Econ Ch 6
Suppose that, in a competitive market without government regulations, the equilibrium price of donuts is $1.50 each. Due to new regulations, donut shops that would like to pay better wages in order to hire more workers are prohibited from doing so. PRICE CEILING, BINDING
A price ceiling is a legal maximum on the price at which a good can be sold. Therefore, prohibiting donut shops from selling donuts for more than a particular price is an example of a price ceiling. A binding price ceiling is a price ceiling that is set below the equilibrium price. Because the equilibrium price is $1.50 each for donuts, a legal maximum price of $1.00 each is a binding price ceiling. A binding price ceiling will ultimately cause a shortage, while a non-binding price ceiling has no effect on the equilibrium price and quantity.
Suppose that, in a competitive market without government regulations, the equilibrium price of hamburgers is $5 each The government prohibits fast-food restaurants from selling hamburgers for more than $8 each. PRICE CEILING, NON-BINDING
A price ceiling is a legal maximum on the price at which a good can be sold. Therefore, prohibiting fast-food restaurants from selling hamburgers for more than a particular price is an example of a price ceiling. A binding price ceiling is a price ceiling that is set below the equilibrium price. Because the equilibrium price is $5 each for hamburgers, a legal maximum price of $8 is a non-binding price ceiling. A binding price ceiling will ultimately cause a shortage, while a non-binding price ceiling has no effect on the equilibrium price and quantity.
Price $15 Quantity Demanded 900 Quantity Supplied 0 Pressure on Prices Upward
At a price of $15 per box, consumers demand 900 million boxes of oranges, but producers supply only 0 million boxes. Therefore, there is a shortage of 900 million boxes. In the absence of a price ceiling, a shortage exerts upward pressure on prices until there is neither a surplus nor a shortage.
Price $35 Quantity Demanded 0 Quantity Supplied 900 Pressure on Prices Downward
At a price of $35 per box, consumers demand 0 million boxes of oranges, but producers supply 900 million boxes. Therefore, there is a surplus of 900 million boxes. In the absence of a price ceiling, a surplus exerts downward pressure on prices until there is neither a surplus nor a shortage.
True or False: A minimum wage above $10 per hour is a binding minimum wage in this market.
TRUE In order for a minimum wage to be binding—that is, in order for it to prevent the labor market from reaching equilibrium—it must be set above the equilibrium wage. In this case, you found that the equilibrium wage rate was $10 per hour. Therefore, any minimum wage above $10 per hour would be binding, and any minimum wage set below $10 per hour would not.
The government has instituted a legal minimum price of $2.50 per gallon for gasoline. PRICE FLOOR, NON-BINDING
A price floor is a legal minimum on the price at which a good can be sold. Therefore, prohibiting gas stations from selling gasoline for less than a particular price is an example of a price floor. A binding price floor is a price floor that is set above the equilibrium price. Because the equilibrium price is $3.00 per gallon, a legal minimum price of $2.50 is a non-binding price floor. A binding price floor will ultimately cause a surplus, while a non-binding price floor has no effect on the equilibrium price and quantity.
Because it takes many years before newly planted orange trees bear fruit, the supply curve in the short run is almost vertical. In the long run, farmers can decide whether to plant oranges on their land, to plant something else, or to sell their land altogether. Therefore, the long-run supply of oranges is much more price sensitive than the short-run supply of oranges. Assuming that the long-run demand for oranges is the same as the short-run demand, you would expect a binding price ceiling to result in a SHORTAGE that is LARGER in the long run than in the short run.
A binding price ceiling always creates a shortage, but the severity of the shortage may differ between the short run and the long run. In the short run, farmers may have no choice but to continue producing oranges since they already have orange trees planted. In the long run, if they cannot sell their oranges at the free-market equilibrium price, more and more farmers will switch to other crops or sell their land. Therefore, at the same price set by the price ceiling, fewer and fewer oranges will be produced. At a price of PC, the quantity demanded is QD. In the short run, the supply curve is nearly vertical, and there is a relatively small shortage of oranges (QD−QS). In the long run, the supply curve is much flatter, and the shortage is more severe. Because QS is much less than before, QD−QS is much greater.
