EC 101.

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1.

Exercises for Chapter 6

FALL 2010

a. b. c.

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

1000 900 800 700 600 500 400 300 200 100

price

1000

2000

3000

4000

5000

6000

7000

8000

quantity

ANS:

a. b.

For this example, 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. For this example, 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.

2. 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.

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?

g.

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

price

S 11 A

8 6

6000 8000

quantity

ANS:

10

a. b. c. d. e. f.

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.

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g.

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

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3. If a nonbinding price ceiling is imposed on a market, then

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a. b. c.

the quantity sold in the market will decrease. the quantity sold in the market will stay the same. the price in the market will increase.

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d.

the price in the market will decrease.

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ANS: B 4. A shortage results when

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a. b. c.

a nonbinding price ceiling is imposed on a market. a nonbinding price ceiling is removed from a market. a binding price ceiling is imposed on a market.

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d. ANS: C

a binding price ceiling is removed from a market.

5. Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling, a. the demand curve for physicals shifts to the right. b. the supply curve for physicals shifts to the left. c. the quantity demanded of physicals increases and the quantity supplied of physicals decreases. d. the number of physicals performed stays the same. ANS: C 6. Long lines a. and discrimination according to seller bias are both inefficient rationing mechanisms because they both waste buyers time. b. and discrimination according to seller bias are both inefficient rationing mechanisms because the good does not necessarily go to the buyer who values it most highly. c. are an inefficient rationing mechanism because they waste buyers time, and discrimination according to seller bias is an inefficient rationing mechanism because the good does not necessarily go to the buyer who values it most highly. d. are an inefficient rationing mechanism because the good does not necessarily go to the buyer who values it most highly, and discrimination according to seller bias is an inefficient rationing mechanism because it wastes buyers time. ANS: C 7. Which of the following is the most likely explanation for the imposition of a price floor on the market for corn? a. Policymakers have studied the effects of the price floor carefully, and they recognize that the price floor is advantageous for society as a whole. b. Buyers and sellers of corn have agreed that the price floor is good for both of them and have therefore pressured policy makers into imposing the price floor. c. Buyers of corn, recognizing that the price floor is good for them, have pressured policymakers into imposing the price floor. d. Sellers of corn, recognizing that the price floor is good for them, have pressured policymakers into imposing the price floor. ANS: D 8. Suppose the government has imposed a price floor on televisions. Which of the following events could transform the price floor from one that is not binding into one that is binding? a. Firms expect the price of televisions to rise 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 increases. ANS: C 9. A binding price floor will reduce a firm's total revenue a. always. b. when demand is elastic. c. when demand is inelastic. d. never. ANS: B Table 6-2

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19

Price $0 $5 $10 $15 $20

Quantity Demanded 250 200 150 100 50

Quantity Supplied 0 75 150 225 300

20

$25

375

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10.

Refer to Table 6-2. Which of the following statements is correct?

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ANS: a. C A price ceiling set at $5 will be binding and will result in a shortage of 50 units. b. A price ceiling set at $5 will be binding and will result in a shortage of 75 units. 11. Refer to Table 6-2.set at $5 of the followingand will resultcorrect? c. A price ceiling Which will be binding statements is in a shortage of 125 units. a. A price ceiling set at $15 will be be binding. will result in a shortage of 50 units. d. A price ceiling set at $5 will not binding and b. A price ceiling set at $15 will be binding and will result in a shortage of 100 units. c. A price ceiling set at $15 will be binding and will result in a shortage of 125 units. d. A price ceiling set at $15 will not be binding. ANS: D 12. Refer to Table 6-2. Which of the following statements is correct? a. A price floor set at $20 will be binding and will result in a surplus of 50 units. b. A price floor set at $20 will be binding and will result in a surplus of 100 units. c. A price floor set at $20 will be binding and will result in a surplus of 250 units. d. A price floor set at $20 will not be binding.

ANS: C 13. Refer to Table 6-2. Which of the following statements is correct? a. A price floor set at $5 will be binding and will result in a surplus of 50 units. b. A price floor set at $5 will be binding and will result in a surplus of 75 units. c. A price floor set at $5 will be binding and will result in a surplus of 125 units. d. A price floor set at $5 will not be binding. ANS: D Figure 6-4
10 9 8 7 6 5 4 3 2 1 10 20 30 40 50 60 70 80 quantity D price S

14.

Refer to Figure 6-4. For a price ceiling to be binding in this market, it would have to be set at a. any price below $6. b. a price between $3 and $6. c. a price between $6 and $9. d. any price above $6.

ANS: A 15. Refer to Figure 6-4. For a price floor to be binding in this market, it would have to be set at a. any price below $6. a. b. a price between $3 and $6. ceiling of $4 b. c. a price between $6 and $9. ceiling of $5 c. a price floor of $6. d. any price above$7 ANS: d. D a to Figure of $8 16. Refer price floor 6-4. Which of the following price controls would cause a shortage of 20 units of ANS: the good? B 17. Refer to Figure 6-4. Which of the following price controls would cause a surplus of 20 units of the good? a. a price ceiling of $4 b. a price ceiling of $5 c. a price floor of $7

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d. ANS: C 18.

a price floor of $8

Refer to Figure 6-4. Suppose a price ceiling of $5 is imposed on this market. As a result, a. the quantity of the good supplied decreases by 20 units. b. the demand curve shifts to the left so as to now pass through the point (quantity = 40, price = $5). c. buyers total expenditure on the good decreases by $100. d. the price of the good continues to serve as the rationing mechanism.

ANS: C 19. Refer to Figure 6-4. Suppose a price floor of $7 is imposed on this market. As a result, a. buyers total expenditure on the good decreases by $20. b. the supply curve shifts to the left so as to now pass through the point (quantity = 40, price = $7). c. the quantity of the good demanded decreases by 20 units. d. the price of the good continues to serve as the rationing mechanism. ANS: A 20. A $0.10 tax levied on the sellers of chocolate bars will cause the 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. ANS: B 21. Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then a. the demand curve will shift upward by $20, and the price paid by buyers will decrease by less than $20. b. the demand curve will shift upward by $20, and the price paid by buyers will decrease by $20. c. the supply curve will shift downward by $20, and the effective price received by sellers will increase by less than $20. d. the supply curve will shift downward by $20, and the effective price received by sellers will increase by $20. ANS: C 22. When a tax is placed on the buyers of cell phones, a. the size of the cell phone market and the effective price received by sellers both decrease. b. the size of the cell phone market decreases, but the effective price received by sellers increases. c. the size of the cell phone market increases, but the effective price received by sellers decreases. d. the size of the cell phone market and the effective price received by sellers both increase. ANS: A 23. The price paid by buyers in a market will increase if the government a. increases a binding price floor in that market. b. increases a binding price ceiling in that market. c. decreases a tax on the good sold in that market. d. More than one of the above is correct. ANS: D 24. Suppose that the demand for picture frames is inelastic and the supply of picture frames is elastic. A tax of $1 per frame levied on picture frames will decrease the effective price received by sellers of picture frames by a. less than $0.50. b. $0.50. c. between $0.50 and $1. d. $1.

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ANS: A 25. If a tax is imposed on a market with inelastic supply and elastic demand, then a. buyers will bear most of the burden of the tax. b. sellers will bear most of the burden of the tax. c. the burden of the tax will be shared equally between buyers and sellers. d. it is impossible to determine how the burden of the tax will be shared. ANS: B 26. 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. ANS: B

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