Chap 06

Chapter 6
Supply, Demand, and Government Policies

MULTIPLE CHOICE
.
Price controls are

a. usually enacted when policymakers believe that the market price of a good or service is unfair to
buyers or sellers.
b. used to make markets more efficient.
c. nearly always effective in eliminating inequities.
d. established by firms with monopoly power.
ANSWER: a.
usually enacted when policymakers believe that the market price of a good or service is
unfair to buyers or sellers.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
1
Price controls
a. always produce an equitable outcome.
b. always produce an efficient outcome.
c. can generate inequities of their own.
d. produce revenue for the government.
ANSWER: c.
can generate inequities of their own.
2
A legal maximum price at which a good can be sold is a

a. price floor.
b. price stabilization.
c. price support.
d. price ceiling.
ANSWER: d. price ceiling.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
3
A legal minimum price at which a good can be sold is a

a. price floor.
b. price stabilization.
c. price ceiling.
d. price cut.
ANSWER: a.
price floor.
4
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
2Chapter 6/Supply, Demand, and Government Policies

.
If a price ceiling is not binding,

a. the equilibrium price is above the ceiling.
b. the equilibrium price is below the ceiling.
c. it has no legal enforcement mechanism.
d. people must voluntarily agree to abide by it.
ANSWER: b.
the equilibrium price is below the ceiling.
5
A price ceiling which is not binding

a. has no effect.
b. is a detriment to society.
c. will cause a shortage.
d. will cause a surplus.
ANSWER: a.
has no effect.
6
In the figure shown, a binding price ceiling is shown in

a. panel (a).
b. panel (b).
c. both panel (a) and panel (b).
d. neither panel (a) nor panel (b).
ANSWER: b.
panel (b).
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 1 GRAPH FORMAT: M INSTRUCTION: 1 RANDOM: N
7
In which panel(s) in the figure shown would there be a shortage for CDs at the market price?
a. panel (a)
b. panel (b)
c. panel (a) and panel (b)
d. neither panel (a) nor panel (b)
ANSWER: b.
panel (b)
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 1 GRAPH FORMAT: M INSTRUCTION: 1 RANDOM: Y
8
Chapter 6/Supply, Demand, and Government Policies3

.
If a price ceiling is a binding constraint on the market,

a. the equilibrium price must be below the price ceiling.
b. the equilibrium price must be above the price ceiling.
c. the forces of supply and demand must be in equilibrium.
d. it will have no effect on supply or demand.
ANSWER: b.
the equilibrium price must be above the price ceiling.
9
. If a price ceiling is a binding constraint,

a. the actual price will be below the price ceiling.
b. the actual price will be above the price ceiling.
c. the equilibrium price will equal the price ceiling.
d. the actual price will equal the price ceiling.
ANSWER: d. the actual price will equal the price ceiling.
10
. A binding price ceiling is imposed on the market for peaches. At the ceiling price,
a. the quantity demanded of peaches will be greater than the quantity supplied.
b. the quantity demanded of peaches will be equal to the quantity supplied.
c. the quantity demanded of peaches will be smaller than the quantity supplied.
d. the quantity demanded of peaches will be artificially restricted by the price ceiling.
ANSWER: a.
the quantity demanded of peaches will be greater than the quantity supplied.
11
. A binding price ceiling in the computer market will cause

a. a surplus of computers.
b. a shortage of computers.
c. quantity demanded of computers to be equal to quantity supplied.
d. an increase in the demand for computers.
ANSWER: b.
a shortage of computers.
12
. A binding price ceiling will make it necessary to

