Chapter 6 Econ

price ceiling

A legal maximum on the price at which a good can be sold (to protect consumers and making sure goods don't come too expensive)

Suppose buyers of vodka are required to send $1.00 to the government for every bottle of vodka they buy. Further, suppose this tax causes the effective price received by sellers of vodka to fall by $0.60 per bottle. Which of the following statements is correct? This tax causes the supply curve for vodka to shift upward by $1.00 at each quantity of vodka. The price paid by buyers is $0.40 per bottle more than it was before the tax. Sixty percent of the burden of the tax falls on buyers. All of the above are correct.

The price paid by buyers is $0.40 per bottle more than it was before the tax. Since the effective price received by sellers of vodka falls by $0.60 per bottle (sellers' tax burden), the effective price paid by buyers increases (buyers' tax burden) by $0.4 ($1-$0.6)

Suppose the government has imposed a price floor on cellular phones. Which of the following events could transform the price floor from one that is binding to one that is not binding? Cellular phones become less popular. Traditional land line phones become more expensive. The components used to produce cellular phones become less expensive. Firms expect the price of cellular phones to fall in the future.

Traditional land line phones become more expensive. For a price floor to be binding, it needs to be above the equilibrium price. If traditional landline phones, which are substitutes to cellular phones, become expensive, the demand for cellular phones will increase (shift to the right). Then, the equilibrium price would go up. If the new equilibrium price is higher than the price floor, then the floor becomes non-binding. Therefore, this event could transform the price floor from one that is binding to one that is not binding.

price floor

a legal minimum on the price of a good or service (to protect producers from selling prices being too low)

per unit tax

a tax of a specific amount on each unit of a product sold

binding price floor

above equilibrium, causes a surplus

example of a price floor

agriculture to protect farmers

binding price ceiling

below equilibrium, causes a shortage

tax - when the supply is more elastic than demand, who has the higher tax burden

buyers tax burden > sellers tax burden

Suppose that in a particular market, the supply curve is highly elastic and the demand curve is highly inelastic. If a tax is imposed in this market, then the buyers will bear a greater burden of the tax than the sellers. sellers will bear a greater burden of the tax than the buyers. buyers and sellers are likely to share the burden of the tax equally. buyers and sellers will not share the burden equally, but it is impossible to determine who will bear the greater burden of the tax without more information.

buyers will bear a greater burden of the tax than the sellers. Correct. The party whose curve is more elastic will bear a smaller burden of the tax.

would we rather have the tax imposed on sellers or buyers?

it doesn't matter, the effects are the same

price controls

price ceiling and price floor

shortage

quantity demanded is greater than quantity supplied

surplus

quantity supplied is greater than quantity demanded

example of a price ceiling

rent controls put a limit on how much you can charge for rent

when the demand is more elastic than supply, who has the higher tax burden

sellers tax burden > buyers tax burden

tax on buyers

shifts the D curve down by the amount of the tax

tax on sellers

shifts the S curve up by the amount of the tax