Micro Chapter 4
Relationship between resource and product markets
an increase in demand for a product will increase demand for resources
When demand for a product increases, what happens to the demand for the resource
it will increase
When the demand for a product decreases, what happens to the demand for the resources
it will decrease
Price Ceiling
A legally determined maximum price that sellers may charge
Price Floor
A legally determined minimum price that sellers may receive.
Shortage
A situation in which the quantity demanded is greater than the quantity supplied, more people want than what is in stock
Surplus
A situation in which quantity supplied is greater than quantity demanded, more in stock than what people want
Example of a common price ceiling
rent control
Example of a common price floor
minimum wage
Deadweight loss
loss of gains from trade
An effective price floor sets price _______ equilibrium to limit how low the price can fall
above
An effective price ceiling sets price ______ equilibrium to limit how high the price can rise
below
What are common secondary effects of price controls
black markets
changes in future supply
quality deterioration
non price methods of rationing
inefficient use of good
changes in future supply
quality deterioration
non price methods of rationing
inefficient use of good
Tax Incidence
The distribution of tax burden among taxpayers; who ultimately pays the tax
Excess burden of taxation
another term for deadweight loss
Statuary Incidence
who is legally responsible to pay the tax, this is the tax burden
Actual Incidence
who really pays the tax but is not responsible for it
Marginal Tax Rate
The extra taxes paid from an additional dollar of income
Laffer Curve
a curve illustrating the relationship between the tax rate and tax revenues
An increase in tax rate may what
may lower revenue
Subsidy
a grant paid by a government to an enterprise that benefits the public
An increase in the number of students attending college would tend to
increase the demand for college professors, increase number of college of professors employed,
increase wages of college professors
increase wages of college professors
The term deadweight loss or excess burden is used to describe which of the following
the loss from the elimination of mutually beneficial exchanges that results from the imposition of a tax in a market
What would happen in a market where a price ceiling was set above equilibrium
equilibrium price would become the market price
When a shortage of a good is present due to a price ceiling
non-price factors will play a greater role in the allocation of the good
If the government imposes a price floor on the market for milk, what will happen
There will be a surplus of milk
Correlation with price ceiling
shortage
Correlation with price floor
surplus
Both price floors and price ceilings lead to
a reduction in quantity traded
If a $5000 tax is placed legally o nthe sellers of new automobiles and as a result the price of the automobiles rises by $4000 the actual burden of tax is
$4000 on the buyers and $1000 on the sellers
The burden of tax will fall primarily on sellers when
demand for the product is highly elastic and the supply is relatively inelastic
When the government increase the tax rate what happens to tax revenue
it depends
According to the Laffer Curve
when marginal tax rates are high a reduction in tax rates may increase tax revenue
The actual benefit of a government subsidy is determined primarily by
the elasticities of demand and supply
if $50 subsidy is granted to the sellers of exercise and a as a results the price of the exercise to consumers falls by $30 the actual benefit of the subsidy
$30 to buyers and $20 to sellers
Which of the following is a true statement regarding the economic impact of a subsidy?
When supply is relatively elastic, the benefits of a subsidy will mainly accrue to buyers.
An increase in the demand for a product will cause output to
increase and both the demand for and prices of the resources used to produce the product
to increase.
to increase.
During the imposition of price controls in the 1970s, long gasoline lines were common. In the absence of price controls, markets would have eliminated such excess demand by
allowing the price to rise, so gas was rationed to those willing to pay the most for it.
If an increase in the government-imposed minimum wage pushes the price (wage) of unskilled labor above market equilibrium, which of the following will most likely occur in the unskilled labor market?
a surplus of unskilled labor
With a price ceiling above the equilibrium price
the market would be in equilibrium.
Rent controls generally fix the price of rental housing below market equilibrium. Economic analysis suggests these controls
reduce the future supply of rental housing.
Currently, federal and state gasoline taxes (imposed statutorily on the sellers of gasoline) amount to about $.45 per gallon. Suppose the current price of gasoline is $1.20 per gallon, and that if the tax was not in place, the price would be only $.80.
A $.05 burden is being borne by sellers and $.40 by consumers.
The deadweight loss resulting from levying a tax on an economic activity is
the loss of potential gains from trade from activities forgone because of the tax.
Suppose there is an increase in the excise tax imposed on cigarettes, a good for which the demand is relatively inelastic. The short-run burden of the tax increase will be borne primarily by
consumers, because the increase in market price will be large relative to the increase in the
excise tax.
excise tax.
The Laffer curve illustrates the principle that
when tax rates are quite high, reducing tax rates will increase tax revenue.
A legal minimum wage is an example of
price floor
Both price floors and price ceilings, when effective, lead to
a reduction in quantity traded
If there was an increase in the tax on cell phones, what would be the effect on the equilibrium price and quantity of cell phones?
price increases, quantity decreases
The more elastic the supply of a product, the more likely it is that the burden of a tax will
fall on buyers.
The marginal tax rate is defined as
the change in tax liability divided by the change in taxable income.
Why does a price floor set above an equilibrium price tend to cause persistent imbalances in the market?
Because quantity supplied exceeds quantity demanded but price cannot fall to remove the surplus.
Why does a price ceiling set below an equilibrium price tend to cause persistent imbalances in the market?
Because quantity demanded exceeds quantity supplied but price cannot rise to remove the shortage.
Why will price controls will tend to cause misallocation of resources?
Production (or opportunity) cost no longer corresponds to market price.
When a tax is imposed on a good, the actual incidence of the tax generally
Is shared between the buyer and seller
When will a subsidy on a product generate more actual benefit for consumers (and less for producers)?
When the supply of the product is relatively elastic
Which of the following will most likely occur when government price controls fix the price of a good above market equilibrium?
a surplus of the good will develop
What happens when a tax is imposed on a good?
The equilibrium quantity of the good always decreases.
How would an increase in the price of paper influence the market for college textbooks?
The supply of textbooks would decrease causing the price of textbooks to rise.
Why does the imposition of a tax on a good create a deadweight?
The tax reduces the quantity of exchanges between buyers and sellers.