a. supply more of the product.
b. develop a way of rationing the product, because there will be a shortage.
c. develop a better marketing plan, because there will be a surplus.
d. increase demand for the product, because there will be a surplus.
ANSWER: b.
develop a way of rationing the product, because there will be a shortage.
13
. According to the graph shown, if the government imposes a binding price ceiling in this market at a
price of $5.00, the result would be
a. a shortage of 20 units.
b. a shortage of 30 units.
c. a surplus of 20 units.
d. a surplus of 40 units.
ANSWER: a.
a shortage of 20 units.
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 1 GRAPH FORMAT: M INSTRUCTION: 1 RANDOM:
14
. According to the graph shown, a binding price ceiling would exist at a price of
a. $8.00.
b. $6.00.
c. $5.00.
d. none of the above.
ANSWER: c.
$5.00.
15
. According to the graph shown, if the government imposes a binding price floor of $6.00 in this
market, the result would be
a. a surplus of 15.
b. a surplus of 35.
c. a shortage of 30.
d. a shortage of 50.
ANSWER: b.
a surplus of 35.
16
. According to the graph shown, a binding price floor would exist at a price of
a. $6.00.
b. $5.00.
c. $2.00.
ANSWER: a.
$6.00.
17
. Rationing by long lines

a. is inefficient, because it wastes buyers time.
b. is efficient, because those who are willing to wait the longest get the goods.
c. is the only way scarce goods can be rationed.
d. is only necessary if price ceilings are not binding.
ANSWER: a.
is inefficient, because it wastes buyers time.
TYPE: M KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y
18

. Long lines at gas stations in the U.S. in the 1970s were primarily a result of
a. the fact that OPEC raised the price of crude oil in world markets.
b. the fact that U.S. gasoline producers raised the price of gasoline.
c. the fact that the U.S. government had imposed a price ceiling on gasoline.
d. the fact that Americans typically commute long distances.
ANSWER: c.
the fact that the U.S. government had imposed a price ceiling on gasoline.
19
. When OPEC raised the price of crude oil in the 1970s, this caused
a. the demand for gasoline to increase.
b. the demand for gasoline to decrease.
c. the supply of gasoline to increase.
d. the supply of gasoline to decrease.
ANSWER: d. the supply of gasoline to decrease.
20
. According to the graph shown, when the supply curve for gasoline shifts from S1 to S2
a. the price will increase to P3.
b. a surplus will occur at the new market price of P2.
c. the market price will stay at P1 due to the price ceiling.
d. a shortage will occur at the price ceiling of P2.
ANSWER: d. a shortage will occur at the price ceiling of P2.
TYPE: M KEY1: C SECTION: 1 OBJECTIVE: 1 GRAPH FORMAT: M RANDOM: N
21

. Water shortages caused by droughts can be lessened by
a. allowing price to equate the demand for water with the supply of water.
b. restricting water usage of consumers.
c. arresting anyone who wastes water.
d. imposing tight price controls on water.
ANSWER: a.
allowing price to equate the demand for water with the supply of water.
22
. Californias drought-emergency water bank

a. caused a severe water shortage in 1991.
b. causes water to be fixed in supply.
c. allows farmers to lease water during dry spells.
d. caused the price of water during the last drought to fall.
ANSWER: c.
allows farmers to lease water during dry spells.
23
. Rent control is
a. a common example of a social problem solved by government regulation.
b. a common example of a price ceiling.
c. the most effective way to provide affordable housing.
d. the most efficient way to allocate housing.
ANSWER: b.
a common example of a price ceiling.
24
. Economists generally hold that rent control is

a. an efficient and equitable way to help the poor.
b. not efficient, but the best way to solve a serious social problem.
c. a highly inefficient way to help the poor raise their standard of living.
d. an efficient way to allocate housing, but not a good way to help the poor.
ANSWER: c.
a highly inefficient way to help the poor raise their standard of living.
25

. In the figure shown, which panel(s) best represent(s) a binding rent control in the short run?
a. panel (a)
b. panel (b)
c. neither panel
d. both panels
ANSWER: a.
panel (a)
26
. In the figure shown, which panel(s) best represent(s) a binding rent control in the long run?
a. panel (a)
b. panel (b)
c. neither panel
d. both panels
ANSWER: b.
panel (b)
27
. Which of the following is NOT a mechanism of rationing used by landlords in cities with rent
control?
a. waiting lists
b. race
c. price
d. bribes
ANSWER: c.
price
28
. Under rent control, bribery is a mechanism to

