94 ❖ Chapter 6/Supply, Demand, and Government Policies
82. A binding minimum wage creates a surplus of labor.
83. A binding minimum wage creates a shortage of labor.
84. A binding minimum wage may not help all workers, but it does not hurt any workers.
85. A binding minimum wage raises the incomes of some workers, but it lowers the incomes of workers who can-
not find jobs.
86. The impact of the minimum wage depends on the skill and experience of the worker.
87. Workers with high skills and much experience are not typically affected by the minimum wage.
88. The minimum wage has its greatest impact on the market for teenage labor.
89. The minimum wage is more often binding for teenagers than for other members of the labor force.
90. Studies by economists have found that a 10 percent increase in the minimum wage decreases teenage em-
ployment 10 percent.
91. A large majority of economists favor eliminating the minimum wage.
92. Advocates of the minimum wage admit that it has some adverse effects, but they believe that these effects are
small and that a higher minimum wage makes the poor better off.
Chapter 6/Supply, Demand, And Government Policies ❖ 95
93. If the equilibrium wage is $4 per hour and the minimum wage is $5.15 per hour, then a shortage of labor will
exist.
94. Minimum-wage laws are precise policy instruments that can specifically target workers whose family incomes
are low.
95. Minimum-wage laws benefit society by creating a surplus of labor.
96. Most economists are in favor of price controls as a way of allocating resources in the economy.
97. When policymakers set prices by legal decree, they obscure the signals that normally guide the allocation of
society’s resources.
98. Price controls often hurt those they are trying to help.
99. Rent subsidies and wage subsidies are better than price controls at helping the poor because they have no costs
associated with them.
100. A price ceiling is always a binding price control, whereas a price floor may be either binding or not binding.
101. A tax on golf clubs will cause buyers of golf clubs to pay a higher price, sellers of golf clubs to receive a lower
price, and fewer golf clubs to be sold.
102. When a tax is imposed on a good, the result is always a shortage of the good.
96 ❖ Chapter 6/Supply, Demand, and Government Policies
103. When a tax of $1.00 per gallon is imposed on sellers of gasoline, the supply curve for gasoline shifts upward,
but by less than $1.00.
104. A tax on sellers shifts the supply curve but not the demand curve.
105. A tax on sellers shifts the supply curve to the left.
106. A tax on sellers increases supply.
107. A tax on sellers and an increase in input prices affect the supply curve in the same way.
108. A tax of $1 on sellers shifts the supply curve upward by exactly $1.
109. A tax of $1 on sellers always increases the equilibrium price by $1.
110. A tax on sellers reduces the size of a market.
111. A tax on sellers increases the quantity of the good sold in the market.
112. A tax on sellers usually causes buyers to pay more for the good and sellers to receive less for the good than
they did before the tax was levied.
113. A tax on buyers shifts the demand curve and the supply curve.
Chapter 6/Supply, Demand, And Government Policies ❖ 97
114. A tax on buyers shifts the demand curve to the right.
115. A tax on buyers decreases demand.
116. A tax of $1 on buyers shifts the demand curve downward by exactly $1.
117. A tax of $1 on buyers always decreases the equilibrium price by $1.
118. A tax on buyers increases the size of a market.
119. A tax on buyers decreases the quantity of the good sold in the market.
120. A tax on buyers usually causes buyers to pay more for the good and sellers to receive less for the good than
they did before the tax was levied.
121. Regardless of whether a tax is levied on sellers or buyers, taxes discourage market activity.
122. Regardless of whether a tax is levied on sellers or buyers, taxes encourage market activity.
123. Taxes levied on sellers and taxes levied on buyers are equivalent.
124. The wedge between the buyers’ price and the sellers’ price is the same, regardless of whether the tax is levied
on buyers or sellers.
98 ❖ Chapter 6/Supply, Demand, and Government Policies
125. The term tax incidence refers to how the burden of a tax is distributed among the various people who make up
the economy.
126. If a tax is imposed on the sellers of a product, then the tax burden will fall entirely on the sellers.
127. If a tax is imposed on the buyers of a product, then the tax burden will fall entirely on the buyers.
128. Whether a tax is levied on sellers or buyers, buyers and sellers usually share the burden of taxes.
129. The tax incidence depends on whether the tax is levied on buyers or sellers.
130. Lawmakers can decide whether the buyers or the sellers must send a tax to the government, but they cannot
legislate the true burden of a tax.
