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Those who are helped by the minimum wage are the workers who are still employed and now receive the higher wage. In the diagram, those would be measured by the quantity of labor demanded at the minimum wage, q0. The minimum wage creates unemployment equal to the difference between the quantity of labor supplied and the quantity demanded at the minimum wage, q2-q0. The buyers of the labor (employers) are also worse off because they have to pay a higher wage for labor and, hence, hire a smaller quantity. 2.

a. Using the graph shown, analyze the effect a $300 price ceiling would have on the market

for ten-speed bicycles. Would this be a binding price ceiling?

b. Using the graph shown, analyze the effect a $700 price floor would have on this market for

ten-speed bicycles. Would this be a binding price floor?

c. Why would policymakers choose to impose a price ceiling or price floor?

a. A $300 price ceiling would cause a shortage of 4,000 bicycles. A price ceiling is binding if

it is set at any price below equilibrium price. Since the equilibrium price in this market is $500, this would be a binding price ceiling.

b. A $700 price floor would cause a surplus of 4,000 bicycles. A price floor is binding if it is

set at any price above equilibrium price. Since the equilibrium price in this market is $500, this would be a binding price floor.

c. More than one reason may exist for policymakers to impose a price ceiling or price floor in a

market. Often this is done in an attempt to increase equality; a price ceiling may be imposed if policymakers perceive the equilibrium price to be unfair to buyers, and a price floor may be imposed if policymakers perceive the equilibrium price to be unfair to sellers.

3. Using the graph shown, in which the vertical distance between points A and B represents the tax in the market, answer the following questions.

a. b. c. d. e. f. g. What was the equilibrium price and quantity in this market before the tax? What is the amount of the tax?

How much of the tax will the buyers pay? How much of the tax will the sellers pay?

How much will the buyer pay for the product after the tax is imposed? How much will the seller receive after the tax is imposed?

As a result of the tax, what has happened to the level of market activity?

a. b. c. d. e. f. g. Equilibrium price was $8 and equilibrium quantity was 8,000 units. The tax is $5.

Buyers will pay $3. Sellers will pay $2. $11. $6.

Instead of 8,000 units bought and sold, only 6,000 will be bought and sold.

4. How does elasticity affect the burden of a tax? Justify your answer using supply and demand diagrams.

CHOICE

1. Price controls (c)

a. always produce a fair outcome.

b. always produce an efficient outcome. c. can generate inequities of their own. d. Both (a) and (b) are correct. 2. Policymakers use taxes (b)

a. to raise revenue for public purposes, but not to influence market outcomes. b. both to raise revenue for public purposes and to influence market outcomes.

c. when they realize that price controls alone are insufficient to correct market inequities. d. only in those markets in which the burden of the tax falls clearly on the sellers. 3. A price ceiling is binding when it is set (c)

a. above the equilibrium price, causing a shortage. b. above the equilibrium price, causing a surplus. c. below the equilibrium price, causing a shortage. d. below the equilibrium price, causing a surplus.

4. The imposition of a binding price ceiling on a market causes quantity demanded to be (a)

a. greater than quantity supplied. b. less than quantity supplied. c. equal to quantity supplied. d. Both (a) and (b) are possible.

5. Suppose the government has imposed a price ceiling on televisions. Which of the following

events could transform the price ceiling from one that is not binding into one that is binding? (B)

a. Firms expect the price of televisions to fall in the future. b. The number of firms selling televisions decreases.

c. Consumers' income decreases, and televisions are a normal good. d. The number of consumers buying televisions decreases.

6. Suppose the government has imposed a price ceiling on cellular phones. Which of the following events could transform the price ceiling from one that is binding to one that is not binding? (D)

a. Cellular phones become more popular.

b. Traditional land line phones become more expensive.

c. The components used to produce cellular phones become more expensive. d. A technological advance makes cellular phone production less expensive.

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

a. increase and the quantity sold in the market will increase. b. increase and the quantity sold in the market will decrease. c. decrease and the quantity sold in the market will increase. d. decrease and the quantity sold in the market will decrease. 8. When OPEC raised the price of crude oil in the 1970s, it caused the (c)

a. United States’ nonbinding price floor on gasoline to become binding. b. United States’ binding price floor on gasoline to become nonbinding. c. United States’ nonbinding price ceiling on gasoline to become binding. d. United States’ binding price ceiling on gasoline to become nonbinding.

9. One economist has argued that rent control is \best way to destroy a city, other than bombing.\

a. He fears that low rents will cause low-income people to move into the city, reducing

the quality of life for other people.

b. He fears that rent control will benefit landlords at the expense of tenants, increasing

inequality in the city.

c. He fears that rent controls will cause a construction boom, which will make the city

crowded and more polluted.

d. He fears that rent control will eliminate the incentive to maintain buildings, leading to a

deterioration of the city.