Suppose a senator introduces a bill to legislate a minimum hourly wage of $6. This type of price control is called a PRICE FLOOR
A legislated minimum price is called a price floor, while a legislated maximum price is called a price ceiling. Because a wage is a kind of price, a minimum wage law is one example of a price floor.
Suppose that, in a competitive market without government regulations, the equilibrium price of donuts is $1.50 each. The government prohibits donut shops from selling donuts for more than $1.00 each. PRICE CEILING, BINDING
A price ceiling is a legal maximum on the price at which a good can be sold. Therefore, prohibiting donut shops from selling donuts for more than a particular price is an example of a price ceiling. A binding price ceiling is a price ceiling that is set below the equilibrium price. Because the equilibrium price is $1.50 each for donuts, a legal maximum price of $1.00 each is a binding price ceiling. A binding price ceiling will ultimately cause a shortage, while a non-binding price ceiling has no effect on the equilibrium price and quantity.
Suppose that, in a competitive market without government regulations, the equilibrium price of hamburgers is $5 each Due to new regulations, fast-food restaurants that would like to pay better wages in order to hire more workers are prohibited from doing so. PRICE CEILING, BINDING
A price ceiling is a legal maximum on the price at which a good can be sold. Therefore, prohibiting fast-food restaurants from selling hamburgers for more than a particular price is an example of a price ceiling. A binding price ceiling is a price ceiling that is set below the equilibrium price. Because the equilibrium price is $5 each for hamburgers, a legal maximum price of $8 is a non-binding price ceiling. A binding price ceiling will ultimately cause a shortage, while a non-binding price ceiling has no effect on the equilibrium price and quantity.
The government prohibits gas stations from selling gasoline for more than $2.50 per gallon. PRICE CEILING, BINDING
A price ceiling is a legal maximum on the price at which a good can be sold. Therefore, prohibiting gas stations from selling gasoline for more than a particular price is an example of a price ceiling. A binding price ceiling is a price ceiling that is set below the equilibrium price. Because the equilibrium price is $3.00 per gallon for gasoline, a legal maximum price of $2.50 per gallon is a binding price ceiling. A binding price ceiling will ultimately cause a shortage, while a non-binding price ceiling has no effect on the equilibrium price and quantity.
Suppose that, in a competitive market without government regulations, the equilibrium price of donuts is $1.50 each. The government has instituted a legal minimum price of $2.00 each for donuts. PRICE FLOOR, BINDING
A price floor is a legal minimum on the price at which a good can be sold. Therefore, prohibiting donut shops from selling donuts for less than a particular price is an example of a price floor. A binding price floor is a price floor that is set above the equilibrium price. Because the equilibrium price is $1.50 each, a legal minimum price of $2.00 each is a binding price floor. A binding price floor will ultimately cause a surplus, while a non-binding price floor has no effect on the equilibrium price and quantity.
Suppose that, in a competitive market without government regulations, the equilibrium price of hamburgers is $5 each The government has instituted a legal minimum price of $8 each for hamburgers. PRICE FLOOR, BINDING
A price floor is a legal minimum on the price at which a good can be sold. Therefore, prohibiting fast-food restaurants from selling hamburgers for less than a particular price is an example of a price floor. A binding price floor is a price floor that is set above the equilibrium price. Because the equilibrium price is $5 each, a legal minimum price of $8 each is a binding price floor. A binding price floor will ultimately cause a surplus, while a non-binding price floor has no effect on the equilibrium price and quantity.
Suppose that the U.S. government decides to charge wine producers a tax. Before the tax, 35,000 bottles of wine were sold every week at a price of $5 per bottle. After the tax, 29,000 bottles of wine are sold every week; consumers pay $6 per bottle, and producers receive $2 per bottle (after paying the tax). The amount of the tax on a bottle of wine is $6 per bottle. Of this amount, the burden that falls on consumers is $1 per bottle, and the burden that falls on producers is $3 per bottle.
After the tax is imposed, the buyer's total cost of purchasing a bottle of wine rises from $5 to $6. The tax also reduces the price producers receive from $5 to $2 per bottle. The tax is equal to the difference between these two prices: Price Consumers Pay - Price producers receive $6-$2 = $4 Because consumers pay $1 more per bottle ($6−$5) than they did before the tax, this represents the burden that falls on consumers. Similarly, producers receive $3 less per bottle ($5−$2) than they did before the tax, so this represents the burden that falls on producers.
