Ch. 6 Study Guide

Which of the following statements is true if the government places a price ceiling on gasoline at $4.00 per gallon and the equilibrium price is $3.00 per gallon?

A significant increase in the demand for gasoline could cause the price ceiling to become a binding constraint.

If the equilibrium price of gasoline is $3.00 per gallon and the government places a price ceiling on gasoline of $4.00 per gallon, the result will be a shortage of gasoline.

False: a price ceiling set above the equilibrium price is not binding.

A 10 percent increase in the minimum wage causes a 10 percent reduction in teenage employment.

False: it causes a 1 to 3 percent reduction in employment.

A price floor in a market always creates a surplus in that market.

False: it creates a surplus only if the floor is set above the equilibrium price.

A price ceiling set below the equilibrium price causes a surplus.

False: its causes a shortage

The minimum wage helps all teenagers because they receive higher wages than they would otherwise.

False: some may be helped but others become unemployed and still others quit school to earn what appears to a teenager to be a good wage.

The government can choose to place the burden of a tax on the buyers in a market by collecting the tax from the buyers rather than the sellers

False: the burden of a tax is determined by the relative elasticities of supply and demand.

A $10 tax on baseball gloves will always raise the price that the buyers pay for baseball gloves by $10.

False: the difference between what the sellers receive and the buyers pay will be $10, but the price received by the sellers usually will fall some so the price paid by the buyers will rise by less than $10.

When we use the model of supply and demand to analyze a tax collected from the buyers, we shift the demand curve upward by the size of the tax.

False: we shift the demand curve downward by the size of the tax.

Which of the following statements about the burden of a tax is correct?

The distribution of the burden of a tax is determined by the relative elasticities of supply and demand and is not determined by legislation.

Suppose the equilibrium price for apartments is $800 per month and the government imposes rent controls of $500. Which of the following is unlikely to occur as a result of the rent controls?

The quality of apartments will improve.

Which of the following statements about a binding price ceiling is true?

The shortage created by the price ceiling is greater in the long run than in the short run.

A price ceiling that is not a binding constraint today could cause a shortage in the future if demand were to increase and raise the equilibrium price above the fixed price ceiling.

True

A price floor set above the equilibrium price is a binding constraint

True

A tax collected from buyers has an equivalent impact to a same size tax collected from sellers.

True

A tax creates a tax wedge between a buyer and a seller. This causes the price paid by the buyer to rise, the price received by the seller to fall, and the quantity sold to fall.

True

If medicine is a necessity, the burden of a tax on medicine will likely land more heavily on the buyers of medicine.

True

The shortage of housing caused by a binding rent control is likely to be more severe in the long run when compared to the short run.

True

The ultimate burden of a tax lands most heavily on the side of the market that is less elastic.

True

A binding price ceiling creates

a shortage.

Which of the following takes place when a tax is placed on a good?

an increase in the price buyers pay, a decrease in the price sellers receive, and a decrease in the quantity sold

For a price ceiling to be a binding constraint on the market, the government must set it

below the equilibrium price.

The surplus caused by a binding price floor will be greatest if

both supply and demand are elastic.

Studies show that a 10 percent increase in the minimum wage

decreases teenage employment by about 1 to 3 percent.

Within the supply-and-demand model, a tax collected from the buyers of a good shifts the

demand curve downward by the size of the tax per unit.

The burden of a tax falls more heavily on the sellers in a market when

demand is elastic and supply is inelastic.

The burden of a tax falls more heavily on the buyers in a market when

demand is inelastic and supply is elastic.

For which of the following products would the burden of a tax likely fall more heavily on the sellers?

entertainment

A tax placed on a good that is a necessity for consumers will likely generate a tax burden that

falls more heavily on buyers.

A tax of $1.00 per gallon on gasoline

places a tax wedge of $1.00 between the price the buyers pay and the price the sellers receive.

A price floor

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

Within the supply-and-demand model, a tax collected from the sellers of a good shifts

supply curve upward by the size of the tax per unit.

Which of the following is an example of a price floor?

the minimum wage

Which side of the market is more likely to lobby government for a price floor?

the sellers

When a tax is collected from the buyers in a market,

the tax burden on the buyers and sellers is the same as an equivalent tax collected from the sellers.