Chapter 6 micro

Refer to the Figure. The per-unit burden of the tax on sellers is

$3. Feedback: Correct. The per-unit burden of the tax on the sellers is the difference between the price at point B, $11, and the equilibrium price before the tax, $14.

Refer to the Figure. The per-unit burden of the tax on buyers is

$4. Feedback: Correct. The tax burden on the buyers is the difference between the price at point A, $18, and the equilibrium price before the tax, $14.

Refer to the Figure. Which of the following price ceilings would be binding in this market?

$6 Feedback: Correct. A price ceiling set at $6 would be binding because it is a government-mandated maximum price that is set lower than the equilibrium price.

Refer to the Figure. The amount of the tax per unit is

$7. Feedback: Correct. The tax is the distance between points A and B; 18-11 = 7.

Which of the following is not a likely statement regarding the imposition of a binding price floor on the market for cigarettes?

Buyers of cigarettes have pressured policymakers into imposing the price floor. It is not likely that buyers of cigarettes would pressure policymakers into imposing a binding price floor because a binding price floor will raise the price of cigarettes above the market price.

Suppose sellers of gasoline are required to send $0.50 to the government for every gallon of gasoline they sell. Further, suppose this tax causes the price paid by buyers of gasoline to rise by $0.40 per gallon. Which of the following statements is correct?

Demand is relatively inelastic compared to supply of gasoline. Feedback: Correct. In this example, the buyers' price increases by $0.40 per gallon and the price the sellers receive decreases by $0.10 per gallon. When demand is relatively inelastic compared to supply, the buyers bear the greater burden of the tax.

Refer to the Figure. In which of the following cases would the market price serve as a rationing mechanism?

a price floor set at $6 A price floor set at $6 would be non-binding because it is a government-mandated minimum price that is set below the equilibrium price. In this case, the market price would serve as a rationing mechanism because the price floor would have no effect on the market.

Refer to the Figure. If the government imposes a price ceiling of $6 on this market, then there will be

a shortage of 20 units. Feedback: Correct. If the government imposes a price ceiling of $6, the quantity demanded is 50 while the quantity supplied is 30, resulting in a shortage of 20 units.

Rent control is an example of a price

ceiling; in cities with rent control mechanisms other than price are used to ration housing. Rent control policies are price ceilings that set the rental price of apartments below the equilibrium price. Because price can no longer be used to ration housing, landlords use other mechanisms such as waiting lists to ration housing.

A payroll tax has the effect of

increasing the wages paid by firms and decreasing the wages received by workers. A payroll tax drives a wedge in the labor market increasing the wages paid by firms and decreasing the wages received by workers

Most labor economists believe workers, rather than firms, bear most of the burden of the payroll tax because the

supply of labor is less elastic than the demand for labor. When supply is less elastic than demand, the incidence of the tax falls more heavily on sellers than on consumers. In the labor market, workers are the sellers of labor.

When policymakers impose a luxury tax on buyers of a good,

they are not successful in redistributing income from the rich to the poor. When a tax is imposed on a good with demand more elastic than its supply, as is the case with luxury goods, the burden of the tax falls more heavily on the sellers of the good than on the buyers. The imposition of a luxury tax does not successfully redistribute income from wealthy buyers of luxury goods to the poor.

Refer to the Table. Suppose the government imposes a price ceiling of $2 on this market. What will be the size of the shortage in this market?

6 units Feedback: Correct. With a $2 price ceiling, the quantity demanded is 12 units and the quantity supplied is 6 units, so there is a shortage of 6 units.

Suppose that a $3.00 tax per pack is imposed on cigarettes. Which of the following is consistent with the demand being relatively inelastic and the supply being relatively elastic?

The price buyers pay increases by more than $1.50 and the price sellers receive decreases by less than $1.50. The burden of a tax falls more heavily on the side of the market that is more inelastic. With a relatively inelastic demand curve and a relatively elastic demand curve, the buyers will bear a greater burden of the tax than the sellers.

A binding price ceiling

forces the price lower than the market price. Feedback: Correct. A price ceiling is a legal maximum on the price at which a good be sold. A price ceiling is binding if it is set below the market price.

If the equilibrium wage exceeds the minimum wage, then

there will be no unemployment. If the equilibrium wage exceed the minimum wage, then the minimum wage is a nonbinding price floor and the equilibrium price and quantity will prevail.

A policy to help the poor that would not reduce the quantity of housing supplied is

a subsidy from the government to offset a portion of a poor family's rent. Feedback: Correct. A subsidy from the government to offset a portion of a poor family's rent would not reduce the quantity of housing supplied.