a. bring the total price of an apartment (including the bribe) closer to the equilibrium price.
b. allocate housing to the poorest individuals in the market.
c. force the total price of an apartment (including the bribe) to be less than the market price.
d. allocate housing to the most deserving tenants.
ANSWER: a.
bring the total price of an apartment (including the bribe) closer to the equilibrium price.
29
. Under rent control, landlords cease to be responsive to tenants concerns about the quality of the
housing because
a. with shortages and waiting lists, they have no incentive to maintain and improve their property.
b. they know they can never please their tenants.
c. the law no longer requires them to maintain their buildings.
d. that is the governments responsibility.
ANSWER: a.
with shortages and waiting lists, they have no incentive to maintain and improve their
property.
30

. Which of the following statements about rent control in New York City is accurate?
a. Rent control has proven successful in providing low-cost housing for poor people.
b. Rent control has produced an increase in available rental units.
c. Many well-to-do people live in rent-controlled apartments.
d. All of the above are accurate statements.
ANSWER: c.
Many well-to-do people live in rent-controlled apartments.
31
. A price floor is binding if

a. it is higher than the equilibrium market price.
b. it is lower than the equilibrium market price.
c. it is equal to the equilibrium market price.
d. it is set by the government.
ANSWER: a.
it is higher than the equilibrium market price.
32
. A price floor is not binding if

a. the price floor is higher than the equilibrium market price.
b. the price floor is lower than the equilibrium market price.
c. people are willing to buy as much when the price floor is imposed as they did before.
d. the government sets it.
ANSWER: b.
the price floor is lower than the equilibrium market price.
33
. A binding price floor causes

a. excess demand.
b. a shortage.
c. a surplus.
d. equilibrium price to fall.
ANSWER: c.
a surplus.
34

. In the figure shown, which of the panels represents a binding price floor?
a. panel (a)
b. panel (b)
c. panel (a) and panel (b)
d. neither panel (a) nor panel (b)
ANSWER: b.
panel (b)
35
. In panel (b), at the actual price there will be

a. a shortage of wheat.
b. equilibrium in the market.
c. a surplus of wheat.
d. an excess demand for wheat.
ANSWER: c.
a surplus of wheat.
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 2 GRAPH FORMAT: M
36
INSTRUCTION: 4 RANDOM: N
. The minimum wage is an example of

a. a price ceiling.
b. a price floor.
c. a free-market process.
d. an efficient labor allocation mechanism.
ANSWER: b.
a price floor.
37
. Minimum wage laws dictate

a. the average price employers must pay for labor.
b. the highest price employers may pay for labor.
c. the lowest price employers may pay for labor.
d. the quality of labor which must be supplied.
ANSWER: c.
the lowest price employers may pay for labor.
38
. The U.S. Congress first instituted a minimum wage in

a. 1890.
b. 1914.
c. 1974.
d. 1938.
ANSWER: d. 1938.
39
. The minimum wage was instituted in order to ensure workers

a. a middle-class standard of living.
b. employment.
c. a minimally adequate standard of living.
d. unemployment compensation.
ANSWER: c.
a minimally adequate standard of living.
40

. As of 1999, the U.S. minimum wage according to federal law was
a. $3.75 per hour.
b. $4.25 per hour.
c. $4.75 per hour.
d. $5.15 per hour.
ANSWER: d. $5.15 per hour.
41
. Which of the following is the most accurate statement about minimum wage laws?
a. All states have legislation which establishes the same minimum wage as the federal law.
b. Some states have legislation which establishes a higher minimum wage than the federal law.
c. Some states have legislation which establishes a lower minimum wage than the federal law.
d. All states have legislation which establishes a higher minimum wage than the federal law.
ANSWER: b.
Some states have legislation which establishes a higher minimum wage than the federal
law.
42
. Which of the following is a correct statement about the labor market?

