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SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
1. A price ceiling is a legal maximum on the price at which a good can be sold.
Examples of price ceilings include rent controls, price controls on gasoline in the
2. With no tax, as shown in Figure 1, the demand curve is D1 and the supply curve is
S. The equilibrium price is P1 and the equilibrium quantity is Q1. If the tax is
imposed on car buyers, the demand curve shifts downward by the amount of the
Figure 1 Figure 2
If the tax is imposed on car sellers, as shown in Figure 2, the supply curve shifts
Chapter Quick Quiz
1. d
99
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 6/Supply, Demand, and Government Policies ❖ 100
Questions for Review
1. An example of a price ceiling is the rent control system in New York City. An example of a
2. A shortage of a good arises when there is a binding price ceiling. A binding price ceiling
Figure 3
3. When the price of a good is not allowed to bring supply and demand into equilibrium,
4. Economists usually oppose controls on prices because prices have the crucial job of
5. Removing a tax paid by buyers and replacing it with a tax paid by sellers raises the price
6. A tax on a good raises the price buyers pay, lowers the price sellers receive, and reduces
7. The burden of a tax is divided between buyers and sellers depending on the elasticities
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 6/Supply, Demand, and Government Policies ❖ 101
Problems and Applications
1. If the price ceiling of $40 per ticket is below the equilibrium price, then quantity
2. a. The imposition of a binding price oor in the cheese market is shown in Figure 4. In
Figure 4
b. The producers’ complaint that their total revenue has declined is correct if demand is
c. If the government purchases all the surplus cheese at the price oor, producers
3. a. The equilibrium price of Frisbees is $8 and the equilibrium quantity is six million
Frisbees.
b. With a price oor of $10, the new market price is $10 because the price oor is
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 6/Supply, Demand, and Government Policies ❖ 102
c. If there’s a price ceiling of $9, it has no eGect, because the market equilibrium price
4. a. Figure 5 shows the market for beer without the tax. The equilibrium price is P1 and
Figure 5 Figure 6
b. When the tax is imposed, it drives a wedge of $2 between supply and demand, as
5. Raising the payroll tax paid by +rms and using part of the extra revenue to reduce the
6. The price will rise by less than $500. The burden of any tax is shared by both producers
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 6/Supply, Demand, and Government Policies ❖ 103
7. a. It does not matter whether the tax is imposed on producers or consumersthe eGect
will be the same. With no tax, as shown in Figure 7, the demand curve is D1 and the
Figure 7 Figure 8
b. The more elastic the demand curve is, the more eGective this tax will be in reducing
the quantity of gasoline consumed. Greater elasticity of demand means that quantity
c. The consumers of gasoline are hurt by the tax because they get less gasoline at a
higher price.
d. Workers in the oil industry are hurt by the tax as well. With a lower quantity of
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 6/Supply, Demand, and Government Policies ❖ 104
8. a. Figure 9 shows the eGects of the minimum wage. In the absence of the minimum
wage, the market wage would be w1 and Q1 workers would be employed. With the
Figure 9
b. An increase in the minimum wage would decrease employment. The size of the eGect
c. The increase in the minimum wage would increase unemployment. The size of the
d. If the demand for unskilled labor were inelastic, the rise in the minimum wage would
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 6/Supply, Demand, and Government Policies ❖ 105
9. Since the supply of seats is perfectly inelastic, the entire burden of the tax will fall on the
Figure 11
10. a. Solve for the equilibrium price and quantity by setting the quantity supplied equal to
b. If the government imposes a price ceiling of $90, a shortage develops. The ceiling is
a. If the government imposes a price oor of $90, neither a shortage nor a surplus
b. If the government levies a $30 tax on producers, neither a shortage nor a surplus
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