If a binding price floor is imposed on the market for carrots, then

a surplus of carrots will develop. Feedback: Correct. When a binding price floor is imposed, the quantity supplied exceeds the quantity demanded resulting in a surplus.

If the market price of 60-inch flat-screen TVs is $1,200 and the government imposes a price control setting the price at $1,000, this price control could be a

binding price ceiling or a nonbinding price floor. Feedback: Correct. A price ceiling is a legal maximum on the price and it is binding if it is set below the market price. Because this price control is set below the market price, it would be binding if it were a price ceiling. A price floor is a legal minimum on the price and it is binding if it is set above the market price. Because this price control is set below the market price, it would not be binding if it were a price floor.

When a tax is placed on the buyers of hockey skates, the size of the hockey skate market

decreases, but the price paid by buyers increases. Feedback: Correct. When a tax is placed on a market, the size of the market decreases, the price paid by the buyers increases, and the price received by the sellers decreases.

The Earned Income Tax Credit is a

method of raising living standards of the working poor without creating unemployment. Feedback: Correct. The Earned Income Tax Credit is an example of a method of raising living standards of the working poor without creating unemployment.

Refer to the Figure. If the government imposes a price ceiling of $10 on this market, then there will be

no shortage. Feedback: Correct. A price ceiling of $10 is non-binding because a price ceiling is a government mandated maximum price and the market price is lower than this price ceiling. There will be equilibrium in this market rather than a shortage.

If the market price of T-shirts is $10 and the government imposes a price ceiling at $12, the market will

reach the equilibrium and the price ceiling is not binding. Feedback: Correct. A price ceiling is a legal maximum on the price and it is binding if it is set below the market price. Because the price ceiling is set at $12 and the market price is $10, this ceiling is not binding, so the market will reach the equilibrium.

Refer to the Table. A price floor set at $4 will

be binding and will result in a surplus of 6 units. Feedback: Correct. A price floor set at $4 will be binding because it is higher than the equilibrium price. At a price of $4, the quantity supplied is 12 and the quantity demanded is 6 resulting in a surplus of 6 units.

Which of the following is correct? Price controls often help

some of those they are designed to help. Feedback: Correct. Price controls often help some of those they are designed to help while hurting others they are designed to help.

Refer to the Figure. A government-imposed price of $12 in this market is an example of a

binding price ceiling that creates a shortage. Feedback: Correct. A government-imposed price of $12 is less than the market price of $20, which means it could be a binding price ceiling or a nonbinding price floor. If it were a non-binding price floor, the outcome would be the equilibrium rather than a surplus. At the price of $12, the quantity demanded exceeds the quantity supplied, creating a shortage.

After a tax is imposed on the buyers of bottled water, the price buyers pay is $2.50 per bottle and the price sellers receive is $1.75. If the equilibrium price was $2.00 before the tax was imposed on the market, how much is the tax per unit?

$0.75 Feedback: Correct. The tax per unit is the difference between the price the buyers pay after the tax and the price the sellers receive after the tax. In this case, the tax is ($2.50 − $1.75 =) $0.75 per unit.

Refer to the Figure. In the after-tax equilibrium, how much revenue does the government collect from the tax on this good?

$240 Tax revenue equals the tax per unit multiplied by the number of units sold with the tax imposed. In this case, the tax per unit is $3 and the number of units sold is 80, resulting in tax revenue of $240.

Refer to the Table. Suppose the government imposes a price floor of $5 on this market. What will be the size of the surplus in this market?

12 units With a price floor of $5, the quantity supplied will be 15 and the quantity demanded will be 3, so there is a surplus of 12 units.

Suppose the government wants to encourage Americans to eat healthier, so it imposes binding price ceilings on the markets for fresh vegetables. As a result,

a shortage of fresh vegetables will develop. Feedback: Correct. When a binding price ceiling is imposed, the quantity demanded exceeds the quantity supplied resulting in a shortage.

A binding minimum wage

alters both the quantity demanded of labor and the quantity supplied of labor. Feedback: Correct. A binding minimum wage causes an increase in the quantity supplied of labor, as more workers are willing to work at the higher wage, and a decrease in the demand for labor, as firms are willing to hire fewer workers at the higher wage.

Refer to the Figure. A price ceiling set at $4 causes quantity

demanded to exceed quantity supplied by 20 units. Feedback: Correct. When the price ceiling is set at $4.00, the quantity demanded is 30 units and the quantity supplied is 10 units. This outcome results in a shortage of 20 units.

If the market price of burgers is $8 and the government sets a legal minimum at $9, the government has imposed a price

floor that is binding. Feedback: Correct. A price floor is a legal minimum on the price and it is binding if it is set above the market price. Because the price floor is set at $9 and the market price is $8, this floor is binding, so there will be a surplus of burgers.

