ECON 1113 LS 6 HW 6A and HW 6B

Describe what has happened in the markets for tortillas in Mexico and milk in the U.S.

Price floor in milk, price ceiling in tortillas.

A tax on sellers results in

a new supply curve rather than a shifted curve and a movement along the demand curve.

When producers receive a subsidy,

the demand curve is unchanged.

When a tax is imposed on buyers,

the equilibrium quantity is lower and the equilibrium price is lower.

To ensure that all producers benefit from a milk price floor

the government can decide to buy up all the excess supply of milk.

The outcome of a price ceiling can benefit producers.

False

A tax wedge

equals the amount of the tax.

When a tax is imposed on buyers, the tax wedge

equals the amount of the tax.

A price ____ is a minimum legal price at which a good can be sold.

floor

The arguments for intervention fall into three categories:

1) Changing the distribution of surplus. 2) Correcting market failures. 3) Encouraging or discouraging consumption of certain goods.

An effective price ceiling will cause consumers to

1) Gain surplus from paying a lower price. 2) Lose surplus from trades that no longer take place.

There are four effects that result from excise taxes:

1) Government revenue equals the amount of the tax multiplied by the new equilibrium quantity. 2) Equilibrium quantity falls. 3) Buyers pay more and sellers receive less. 4) There is usually a deadweight loss.

Price controls can

1) Increase quantity demanded and decrease quantity supplied. 2) Decrease quantity demanded and increase quantity supplied. 3) Cause a shortage. 4) Cause excess supply.

Taxes and subsidies can

1) Increase quantity supplied and demanded. 2) Decrease quantity supplied and demanded.

Taxes can:

1) Raise government revenue 2) Discourage people from buying or selling a particular good. 3) Impose a cost on both buyers and sellers.

In summary, a subsidy has the following effects, regardless of whether it is paid to buyers or sellers:

1) The government has to pay for the subsidy. 2) Equilibrium quantity increases. 3) Buyers pay less and sellers receive more for each unit sold.

Which of the following are examples of market failure?

1) There is only one producer of a good. 2) Pollution from burning gas in your car.

Identify the two primary effects of taxes.

1) They can discourage consumption of the good. 2) They raise government revenue.

Governments use subsidies:

1) To encourage the production and consumption of a particular good or service. 2) As an alternative to price controls. 3) To benefit certain groups without generating a shortage or an excess supply

An effective price ceiling, which is ____ than the equilibrium price, will result in an ____ quantity demanded, but ____ quantity supplied, than would occur at equilibrium.

1) below 2) higher 3) lower

Price controls can be divided into two opposing categories: Price ____ and price ____.

1) ceilings 2) floors

Governments have sometimes used subsidies to encourage the consumption of desirable goods and services such as ____.

1) education 2) vaccinations

An effective milk price ____, which is above the equilibrium price creates an excess ____ of milk.

1) floor 2) supply

A subsidy imposes a cost on the ____, and ultimately on ____.

1) government 2) consumer

Elasticity is often greater over a ____ period than over a ____ one.

1) long 2) short

Under a tax, consumers pay ____ than they would have under equilibrium; producers receive ____.

1) more 2) less

An effective price ceiling causes a ____, for which goods must be ____.

1) shortage 2) rationed

With a ____, the quantity supplied and demanded decreases, and the government collects revenue. With a ____, the quantity supplied and demanded increases, and the government spends money.

1) tax 2) subsidy

As it takes ____ for buyers and sellers to respond to a change in price, sometimes the full effect of price controls becomes clear only in the ____ run.

1) time 2) long

Suppose the government receives $0.20 for each of the 20 million units sold. It receives $____ million total.

4

Which of the following is not an argument for government intervention?

Favoring certain groups.

Policymakers have little control over how the tax burden is shared between buyers and sellers.

Have little control over how the tax burden is shared between buyers and sellers.

Which of the following statements is true?

Positive analysis is about facts; normative analysis is a matter of opinion.

Taxes decrease the quantity of a good or service that is sold, shrinking the market.

True

When a tax is imposed on buyers or sellers, the actual amount that buyers pay and sellers receive is the same no matter who pays the tax.

True

When a tax is imposed on sellers, demand remains the same because the tax does not change any of the non-price determinants of demand.

True

When a tax is imposed on sellers, the new supply curve is above the original by the amount of the tax.

True

If the price ceiling is set ____ the equilibrium price in a market, it is said to be non-binding.

above

If the price floor is set ____ the equilibrium price in a market, it is said to be non-binding.

below

When there is a tax on buyers of a good,

buyers behave as if the price is higher than the original price.

Suppose a market has a demand curve that is less elastic than the supply curve. In this case,

buyers pay a higher share of the tax.

Where there is a market failure, intervening

can increase total surplus.

The government might initiate a minimum wage to

change the distribution of surplus.

Because some trades that would have happened at the equilibrium price do not happen, the surplus that would have been generated by those mutually beneficial trades is the ____ loss.

deadweight

A subsidy is a requirement that the

government pays an extra amount to producers or consumers of a good.

When producers receive a subsidy, sellers receive a

higher price than the pre-subsidy equilibrium, and buyers pay a lower one.

The relative tax burden borne by buyers and sellers is called the tax ____.

incidence

Unless demand is perfectly elastic or perfectly inelastic, when a tax is levied on buyers or on sellers, the cost

is shared

When supply and demand are relatively elastic, the change in quantity is much

larger than when supply and demand are relatively inelastic.

When producers receive a subsidy, sellers receive a

lower price than the pre-subsidy equilibrium, and buyers pay a lower one.

When there is a tax on buyers of a good,

none of the non-price determinants of supply are affected.

Market failues

occur when the assumption of competitive markets fails to hold.

When producers receive a subsidy, the equilibrium

quantity increases and the equilibrium price decreases.

When people bribe the person in charge of allocating scarce supplies, economists call this rent ____ behavior.

seeking

When a price floor is in effect,

some consumer surplus is transferred to the producers.

The ____ tax incidence refers to the person who is legally responsible for paying the tax.

statutory

The effect of a ____ is the same regardless of whether it is paid to producers or consumers.

subsidy

A tax causes deadweight loss equal to the

surplus lost to buyers and sellers who would have made trades at the pre-tax price.

Raising revenue and/or discouraging consumption are the two primary effects of

taxes.

When there is a tax imposed on buyers,

the outcome is the same as the tax on sellers.

A tax wedge is the difference between

the price paid by buyers and the price received by seller.

When producers receive a subsidy,

the real price they receive for each unit sold is higher than the market price.

A subsidy benefits both buyers and sellers, increasing ____ surplus within the market.

total

Taxes and subsidies can have ____ consequences.

unintended