978-1305971509 Chapter 6 Solutions Manual

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

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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

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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

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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

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Chapter 6/Supply, Demand, and Government Policies ❖ 103

7. a. It does not matter whether the tax is imposed on producers or consumersthe 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

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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

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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

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