If the government removes a $4 tax on buyers of restaurant meals and imposes the same $4 tax on sellers of restaurant meals, then the price paid by buyers will

not change, and the price received by sellers will not change. Feedback: Correct. The tax incidence is independent of the side of the market on which the tax is levied. That is, if the tax amount remains the same, the price paid by the buyers and the price received by the sellers will be the same whether the tax is placed on the buyers or the sellers.

Refer to the Figure. How is the burden of the tax shared between buyers and sellers? Buyers bear

two-thirds of the burden, and sellers bear one-third of the burden. Feedback: Correct. After the tax, the price buyers pay is $5, which is $2 more than the pre-tax price of $3. After the tax, the price sellers receive is $2, which is $1 less than the pre-tax price of $3. Of the $3 tax per unit, buyers bear $2 of the burden and sellers bear $1 of the burden.

Consider the market for electricity. Buyers

would lobby for a price ceiling, whereas sellers would lobby for a price floor. Buyers would prefer a price ceiling because, if it were binding, it would result in a price lower than the market price. Sellers would prefer a price floor because, if it were binding, it would result in a price higher than the market price.

If the government removes a binding price ceiling in the market for gasoline, then

the price of gasoline will increase, and the quantity of gasoline sold will increase. Feedback: Correct. When a price ceiling is binding, the ceiling is set below the market price. If the government removes a binding price ceiling, the higher market price and quantity will prevail.

Refer to the Figure. Which of the following price floors would be binding in this market?

$10 Feedback: Correct. A price floor set at $10 would be binding because it is a government-mandated minimum price that is set higher than the equilibrium price.

Refer to the Figure. The effective price that sellers receive after the tax is imposed is

$11. The tax drives a wedge into the market reducing the price the sellers receive to $11.

Refer to the Figure. The price that buyers pay after the tax is imposed is

$18. Feedback: Correct. The tax drives a wedge into the market and drives up the price the buyers must pay to $18.

Refer to the Figure. XYZ, Inc. is a seller of the good. XYZ sells a unit of the good to a buyer and then pays the tax on that unit to the government. XYZ is left with how much money?

$2.00 Feedback: Correct. XYZ sells a unit to a buyer at a price of $5 per unit and pays the $3 tax per unit to the government, leaving XYZ with $2 from selling that unit.

After a tax is imposed on the market for bottled water, the price buyers pay is $2.50 per bottle and the price sellers receive is $1.75. If the equilibrium price was $2.00 before the tax was imposed on the market, what can you conclude about the relative price elasticities of demand and supply?

Supply is more elastic than demand. The burden of the tax falls more heavily on the side of the market that is less elastic. The price buyers pay increases by ($2.50 − $2.00 =) $0.50 per unit and the price sellers receive decreases by ($2.00 − $1.75 =) $0.25 per unit, indicating that the burden falls more heavily on the buyers. We can conclude that supply is more elastic than demand.

Suppose the government has imposed a price ceiling on textbooks. Which of the following events could transform the price ceiling from one that is not binding into one that is binding?

The number of students buying textbooks increases. When a price ceiling is not binding, the price ceiling is set higher than the market price. For a non-binding price ceiling to become a binding price ceiling, the market price must increase. When the number of students buying textbooks increases, the demand for textbooks shifts to the right, resulting in a higher market price.

Suppose the government has imposed a price floor on cheese. Which of the following events could transform the price floor from one that is binding to one that is not binding?

A bovine disease affects half of the cow population resulting in a higher price for milk. When a price floor is binding, the price is higher than the market price. If the price of milk, an input into cheese, increases, the supply of cheese decreases resulting in a higher price of cheese. This new higher market price could exceed the price floor, making the price floor non-binding.

Refer to the Figure. Which of the following statements is correct?

A price floor set at $9 would result in a surplus. Feedback: Correct. With an equilibrium price of $8, a government-mandated minimum price of $9 would result in a quantity supplied that exceeds the quantity demanded.

A government-mandated maximum price that is set below the market equilibrium price is a

binding price ceiling that results in a shortage. Feedback: Correct. A price ceiling is a legal maximum on the price at which a good can be sold. A price ceiling is binding if it is set below the market price. At the binding ceiling price, the quantity buyers want to buy exceeds the quantity sellers want to sell, resulting in a shortage.

A $15.00 tax levied on the sellers of car batteries will

cause the supply curve for car batteries to shift to the left by $15.00. When a tax is levied on the sellers of a good, the supply curve shifts to the left by the amount of the tax.