10. Which of the following is not a short-run effect of rent control on the housing market? (b)

a. reduced rents b. a large shortage

c. a small increase in quantity demanded d. a small decrease in quantity supplied

11. Over time, housing shortages caused by rent control (b)

a. increase, because the demand for and supply of housing are less elastic in the long run. b. increase, because the demand for and supply of housing are more elastic in the long

run.

c. decrease, because the demand for and supply of housing are less elastic in the long

run.

d. decrease, because the demand for and supply of housing are more elastic in the long

run.

12. A price floor is (d)

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

b. often imposed when sellers of a good are successful in their attempts to convince the

government that the market outcome is unfair without a price floor. c. a source of inefficiency in a market.

d. All of the above are correct. 13. If a price floor is not binding, then (c)

a. there will be a surplus in the market. b. there will be a shortage in the market.

c. there will be no effect on the market price or quantity sold.

d. the market will be less efficient than it would be without the price floor. 14. A price floor is binding when it is set (b)

a. above the equilibrium price, causing a shortage. b. above the equilibrium price, causing a surplus. c. below the equilibrium price, causing a shortage. d. below the equilibrium price, causing a surplus.

15. A minimum wage that is set above a market's equilibrium wage will result in (c)

a. an excess demand for labor, that is, unemployment.

b. an excess demand for labor, that is, a shortage of workers. c. an excess supply of labor, that is, unemployment.

d. an excess supply of labor, that is, a shortage of workers. 16. Price ceilings and price floors that are binding (b)

a. are desirable because they make markets more efficient and more fair.

b. cause surpluses and shortages to persist since price cannot adjust to the market

equilibrium price.

c. can have the effect of restoring a market to equilibrium.

d. are imposed because they can make the poor in the economy better off without

causing adverse effects.

17. When government imposes a price ceiling or a price floor on a market, (a)

a. price no longer serves as a rationing device. b. efficiency in the market is enhanced. c. shortages and surpluses are eliminated. d. buyers and sellers both become better off. 18. A tax on sellers will (c)

a. shift the demand curve upwards by the amount of the tax. b. shift the demand curve downwards by the amount of the tax. c. shift the supply curve upwards by the amount of the tax. d. shift the supply curve downwards by the amount of the tax. 19. A $0.10 tax levied on the sellers of chocolate bars will cause the (b)

a. supply curve for chocolate bars to shift down by $0.10. b. supply curve for chocolate bars to shift up by $0.10. c. demand curve for chocolate bars to shift down by $0.10. d. demand curve for chocolate bars to shift up by $0.10.

20. When a tax is placed on the sellers of a product, (b)

a. buyers pay more and sellers receive more than they did before the tax. b. buyers pay more and sellers receive less than they did before the tax. c. buyers pay less and sellers receive more than they did before the tax. d. buyers pay less and sellers receive less than they did before the tax. 21. When a tax is placed on the sellers of cell phones, (c)

a. the size of the cell phone market and the price paid by buyers both increase.

b. the size of the cell phone market increases, but the price paid by buyers decreases. c. the size of the cell phone market decreases, but the price paid by buyers increases. d. the size of the cell phone market and the price paid by buyers both decrease. 22. If a tax is levied on the buyers of a product, then the demand curve (b)

a. will not shift. b. will shift down. c. will shift up.

d. will become flatter.

23. A tax imposed on the buyers of a good will (a)

a. raise the price paid by buyers and lower the equilibrium quantity. b. raise the price paid by buyers and raise the equilibrium quantity.

c. raise the effective price received by sellers and lower the equilibrium quantity. d. raise the effective price received by sellers and raise the equilibrium quantity. 24. A tax imposed on the buyers of a good will (c)

a. lower the price paid by buyers and lower the equilibrium quantity. b. lower the price paid by buyers and raise the equilibrium quantity.

c. lower the effective price received by sellers and lower the equilibrium quantity. d. lower the effective price received by sellers and raise the equilibrium quantity.

25. If the government removes a tax on sellers of a good and imposes the same tax on buyers of the good,

then the price paid by buyers will (d)

a. increase and the price received by sellers will increase. b. increase and the price received by sellers will not change. c. not change and the price received by sellers will increase. d. not change and the price received by sellers will not change. 26. In the final analysis, tax incidence (c)

a. depends on the legislated burden. b. is entirely random.

c. depends on the forces of supply and demand. d. falls entirely on buyers or entirely on sellers.