drinks to shift downward by $0.50 at each quantity.

If the demand curve is more price elastic than the supply curve, will the buyers or the sellers bear a greater burden of a tax? Draw a diagram to illustrate your answer.

When the demand curve is more elastic than the supply curve, the sellers will bear the greater burden of a tax imposed on the market. A graph such as the following illustrates this.

. If the government imposes a tax of $6 per unit in this market, how much is the burden of the tax on the sellers in this market?

With a $6 tax per unit, the amount sellers receive will fall from $8 to $6 per unit. Therefore, the burden of the tax on sellers is $2 per unit.

If the government imposes a tax of $6 per unit in this market, who will bear the greater burden of the tax - the buyers, the sellers, or will the burden be shared equally?

With a $6 tax per unit, the burden of the tax on buyers is $4 and the burden of the tax on sellers is $2. Therefore, buyers will bear a greater burden of the tax.

If the government imposes a tax of $6 per unit in this market, how many units will be bought and sold in the market after the tax is imposed?

With a $6 tax per unit, the number of transactions will fall to 30 units

. If the government imposes a tax of $6 per unit in this market, what price will buyers pay per unit after the tax is imposed?

With a $6 tax per unit, the price buyers pay will rise to $12 per unit.

Which of the following observations would be consistent with the imposition of a binding price ceiling on a market? After the price ceiling is established,

a larger quantity of the good is demanded.

A price ceiling is

a legal maximum on the price at which a good can be sold.

The minimum wage was instituted to ensure workers

a minimally adequate standard of living.

Suppose the government wants to encourage Americans to exercise more, so it imposes a binding price ceiling on the market for in-home treadmills. As a result,

a shortage of treadmills will develop

. Using the graph shown, answer the following questions. a. What was the equilibrium price in this market before the tax? b. What is the amount of the tax? c. How much of the tax will the buyers pay? d. How much of the tax will the sellers pay? e. How much will the buyer pay for the product after the tax is imposed? f. How much will the seller receive after the tax is imposed? g. As a result of the tax, what has happened to the level of market activity?

a. $6 b. $4 c. $1 d. $3 e. $7 f. $3 g. As a result of the tax, the level of market activity has fallen, from 60 units bought and sold to only 50 units bought and sold.

Using the graph shown, in which the vertical distance between points A and B represents the tax in the market, answer the following questions. a. What was the equilibrium price and quantity in this market before the tax? b. What is the amount of the tax? c. How much of the tax will the buyers pay? d. How much of the tax will the sellers pay? e. How much will the buyer pay for the product after the tax is imposed? f. How much will the seller receive after the tax is imposed? g. As a result of the tax, what has happened to the level of market activity?

a. $8; 8,000 units b. $5 c. $3 d. $2 e. $11 f. $6 g. As a result of the tax, instead of 8,000 units bought and sold, only 6,000 will be bought and sold.

A shortage results when a

binding price ceiling is imposed on a market.

. A government-imposed price of $24 in this market is an example of a

binding price floor that creates a surplus.

A government-imposed price of $12 in this market is an example of a

binding price floor that creates a surplus.

Suppose D1 represents the demand curve for paperback novels, D2 represents the demand curve for gasoline, and S1 is representative of the supply curve for paperback novels as well as the supply curve for gasoline. After the imposition of the $2 tax on paperback novels and on gasoline, the

buyers of gasoline bear a higher burden of the $2 tax than buyers of paperback novels.

Price ceilings and price floors that are binding

cause surpluses and shortages to persist because price cannot adjust to the market equilibrium price.

If the government imposes a binding price ceiling on a market, then the price paid by buyers will

decrease, and the quantity sold in the market will decrease.

. If the government removes a binding price floor from a market, then the price paid by buyers will

decrease, and the quantity sold in the market will increase

Suppose that a tax is placed on books. If the buyers pay the majority of the tax, then we know that the

demand is more inelastic than the supply.

. The price ceiling causes quantity

demanded to exceed quantity supplied by 90 units.

When a certain price control is imposed on this market, the resulting quantity of the good that is actually bought and sold is such that buyers are willing and able to pay a maximum of P1 dollars per unit for that quantity and sellers are willing and able to accept a minimum of P2 dollars per unit for that quantity. If P1 − P2 = $3, then the price control is

either a price ceiling of $3.00 or a price floor of $6.00

The goal of rent control is to

help the poor by making housing more affordable.

Suppose D1 represents the demand curve for gasoline in both the short run and long run, S1 represents the supply curve for gasoline in the short run, and S2 represents the supply curve for gasoline in the long run. After the imposition of the $2 tax, the price paid by buyers will be

higher in the long run than in the short run.

The price ceiling shown in graph (a)

is not binding

One disadvantage of government subsidies over price controls is that subsidies

make higher taxes necessary.

The burden of a luxury tax usually falls

more on the middle class than on the rich.

Rent-control laws dictate

only a maximum rent that landlords may charge tenants

Minimum-wage laws dictate

only a minimum wage that firms may pay workers

The presence of a price control in a market for a good or service usually is an indication that

policymakers believed that the price that prevailed in that market in the absence of price controls was unfair to buyers or sellers.

A legal minimum on the price at which a good can be sold is called a

price floor.

. Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling, the

quantity demanded of physicals increases, and the quantity supplied of physicals decreases.

The imposition of a binding price ceiling on a market causes

quantity demanded to be greater than quantity supplied.

If a nonbinding price floor is imposed on a market, then the

quantity sold in the market will stay the same

Suppose the government imposes a 20-cent tax on the sellers of artificially-sweetened beverages. The tax would shift

supply, raising the equilibrium price and lowering the equilibrium quantity in the market for artificially sweetened beverages.

. In this market, a minimum wage of $6 creates a labor

surplus of 4,000 worker hours

If a price floor is not binding, then

the equilibrium price is above the price floor.

Suppose buyers, rather than sellers, were required to pay this tax (in the same amount per unit as shown in the graph). Relative to the tax on sellers, the tax on buyers would result in

the same amount of tax revenue for the government

If a price ceiling is not binding, then

there will be no effect on the market price or quantity sold.