Rent control is

considered to be an inefficient way to help the poor raise their standard of living. Economists believe that rent control is an inefficient way to help the poor raise their standard of living because it is likely to cause a large shortage of housing in the long run.

A tax on the sellers of chocolate

decreases the amount of chocolate that will be bought and sold. When a tax is imposed on a market, the size of the market decreases.

Suppose that the demand for toilet paper is highly inelastic, and the supply of toilet paper is highly elastic. A tax of $0.10 per roll levied on toilet paper will decrease the effective price received by sellers of toilet paper by

less than $0.05. If the demand is highly inelastic and the supply is highly elastic, the burden of the tax will fall more heavily on the buyers. In this case, the price that buyers of toilet paper will pay increases by more than half of the tax amount, or more than $0.05. Likewise, the price the sellers will receive decreases by less than half of the tax amount, or less than $0.05.

Suppose that in a particular market, the supply curve is relatively inelastic and the demand curve is relatively elastic. If a tax is imposed in this market, then the

sellers will bear a greater burden of the tax than the buyers. Feedback: Correct. The burden of a tax falls more heavily on the side of the market that is more inelastic. With a relatively inelastic supply curve and a relatively elastic demand curve, the sellers will bear a greater burden of the tax than the buyers.

Refer to the Figure. A price ceiling at $4.00 causes a

shortage of 20 units. Feedback: Correct. When the price ceiling is set at $4.00, the quantity demanded is 30 units and the quantity supplied is 10 units. This outcome results in a shortage of 20 units.

Refer to the Figure. What is the amount of the tax per unit?

$3 Feedback: Correct. The amount of the tax is the vertical distance between the two supply curves. At the intersection between D and S2, the price is $5 and the quantity is 80 units. On S1, at a quantity of 80 units, the price is $2. Therefore, the amount of the tax per unit is $5 - $2 = $3.

Refer to the Figure. 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 $24 exceeds the market price of $20, which means it could be a binding price floor or a nonbinding price ceiling. If it were a non-binding price ceiling, the outcome would be the equilibrium rather than a shortage. At the price of $24, the quantity supplied exceeds the quantity demanded, creating a surplus.

If the government levies a $10 tax per designer handbag, then the price paid by buyers of designer handbags would

increase by less than $10. A tax per unit of a good will be split between the buyers and the sellers. The division is determined by the relative elasticities of demand and supply.

Suppose the equilibrium price of a jar of spaghetti sauce is $3, and the government imposes a price floor of $4 per jar. As a result of the price floor, the

quantity demanded of spaghetti sauce decreases, and the quantity of spaghetti sauce that firms want to supply increases. When a binding price floor is imposed, the quantity demanded is less than the equilibrium quantity and the quantity that firms would like to supply exceeds the equilibrium quantity.

A tax on fur coats, a luxury good is not likely redistribute income from the rich to the poor because demand is more elastic than supply.

true . When a tax is imposed on a good with demand more elastic than its supply, as is the case with luxury goods like fur coats, the burden of the tax falls more heavily on the sellers of the good than on the buyers. The imposition of a luxury tax does not successfully redistribute income from wealthy buyers of luxury goods to the poor.

A government-mandated minimum price that is set above the market equilibrium price is a

binding price floor that results in a surplus. Feedback: Correct. A price floor is a legal minimum on the price at which a good can be sold. A price floor is binding if it is set above the market price. At the binding price floor, the quantity buyers want to buy is less than the quantity sellers want to sell, resulting in a surplus.

When OPEC raised the price of crude oil in the 1970s, it caused a

shortage of gasoline as the nonbinding price ceiling became binding. When OPEC raised the price of crude oil in the 1970s, the United States' nonbinding price ceiling became binding. When a price ceiling becomes binding, the quantity demanded exceeds the quantity supplied resulting in a shortage.

Although lawmakers legislated a fifty-fifty division of the payment of the FICA tax,

the burden of the tax is dictated by the relative elasticities of supply and demand rather than the legislated tax incidence. Feedback: Correct. Tax incidence depends on the relative elasticities of supply and demand rather than any law dictating from whom the tax is to be collected.

Before OPEC raised the price of crude oil in the 1970s, the price

ceiling on gasoline was not binding, but it became binding and caused a shortage when the supply of gasoline decreased. Before OPEC raised the price of crude oil in the 1970s, the price ceiling was above the equilibrium price, so it was not binding. When the supply of gas shifted to the left, the equilibrium price was higher than the ceiling, so the ceiling became binding. At the ceiling price, buyers wanted to buy more than sellers were willing to sell, resulting in a shortage.