Chapter 6/Supply, Demand, And Government Policies ❖ 81
171. Suppose that a tax is placed on books. If the sellers pay the majority of the tax, then we know that the
a.
demand is more inelastic than the supply.
b.
supply is more inelastic than the demand.
c.
government has required that buyers remit the tax payments.
d.
government has required that sellers remit the tax payments.
172. The demand for salt is inelastic, and the supply of salt is elastic. The demand for caviar is elastic, and the sup-
ply of caviar is inelastic. Suppose that a tax of $1 per pound is levied on the sellers of salt, and a tax of $1 per
pound is levied on the buyers of caviar. We would expect that most of the burden of these taxes will fall on
a.
sellers of salt and the buyers of caviar.
b.
sellers of salt and the sellers of caviar.
c.
buyers of salt and the sellers of caviar.
d.
buyers of salt and the buyers of caviar.
173. Suppose the demand for macaroni is inelastic, the supply of macaroni is elastic, the demand for cigarettes is
inelastic, and the supply of cigarettes is elastic. If a tax were levied on the sellers of both of these commodi-
ties, we would expect that the burden of
a.
both taxes would fall more heavily on the buyers than on the sellers.
b.
the macaroni tax would fall more heavily on the sellers than on the buyers, and the burden of the
cigarette tax would fall more heavily on the buyers than on the sellers.
c.
the macaroni tax would fall more heavily on the buyers than on the sellers, and the burden of the
cigarette tax would fall more heavily on the sellers than on the buyers.
d.
both taxes would fall more heavily on the sellers than on the buyers.
174. Which of the following is correct? A tax burden
a.
falls more heavily on the side of the market that is more elastic.
b.
falls more heavily on the side of the market that is less elastic.
c.
falls more heavily on the side of the market that is closest to unit elastic.
d.
is distributed independently of the relative elasticities of supply and demand.
175. A tax burden falls more heavily on the side of the market that
a.
has a fewer number of participants.
b.
is more inelastic.
c.
is closer to unit elastic.
d.
is less inelastic.
82 ❖ Chapter 6/Supply, Demand, and Government Policies
176. Which of the following statements is correct?
a.
A tax levied on buyers will never be partially paid by sellers.
b.
Who actually pays a tax depends on the price elasticities of supply and demand.
c.
Government can decide who actually pays a tax.
d.
A tax levied on sellers always will be passed on completely to buyers.
177. Assume the demand for cigarettes is relatively inelastic, and the supply of cigarettes is relatively elastic.
When cigarettes are taxed, we would expect
a.
most of the burden of the tax to fall on sellers of cigarettes, regardless of whether buyers or sellers
of cigarettes are required to pay the tax to the government.
b.
most of the burden of the tax to fall on buyers of cigarettes, regardless of whether buyers or sellers
of cigarettes are required to pay the tax to the government.
c.
the distribution of the tax burden between buyers and sellers of cigarettes to depend on whether
buyers or sellers of cigarettes are required to pay the tax to the government.
d.
a large percentage of smokers to quit smoking in response to the tax.
Figure 6-24
Suppose the government imposes a $2 on this market.
D1
S1
D2
S2
1 2 3 4 5 6 7 8 9 Quantity
1
2
3
4
5
6
7
8
9
10 Price
178. Refer to Figure 6-24. The buyers will bear a higher share of the tax burden than sellers if the demand is
a.
D1, and the supply is S1.
b.
D2, and the supply is S1.
c.
D1, and the supply is S2.
d.
D2, and the supply is S2.
Chapter 6/Supply, Demand, And Government Policies ❖ 83
179. Refer to Figure 6-24. The buyers and sellers will bear an eaqual share of the tax burden if the demand is
a.
D1, and the supply is S1.
b.
D2, and the supply is S1.
c.
D1, and the supply is S2.
d.
D2, and the supply is S2.
180. Refer to Figure 6-24. Suppose D1 represents the demand curve for paperback novels, D2 represents the de-
mand curve for gasoline, and S1 represents the supply curve for paperback novels and gasoline. After the im-
position of the $2 on paperback novels and on gasoline, the
a.
buyers of gasoline bear a higher burden of the $2 tax than buyers of paperback novels.
b.
sellers of gasoline bear a higher burden of the $2 tax than sellers of paperback novels.
c.
buyers of gasoline bear an equal burden of the $2 tax as buyers of paperback novels.
d.
Both a) and b) are correct.
181. Refer to Figure 6-24. Suppose D1 represents the demand curve for gasoline in both the short run and long
run, S1 represents the supply curve for gasoline in the short run, and S2 represents the supply curve for gaso-
line in the long run. After the imposition of the $2, the price paid by buyers will be
a.
higher in the long run than in the short run.
b.
higher in the short run than in the long run.
c.
equivalent in the short run and the long run.
d.
unable to be determined without additional information.
