CHAPTER 6: SUPPLY, DEMAND, & GOVERNMENT POLICY

per unit tax levied on consumers of a good is equivalent to

1 per unit tax levied on producers of the good.

price ceiling

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

Refer to Figure 6-1. The price ceiling shown in graph (a)

is not binding.

causes to binding

long lines, discrimination according to seller bias

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

quantity sold in the market will stay the same.

In a free market, the price of housing adjusts to eliminate the shortages that give rise to undesirable landlord behavior.

true

Under rent control, landlords can cease to be responsive to tenants' concerns about the quality of the housing because

with shortages and waiting lists, they have no incentive to maintain and improve their property.

The vertical distance between points A and B represents the tax in the market. Refer to Figure 6-10. The price that buyers pay after the tax is imposed is

$24.

The vertical distance between points A and B represents the tax in the market. Refer to Figure 6-10. The per-unit burden of the tax on buyers is

$8.

Suppose the government imposes a $2 tax on this market. Refer to Figure 6-14. The buyers will bear the highest share of the tax burden compared to sellers if the demand is

D2, and the supply is S2.

If the Market for for rental housing is currently at equilibrium and a binding price ceiling is imposed, what is the most likely impact on price, quantity demand, and quality supply?

Decrease, Increase, Decrease

All buyers benefit from a binding price ceiling.

False

Prices are inefficient rationing devices.

False

The housing shortages caused by rent control are larger in the long run than in the short run because both the supply of housing and the demand for housing are more elastic in the long run.

True

The rationing mechanisms that develop under binding price ceilings are usually inefficient.

True

Refer to Figure 6-5. Which of the following statements is not correct?

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

price floor

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

When the government imposes a binding price ceiling on a competitive market,

a shortage of the good arises, and sellers must ration the scarce goods among the large number of potential buyers.

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 smaller quantity of the good is bought and sold.

When the government imposes a binding price floor, it causes

a surplus of the good to develop.

Refer to Figure 6-3. A government-imposed price of $24 in this market is an example of a

binding price floor that creates a surplus.

When a tax is placed on the buyers of lemonade, the

burden of the tax will be shared by the buyers and the sellers, but the division of the burden is not always equal.

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.

Following a prolonged power outage, the price of flashlights normally increases significantly. If cities had passed laws prohibiting price increases for flashlights, during power outages such laws would most likely

create a shortage of flashlights

In a market with a binding price ceiling, increasing the ceiling price will

decrease the shortage.

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.

An increase in the minimum wage reduces the total amount paid to the affected workers if the price elasticity of __________ is __________ than one.

demand; greater

A $1.50 tax levied on the buyers of pomegranate juice will shift the demand curve

downward by exactly $1.50.

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

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

Rent control causes larger shortages in the _________ run because over that time horizon, supply and demand are ___________ elastic

long; more

Refer to Figure 6-2. The price ceiling

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

example of price floor

minimum wage

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

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

This principle explains why economists often oppose

price ceilings and price floors.

Suppose the equilibrium price of a tube of toothpaste is $2, and the government imposes a price floor of $3 per tube. As a result of the price floor, the

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

example of price ceiling

rent control

a binding price ceiling causes a what?

shortage

Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then the

supply curve will shift downward by $20, and the effective price received by sellers will increase by less than $20.

When a good is taxed, the burden of the tax falls mainly on consumers if

supply is elastic and demand is inelastic.

a binding price floor causes a what?

surplus

alternative to rent control

the government can make housing more affordable by paying a fraction of the rent for poor families

Which of the following increases quantity supplied, decreases quantity demanded, and increases the price that consumers pay?

the imposition of a binding price floor

tax incedence

the manner in which the burden of a tax is shared among participants in a market

Which of the following increases quantity supplied, increases quantity demanded, and decreases the price that consumers pay?

the repeal of a tax on a good

Refer to Figure 6-13. 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.

policymakers are motivated to control prices because

they view the market's outcome as unfair.

Refer to Figure 6-13. How is the burden of the tax shared between buyers and sellers? Buyers bear

three-fourths of the burden, and sellers bear one-fourth of the burden.