131. Buyers and sellers always share the burden of a tax equally.
132. Buyers and sellers rarely share the burden of a tax equally.
133. Who bears the majority of a tax burden depends on whether the tax is placed on the buyers or the sellers.
Chapter 6/Supply, Demand, And Government Policies ❖ 99
Figure 6-27
Demand
Supply
1 2 3 4 5 6 7 8 9 10 Quantity
1
2
3
4
5
6
7
8
9
10 Price
134. Refer to Figure 6-27. If the government places a $2 tax in the market, the buyer pays $4.
135. Refer to Figure 6-27. If the government places a $2 tax in the market, the buyer pays $6.
136. Refer to Figure 6-27. If the government places a $2 tax in the market, the seller receives $6.
137. Refer to Figure 6-27. If the government places a $2 tax in the market, the seller receives $4.
138. Refer to Figure 6-27. If the government places a $2 tax in the market, the buyer bears $2 of the tax burden.
139. Refer to Figure 6-27. If the government places a $2 tax in the market, the buyer bears $1 of the tax burden.
140. Refer to Figure 6-27. If the government places a $2 tax in the market, the seller bears $2 of the tax burden.
100 ❖ Chapter 6/Supply, Demand, and Government Policies
141. Refer to Figure 6-27. If the government places a $2 tax in the market, the seller bears $1 of the tax burden.
142. Most labor economists believe that the supply of labor is much more elastic than the demand.
143. FICA is an example of a payroll tax, which is a tax on the wages that firms pay their workers.
144. Since half of the FICA tax is paid by firms and the other half is paid by workers, the burden of the tax must
fall equally on firms and workers.
145. Workers, rather than firms, bear most of the burden of the payroll tax.
146. Who bears the majority of a tax burden depends on the relative elasticity of supply and demand.
147. If the demand curve is very elastic and the supply curve is very inelastic in a market, then the sellers will bear
a greater burden of a tax imposed on the market, even if the tax is imposed on the buyers.
148. If the demand curve is very inelastic and the supply curve is very elastic in a market, then the sellers will bear
a greater burden of a tax imposed on the market, even if the tax is imposed on the buyers.
149. A tax burden falls more heavily on the side of the market that is less elastic.
150. The tax burden falls more heavily on the side of the market that is more inelastic.
Chapter 6/Supply, Demand, And Government Policies ❖ 101
151. A tax on a market with elastic demand and elastic supply will shrink the market more than a tax on a market
with inelastic demand and inelastic supply will shrink the market.
152. The true burden of a payroll tax has nothing to do with the percentage of the tax that employers are required to
pay.
153. Even though federal law mandates that workers and firms each pay half of the total FICA tax, the tax burden
may not fall equally on workers and firms.
154. Most of the burden of a luxury tax falls on the middle class workers who produce luxury goods rather than on
the rich who buy them.
155. The burden that results from a tax on yachts falls more heavily on the buyers of yachts than on the sellers of
yachts.
156. The burden of a luxury tax most likely falls more heavily on sellers because demand is more elastic and supply
is more inelastic.
SHORT ANSWER
1. Using a supply and demand diagram, show a labor market with a binding minimum wage. Use the diagram to
show those who are helped by the minimum wage and those who are hurt by the minimum wage.
102 ❖ Chapter 6/Supply, Demand, and Government Policies
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?
S
D
1000 2000 3000 4000 5000 6000 7000 8000 quantity
100
200
300
400
500
600
700
800
900
1000 price
3. Using the graph shown, answer the following questions.
a.
What was the equilibrium price in this market before the tax?
b.
What is the amount of the tax?
c.
How much of the tax will the buyers pay?
Chapter 6/Supply, Demand, And Government Policies ❖ 103
d.
How much of the tax will the sellers pay?
e.
How much will the buyer pay for the product after the tax is imposed?
f.
How much will the seller receive after the tax is imposed?
g.
As a result of the tax, what has happened to the level of market activity?
S
D
D after tax
10 20 30 40 50 60 70 80 quantity
1
2
3
4
5
6
7
8
9
10 price
4. Using the graph shown, answer the following questions.
a.
b.
c.
d.
e.
f.
g.
D
S
S after tax
246810 12 14 16 quantity
1
2
3
4
5
6
7
8
9
price
a.
b.
$4
c.
$1
e.
$7
f.
$3
50 units bought and sold.
104 ❖ Chapter 6/Supply, Demand, and Government Policies
5. 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.
What was the equilibrium price and quantity in this market before the tax?
b.
What is the amount of the tax?
c.
How much of the tax will the buyers pay?
d.
How much of the tax will the sellers pay?
e.
How much will the buyer pay for the product after the tax is imposed?
f.
How much will the seller receive after the tax is imposed?
g.
As a result of the tax, what has happened to the level of market activity?
D
S
B
A
6000 8000
6
8
11
quantity
price
a.
$8; 8,000 units
b.
$5
c.
$3
d.
$2
e.
$11
f.
$6
g.
As a result of the tax, instead of 8,000 units bought and sold, only 6,000 will be bought and sold.
a.
$5
d.
$1
e.
$7
f.
$4
Chapter 6/Supply, Demand, And Government Policies ❖ 105
6. How does elasticity affect the burden of a tax? Justify your answer using supply and demand diagrams.