Chapter 6 Microeconomics

a tax on a good places a wedge...

...between the price paid by buyers and the price received by sellers, buyers pay more, sellers receive less,

a payroll tax places a wedge...

...between the wife that workers receive and the wage that firms pay, workers and firms share the tax burden

when supply is more elastic than demand.... when demand is more elastic than supply....

...tax impacts consumers more than producers ....tax impacts producers more than consumers

T or F: A 10 per cent increase in the minimum wage is more likely to raise unemployment among teenage workers than among mid-career professional workers

True

T or F: 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

price ceiling

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

price floor

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

A binding price ceiling creates

a shortage

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

above the equilibrium price

binding price floor non-binding price floor binding price ceiling non-binding price ceiling

binding price floor- above equilibrium, causes surplus bc Qd>Qs non-binding price floor- below equilibrium, no effect binding price ceiling- below equilibrium, causes shortage bc Qs>Qd non-binding price ceiling- above equilibrium, no effect

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

both supply and demand are elastic.

Which of the following statements about the burden of a tax is correct? a.) The tax burden generated from a tax placed on a good consumers perceive to be a necessity will fall most heavily on the sellers of the good. b.) The burden of a tax falls on the side of the market (buyers or sellers) from which it is collected. c.) The distribution of the burden of a tax is determined by the relative elasticities of supply and demand and is not determined by legislation. d.) The tax burden falls most heavily on the side of the market (buyers or sellers) that is most willing to leave the market when price movements are unfavourable to them.

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

Which of the following statements about a binding price ceiling is true? a.) The shortage created by the price ceiling is greater in the short run than in the long run. b.) The surplus created by the price ceiling is greater in the short run than in the long run. c.) The surplus created by the price ceiling is greater in the long run than in the short run. d.) The shortage created by the price ceiling is greater in the long run than in the short run.

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

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

demand is elastic and supply is inelastic.

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

falls more heavily on buyers.

who is burdened by a tax on sellers? buyers?

for both, both buyers and sellers share the burden of the tax

a labor market with a binding minimum wage causes...

labor surplus (unemployment)

**a tax burden falls more heavily on the side of the market that is...

less elastic

do economists agree with rent control?

no

A tax of €1.00 per litre on petrol

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.

rent control in the short run vs. long run

short run- supply and demand are inelastic, shortage is smaller long run- supply and demand are elastic, shortage is greater

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

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

tax incidence

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

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.

T or F: A price floor in a market always creates a surplus in that market.

False

T or F: A €10 tax on football boots will always raise the price that the buyers pay for football boots by €10.

False

T or F: If the equilibrium price of petrol is €1.00 per litre and the government places a price ceiling on petrol of €1.50 per litre, the result will be a shortage of petrol

False

T or F: 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

T or F: The minimum wage helps all teenagers because they receive higher wages than they would otherwise.

False

T or F: When we use the model of supply and demand to analyse a tax collected from the buyers, we shift the demand curve upward by the size of the tax.

False

T or F: A price ceiling set below the equilibrium price causes a surplus.

False

T or F: A price floor set above the equilibrium price is a binding constraint.

True

T or F: A tax collected from buyers has an equivalent impact to a same size tax collected from sellers.

True

T or F: 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

T or F: If medicine is a necessity, the burden of a tax on medicine will probably fall more heavily on the buyers of medicine.

True

T or F: 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

T or F: The ultimate burden of a tax falls most heavily on the side of the market that is less elastic.

True

Which of the following statements is true if the government places a price ceiling on petrol at €1.50 per litre and the equilibrium price is €1.00 per litre? a.) A significant increase in the demand for petrol could cause the price ceiling to become a binding constraint. b.) A significant increase in the supply of petrol could cause the price ceiling to become a binding constraint. c.) There will be a shortage of petrol. d.) There will be a surplus of petrol.

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

Which of the following workers would be most likely to find it more difficult to get a job after a rise in the minimum wage rate? a.) A teenage worker with few qualifications. b.) A manual worker with fifteen years of work experience. c.) A professional worker with a university degree. d.) All three are equally likely to find it difficult to get a job.

a.) A teenage worker with few qualifications.

Which of the following is an example of a price floor? a.) the minimum wage b.) rent controls c.) restricting petrol prices to €1.00 per litre when the equilibrium price is €1.50 per litre d.) All of these answers are price floors.

a.) the minimum wage

Which of the following takes place when a tax is placed a good? a.) a decrease in the price buyers pay, an increase in the price sellers receive, and a decrease in the quantity sold b.) an increase in the price buyers pay, a decrease in the price sellers receive, and an increase in the quantity sold c.) a decrease in the price buyers pay, an increase in the price sellers receive, and an increase in the quantity sold d.) an increase in the price buyers pay, a decrease in the price sellers receive, and a decrease in the quantity sold

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

For which of the following products would the burden of a tax likely fall more heavily on the sellers? a.) food b.) clothing c.) housing d.) entertainment

d.) entertainment

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 buyers in a market when

demand is inelastic and supply is elastic.

a tax on buyers shifts the demand curve....

downward by the size of the tax, equilibrium quantity decreases, price sellers receive decreases price buyers pay increases

Suppose the equilibrium price for apartments is €500 per month and the government imposes rent controls of €250. Which of the following is unlikely to occur as a result of the rent controls? a.) There may be long lines of buyers waiting for apartments. b.) Landlords may discriminate among apartment renters. c.) Landlords may be offered bribes to rent apartments. d.) There will be a shortage of housing. e.) The quality of apartments will improve.

e.) The quality of apartments will improve

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

the sellers

a tax on sellers shifts the supply curve....

upward by the size of the tax, equilibrium quantity decreases, price buyers pay increases,