182. Refer to Figure 6-24. Suppose D1 represents the demand curve for gasoline in both the short run and long
run, S1 represents the supply curve for gasoline in the short run, and S2 represents the supply curve for gaso-
line in the long run. After the imposition of the $2,
a.
buyers bear a higher burden of the tax in the short run than in the long run.
b.
sellers bear a higher burden of the tax in the short run than in the long run.
c.
buyers and sellers bear an equal burden of the tax in both the short run and long run.
d.
buyers and sellers bear an equal burden of the tax in the short run, but buyers bear a higher burden
of the tax in the long run.
84 ❖ Chapter 6/Supply, Demand, and Government Policies
Figure 6-25
Panel (a)
Panel (b)
D
S
quantity
price
D
S
quantity
price
Panel (c)
D
S
quantity
price
183. Refer to Figure 6-25. In which market will the majority of the tax burden fall on buyers?
a.
market (a)
b.
market (b)
c.
market (c)
d.
All of the above are correct.
Chapter 6/Supply, Demand, And Government Policies ❖ 85
184. Refer to Figure 6-25. In which market will the majority of the tax burden fall on sellers?
a.
market (a)
b.
market (b)
c.
market (c)
d.
All of the above are correct.
185. Refer to Figure 6-25. In which market will the tax burden be most equally divided between buyers and
sellers?
a.
market (a)
b.
market (b)
c.
market (c)
d.
All of the above are correct.
186. In 1990, Congress passed a new luxury tax on items such as yachts, private airplanes, furs, jewelry, and ex-
pensive cars. The goal of the tax was to
a.
raise revenue from the wealthy.
b.
prevent wealthy people from buying luxuries.
c.
force producers of luxury goods to reduce employment.
d.
limit exports of luxury goods to other countries.
187. Which of the following was not a result of the luxury tax imposed by Congress in 1990?
a.
The larger part of the tax burden fell on sellers.
b.
A larger part of the tax burden fell on the middle class than on the rich.
c.
Even the wealthy demanded fewer luxury goods.
d.
The tax was never repealed or even modified.
188. The burden of a luxury tax falls
a.
more on the rich than on the middle class.
b.
more on the poor than on the rich.
c.
more on the middle class than on the rich.
d.
equally on the rich, the middle class, and the poor.
TRUE/FALSE
1. Economic policies often have effects that their architects did not intend or anticipate.
86 ❖ Chapter 6/Supply, Demand, and Government Policies
2. Price controls are usually enacted when policymakers believe that the market price of a good or service is un-
fair to buyers or sellers.
3. Price controls can generate inequities.
4. Rent-control laws dictate a minimum rent that landlords may charge tenants.
5. Minimum-wage laws dictate the lowest wage that firms may pay workers.
6. Policymakers use taxes to raise revenue for public purposes and to influence market outcomes.
7. If a good or service is sold in a competitive market free of government regulation, then the price of the good or
service adjusts to balance supply and demand.
8. At the equilibrium price, the quantity that buyers want to buy exactly equals the quantity that sellers want to
sell.
9. Price is the rationing mechanism in a free, competitive market.
10. Prices are inefficient rationing devices.
11. When free markets ration goods with prices, it is both efficient and impersonal.
Chapter 6/Supply, Demand, And Government Policies ❖ 87
12. When a free market for a good reaches equilibrium, anyone who is willing and able to pay the market price
can buy the good.
13. When a free market for a good reaches equilibrium, anyone who is willing and able to sell at the market price
can sell the good.
14. A price ceiling is a legal minimum on the price at which a good or service can be sold.
15. A price ceiling set above the equilibrium price is not binding.
16. If a price ceiling is not binding, then it will have no effect on the market.
17. To be binding, a price ceiling must be set above the equilibrium price.
18. A price ceiling set below the equilibrium price is binding.
19. A price ceiling set below the equilibrium price is nonbinding.
20. A price ceiling set below the equilibrium price causes quantity demanded to exceed quantity supplied.
21. A price ceiling set above the equilibrium price causes quantity demanded to exceed quantity supplied.
22. A binding price ceiling causes quantity demanded to be less than quantity supplied.
88 ❖ Chapter 6/Supply, Demand, and Government Policies
23. A price ceiling set below the equilibrium price causes a shortage in the market.
24. A price ceiling set above the equilibrium price causes a surplus in the market.
25. A binding price ceiling causes a shortage in the market.
26. When a binding price ceiling is imposed on a market for a good, some people who want to buy the good can-
not do so.
27. Long lines and discrimination are examples of rationing methods that may naturally develop in response to a
binding price ceiling.