Suppose that the U.S. government decides to charge beer consumers a tax. Before the tax, 50 billion cases of beer were sold every year at a price of $7 per case. After the tax, 43 billion cases of beer are sold every year; consumers pay $10 per case (including the tax), and producers receive $5 per case. The amount of the tax on a case of beer is$5 per case. Of this amount, the burden that falls on consumers is$ 3 per case, and the burden that falls on producers is$2 per case.
After the tax is imposed, the buyer's total cost of purchasing a case of beer rises from $7 to $10. The tax also reduces the price producers receive from $7 to $5 per case. The tax is equal to the difference between these two prices: Per-Unit Tax = Price Consumers Pay−Price Producers Receive $10 per case−$5 per case =$5 per case Because consumers pay $3 more per case ($10−$7) than they did before the tax, this represents the burden that falls on consumers. Similarly, producers receive $2 less per case ($7−$5) than they did before the tax, so this represents the burden that falls on producers.
Wage 12 Labor Demanded 138 Labor Supplied 162 Pressure on Wages DOWNWARD
At a wage of $12 per hour, firms demand 138 thousand workers, but 162 thousand workers want to work. Therefore, there is a surplus of 24 thousand workers. In the absence of a price floor, a surplus exerts downward pressure on wage until there is neither a surplus nor a shortage.
Wage 8 Labor Demanded 162 Labor Supplied 138 Pressure on Wages UPWARD
At a wage of $8 per hour, firms demand 162 thousand workers, but only 138 thousand workers want to work. Therefore, there is shortage of 24 thousand workers. In the absence of a price floor, a shortage exerts upward pressure on wages until there is neither a surplus nor a shortage.
True or False: A minimum wage below $10 per hour is not a binding minimum wage in this market.
FALSE In order for a minimum wage to be binding—that is, in order for it to prevent the labor market from reaching equilibrium—it must be set above the equilibrium wage. In this case, you found that the equilibrium wage rate was $10 per hour. Therefore, any minimum wage above $10 per hour would be binding, and any minimum wage set below $10 per hour would not.
In this market, the equilibrium price is $25 per box, and the equilibrium quantity of oranges is 350 million boxes. True or False: A price ceiling below $25 per box is not a binding price ceiling in this market.
FALSE In order for a price ceiling to be binding—that is, in order for it to prevent the market from reaching equilibrium—it must be set below the equilibrium price. In this case, you found that the equilibrium price was $25 per box. Therefore, any price ceiling below $25 per box would be binding, and any price ceiling set above $25 per box would not.
In this market, the equilibrium price is $25 per box, and the equilibrium quantity of oranges is 450 million boxes. True or False: A price ceiling above $25 per box is a binding price ceiling in this market.
FALSE In order for a price ceiling to be binding—that is, in order for it to prevent the market from reaching equilibrium—it must be set below the equilibrium price. In this case, you found that the equilibrium price was $25 per box. Therefore, any price ceiling below $25 per box would be binding, and any price ceiling set above $25 per box would not.
True or False: The effect of the tax on the quantity sold would have been larger if the tax had been levied on producers.
FALSE The equilibrium quantity of beer produced, the amount consumers pay per case of beer, and the amount producers receive for each case of beer are all independent of who pays the tax. Regardless of whether the tax is levied on consumers, causing the demand curve to shift by the amount of the tax, or on producers, causing the supply curve to shift by the amount of the tax, the new quantity at which the curves intersect will be the same. Therefore, it doesn't matter whether the government imposes the tax on consumers or producers.
True or False: The effect of the tax on the quantity sold would have been smaller if the tax had been levied on consumers.
FALSE The equilibrium quantity of wine produced, the amount consumers pay per bottle of wine, and the amount producers receive for each bottle of wine are all independent of who pays the tax. Regardless of whether the tax is levied on consumers, causing the demand curve to shift by the amount of the tax, or on producers, causing the supply curve to shift by the amount of the tax, the new quantity at which the curves intersect will be the same. Therefore, it doesn't matter whether the government imposes the tax on consumers or producers.