28. Price ceilings are typically imposed to benefit buyers.
29. Price ceilings are typically imposed to benefit sellers.
30. Binding price ceilings benefit consumers because they allow consumers to buy all the goods they demand at a
lower price.
31. All buyers benefit from a binding price ceiling.
32. A binding price ceiling may not help all consumers, but it does not hurt any consumers.
Chapter 6/Supply, Demand, And Government Policies ❖ 89
33. When the government imposes a binding price ceiling on a competitive market, a surplus of the good arises,
and sellers must ration the scarce goods among the large number of potential buyers.
34. The rationing mechanisms that develop under binding price ceilings are usually inefficient.
35. If a price ceiling of $2 per gallon is imposed on gasoline, and the market equilibrium price is $1.50, then the
price ceiling is a binding constraint on the market.
36. If a price ceiling of $1.50 per gallon is imposed on gasoline, and the market equilibrium price is $2, then the
price ceiling is a binding constraint on the market.
37. A price ceiling caused the gasoline shortage of 1973 in the United States.
38. One common example of a price ceiling is rent control.
39. The goal of rent control is to help the poor by making housing more affordable.
40. Economists argue that rent control is a highly efficient way to help the poor raise their standard of living.
41. The primary effect of rent control in the short run is to reduce rents.
42. The effects of rent control in the long run include lower rents and lower-quality housing.
90 ❖ Chapter 6/Supply, Demand, and Government Policies
43. Rent control may lead to lower rents for those who find housing, but the quality of the housing may also be
lower.
44. Renters of rent-controlled apartments will likely benefit from both lower rents and higher quality of apart-
ments.
45. In a free market, the price of housing adjusts to eliminate the shortages that give rise to undesirable landlord
behavior.
46. Because the supply and demand of housing are inelastic in the short run, the initial shortage caused by rent
control is large.
47. The housing shortages caused by rent control are larger in the long run than in the short run because both the
supply of housing and the demand for housing are more elastic in the long run.
48. A price floor is a legal minimum on the price at which a good or service can be sold.
49. A price floor set above the equilibrium price is not binding.
50. A price floor set above the equilibrium price is binding.
51. If a price floor is not binding, then it will have no effect on the market.
52. To be binding, a price floor must be set above the equilibrium price.
Chapter 6/Supply, Demand, And Government Policies ❖ 91
53. A price floor set below the equilibrium price causes quantity supplied to exceed quantity demanded.
54. A price floor set above the equilibrium price causes quantity supplied to exceed quantity demanded.
55. A binding price floor causes quantity supplied to be less than quantity demanded.
56. A price floor set below the equilibrium price causes a surplus in the market.
57. A price floor set above the equilibrium price causes a surplus in the market.
58. A binding price floor causes a shortage in the market.
59. When a binding price floor is imposed on a market for a good, some people who want to sell the good cannot
do so.
60. Discrimination is an example of a rationing mechanism that may naturally develop in response to a binding
price floor.
61. Price floors are typically imposed to benefit buyers.
62. Price floors are typically imposed to benefit sellers.
63. Binding price floors benefit sellers because they allow sellers to sell all the goods they want at a higher price.
92 ❖ Chapter 6/Supply, Demand, and Government Policies
64. Not all sellers benefit from a binding price floor.
65. A binding price floor may not help all sellers, but it does not hurt any sellers.
66. The rationing mechanisms that develop under binding price floors are usually efficient.
67. If the equilibrium price of an airline ticket is $400 and the government imposes a price floor of $500 on airline
tickets, then fewer airline tickets will be sold than at the market equilibrium.
68. If the equilibrium price of an airline ticket is $500 and the government imposes a price floor of $400 on airline
Figure 6-26
D
S
10 20 30 40 50 60 70 80 90 100 quantity
10
20
30
40
50
60
70
80
90
100
price
69. Refer to Figure 6-26. A price ceiling set at $30 would create a shortage of 20 units.
70. Refer to Figure 6-26. A price ceiling set at $70 would create a shortage of 40 units.
Chapter 6/Supply, Demand, And Government Policies ❖ 93
71. Refer to Figure 6-26. A price floor set at $60 would create a surplus of 20 units.
72. Refer to Figure 6-26. A price floor set at $40 would create a surplus of 20 units.
73. Workers determine the supply of labor, and firms determine the demand for labor.
74. In an unregulated labor market, the wage adjusts to balance labor supply and labor demand.
75. The economy contains many labor markets for different types of workers.
76. One common example of a price floor is the minimum wage.
77. The goal of the minimum wage is to ensure workers a minimally adequate standard of living.
78. The United States is the only country in the world with minimum-wage laws.
79. States in the U.S. may mandate minimum wages above the federal level.
80. A binding minimum wage causes the quantity of labor demanded to exceed the quantity of labor supplied.
81. A binding minimum wage creates unemployment.