There are many teenagers who would like to work at gas stations, but they are not hired due to minimum-wage laws. PRICE FLOOR, BINDING
In the labor market, minimum wage laws are an example of a price floor while a cap on wages is an example of a price ceiling. Moreover, the impact of the minimum wage laws depends on the skill and experience of the worker. In this case, teenagers fall in the low-skill category of workers, and, thus, the free market equilibrium wage of teenagers is typically much lower than the minimum wage mandated by the government. Therefore, minimum-wage laws prevent some teenagers from working because the binding price floor causes a surplus of workers in this labor market
Suppose the government is concerned that research assistants already make too little money and, therefore, wants to minimize the share of the tax paid by employees. Of the three tax proposals, which is best for accomplishing this goal?
None of the proposals is better than the others From this exercise, you can see that the quantity of labor hired, the amount employers pay per hour after the tax, and the amount workers take home are all independent of how the tax is levied. Therefore, it doesn't matter which tax proposal the government implements because none of the proposals is better than the others.
Rent controls force landlords to price apartments below the equilibrium price level. An immediate effect is a shortage (excess demand) of apartments, because the quantity of apartments demanded is greater than the quantity supplied at the regulated price. When cities prevent landlords from charging market rents, which of the following are common long-run outcomes? Check all that apply.
Nonprice methods of rationing emerge. The quality of rental housing units falls. Results of Rental-Control Laws •Landlords provide less maintenance under rent control and are unlikely to upgrade their units because they cannot pass on these costs to tenants through higher rents. Because of reduced maintenance, quality suffers and housing units deteriorate more quickly. •Because the profitability of owning and renting apartment units decreases with rent control, landlords construct fewer new units and may even convert existing apartments to more profitable uses. This decreases the number of units available to renters in the future. •A shortage (excess demand) of housing units may lead renters to make under-the-table payments to secure an apartment. This can lead to the development of a black market for rental units. •Because price is no longer an effective mechanism of rationing apartments, alternative methods of rationing will emerge, such as screening processes or personal networking connections.
In this market, the equilibrium price is $25 per box, and the equilibrium quantity of oranges is 300 million boxes. True or False: A price ceiling above $25 per box is not a binding price ceiling in this market.
TRUE In order for a price ceiling to be binding—that is, in order for it to prevent the market from reaching equilibrium—it must be set below the equilibrium price. In this case, you found that the equilibrium price was $25 per box. Therefore, any price ceiling below $25 per box would be binding, and any price ceiling set above $25 per box would not.
True or False: The effect of the tax on the quantity sold would have been the same as if the tax had been levied on consumers.
TRUE The equilibrium quantity of wine produced, the amount consumers pay per bottle of wine, and the amount producers receive for each bottle of wine are all independent of who pays the tax. Regardless of whether the tax is levied on consumers, causing the demand curve to shift by the amount of the tax, or on producers, causing the supply curve to shift by the amount of the tax, the new quantity at which the curves intersect will be the same. Therefore, it doesn't matter whether the government imposes the tax on consumers or producers.
In this market, the equilibrium hourly wage is $10, and the equilibrium quantity of labor is 150 thousand workers.
The equilibrium hourly wage and quantity of workers occur at the intersection of the demand and supply curves. Using the graph input tool, you can see that this occurs at a wage of $10 per hour, which is where the quantity of labor that workers are willing to supply is equal to the quantity of labor firms demand (150 thousand workers).
In this market, the equilibrium price is $25 per box, and the equilibrium quantity of oranges is 450 million boxes.
The equilibrium price and quantity of oranges occur at the intersection of the demand and supply curves. Using the graph input tool, you can see that this occurs at a price of $25 per box, which is where the quantity of oranges that producers are willing to supply is equal to the quantity consumers demand (450 million boxes).
The following graph shows the daily market for wine. Suppose the government institutes a tax of $40.60 per bottle. This places a wedge between the price buyers pay and the price sellers receive. Before Tax Quantity 500 Price Buyers Pay 100 Price Sellers Receive 100 After Tax Quantity 430 Price Buyers Pay 105.60 Price Sellers Receive 65
The intersection of the demand and supply curves determines the equilibrium price and quantity. Before the tax is instituted, the equilibrium quantity is 500 bottles of wine, while the equilibrium price is $100.00 per bottle. When a tax of $40.60-per-bottle is imposed on this market, this places a wedge between the price buyers pay and the price sellers receive. The quantity of bottles sold decreases to 430 bottles of wine. At this quantity, the lowest price that sellers are willing to accept is $65.00 per bottle. The most buyers are willing to pay for 430 bottles of wine is $105.60 per bottle.
Using the data you entered in the previous table, calculate the tax burden that falls on buyers and on sellers, respectively, and calculate the price elasticity of demand and supply over the relevant ranges using the midpoint method. Buyers Tax Burden 5.60 Elasticity 2.76 (more than 1 = elastic) Sellers Tax Burden 100 - 65 = 35 Elasticity 0.35 (less than 1 = inelastic)
The price elasticity of demand measures the buyers' responsiveness to changes in price, and the price elasticity of supply measures the sellers' responsiveness to changes in price. Formally, the price elasticities of demand and supply are equal to the percentage change in quantity divided by the percentage change in the price paid (demand) or received (supply) after the tax. Using the midpoint method, you can compute the percentage change in quantity and price before and after the tax in the following way:
Rent controls force landlords to price apartments below the equilibrium price level. An immediate effect is a shortage (excess demand) of apartments, because the quantity of apartments demanded is greater than the quantity supplied at the regulated price. When cities prevent landlords from charging market rents, which of the following are common long-run outcomes? Check all that apply.
The quantity of available rental housing units falls. Nonprice methods of rationing emerge. Results of Rental-Control Laws •Landlords provide less maintenance under rent control and are unlikely to upgrade their units because they cannot pass on these costs to tenants through higher rents. Because of reduced maintenance, quality suffers and housing units deteriorate more quickly. •Because the profitability of owning and renting apartment units decreases with rent control, landlords construct fewer new units and may even convert existing apartments to more profitable uses. This decreases the number of units available to renters in the future. •A shortage (excess demand) of housing units may lead renters to make under-the-table payments to secure an apartment. This can lead to the development of a black market for rental units. •Because price is no longer an effective mechanism of rationing apartments, alternative methods of rationing will emerge, such as screening processes or personal networking connections.
The following graph shows the labor market for research assistants in the fictional country of Academia. The equilibrium wage is $10 per hour, and the equilibrium number of research assistants is 250. Suppose the government has decided to institute a $2-per-hour payroll tax on research assistants and is trying to determine whether the tax should be levied on the employer, the workers, or both (such that half the tax is collected from each side).
To evaluate the first proposal, enter $2 into the Tax Levied on Employers field. The new number of workers hired is 225, and the new wage paid by employers to workers in this market is $9 per hour. Since employers have to pay $2 on top of that wage, it costs them $11 per hour to hire a research assistant. Since workers don't pay any tax directly, they take home the entire $9 per hour. To evaluate the second proposal, enter $2 into the Tax Levied on Workers field. The new number of workers hired is still 225, but now, the new wage paid by employers to workers in this market is $11. Since employers don't pay any tax directly, it costs them $11 per hour to hire a research assistant. Since workers have $2 per hour taken out of their paychecks, they take home a total of $11−$2=$9 per hour after taxes. To evaluate the third proposal, enter $1 into the Tax Levied on Employers field and $1 into the Tax Levied on Workers field. Once again, the new number of workers hired is 225, but the new wage paid by employers to workers is $10. Since employers have to pay $1 on top of that wage, it costs them $10+$1=$11 per hour to hire a research assistant. Since workers have $1 per hour taken out of their paychecks, they take home a total of $10−$1=$9 per hour after taxes.
The burden of the tax falls more heavily on the LESS elastic side of the market.
You found previously that the burden of the tax falls more heavily on sellers than on buyers and that sellers exhibit a lower elasticity than buyers. In general, a tax falls more heavily on the less elastic side of the market. Intuitively, if demand is more elastic than supply, then buyers' willingness to pay a higher price does not exceed sellers' willingness to accept a lower price. Thus, when the tax is instituted, sellers are less likely than buyers to leave the market, so the burden of the tax falls more heavily on sellers. The reverse is true if demand is less elastic than supply.