a. Workers determine the supply of labor, and firms determine the demand for labor.
b. Workers determine the demand for labor, and firms determine the supply of labor.
c. Workers determine the supply of labor, and government determines the demand for labor.
d. Government determines the supply of labor, and firms determine the supply of labor.
ANSWER: a.
Workers determine the supply of labor, and firms determine the demand for labor.
43
. If the minimum wage is above the equilibrium wage,

a. the quantity demanded of labor will be greater than the quantity supplied.
b. the quantity demanded of labor will equal the quantity supplied.
c. the quantity demanded of labor will be less than the quantity supplied.
d. anyone who wants a job at the minimum wage can find one.
ANSWER: c.
the quantity demanded of labor will be less than the quantity supplied.
44
. Workers with high skills and much experience are not affected by the minimum wage because
a. they belong to unions.
b. they are not legally guaranteed the minimum wage.
c. they generally earn wages less than the minimum wage.
d. their equilibrium wages are well above the minimum wage.
ANSWER: d. their equilibrium wages are well above the minimum wage.
45

. The minimum wage has its greatest impact on
a. the market for female labor.
b. the market for white workers.
c. the market for black workers.
d. the market for teenage labor.
ANSWER: d. the market for teenage labor.
46
. The equilibrium wages of teenagers tend to be

a. low because teenagers are among the least skilled and least experienced workers.
b. high because teenagers are among the strongest and most energetic workers.
c. low because most teenagers live at home and don t require high wages.
d. high because teenagers tend to join unions.
ANSWER: a.
low because teenagers are among the least skilled and least experienced workers.
47
. The typical study on the effect of the minimum wage on teenage employment finds that a 10 percent
increase in the minimum wage
a. depresses teenage employment by 1 to 3 percent.
b. depresses teenage employment by 10 to 13 percent.
c. has no effect on teenage employment.
d. raises wages of teenagers by 10 percent.
ANSWER: a.
depresses teenage employment by 1 to 3 percent.
48
. In general, advocates of the minimum wage

a. believe that there are no adverse effects of minimum-wage laws.
b. believe that adverse effects are small, and generally a higher minimum wage makes the poor
better off.
c. believe that the minimum wage is the answer to societys economic problems.
d. are socialists who want to replace the market system with central economic planning.
ANSWER: b.
believe that adverse effects are small, and generally a higher minimum wage makes the
poor better off.
49
. Which of the following is NOT a function of prices in a market system?

a. Prices have the crucial job of balancing supply and demand.
b. Prices send signals to buyers and sellers to help them make rational economic decisions.
c. Prices coordinate economic activity.
d. Prices make an equitable distribution of goods and services among consumers possible.
ANSWER: d. Prices make an equitable distribution of goods and services among consumers possible.
50

. Policymakers are led to control prices because
a. they view the markets outcome as inefficient.
b. they view the markets outcome as unfair.
c. all politicians enjoy exercising their power.
d. they are required to do so under the Employment Act of 1946.
ANSWER: b.
they view the markets outcome as unfair.
51
. Which of the following is the most correct statement about price controls?
a. Price controls always help those they are designed to help.
b. Price controls never help those they are designed to help.
c. Price controls often hurt those they are designed to help.
d. Price controls always hurt those they are designed to help.
ANSWER: c.
Price controls often hurt those they are designed to help.
52
. Unlike minimum wage laws, wage subsidies

a. discourage firms from hiring the working poor.
b. cause unemployment.
c. help only wealthy workers.
d. raise living standards of the working poor without creating unemployment.
ANSWER: d. raise living standards of the working poor without creating unemployment.
53
. The earned income tax credit is an example of

a. supply and demand.
b. a policy designed to increase efficiency.
c. a wage subsidy.
d. a price control.
ANSWER: c.
a wage subsidy.
54
. Which is the most accurate statement about taxes and government?

a. All governments, federal, state, and local, rely on taxes to raise revenue for public purposes.
b. Federal and state governments use taxes to raise revenue, but local governments use borrowing.
c. Federal and local governments use taxes to raise revenue, but state governments use borrowing.
d. State and local governments use taxes to raise revenue, but the federal government uses
borrowing.
ANSWER: a.
All governments, federal, state, and local, rely on taxes to raise revenue for public
purposes.
55

. The term tax incidence refers to
a. the Boston Tea Party.
b. the "flat tax" movement.
c. the division of the tax burden between buyers and sellers.
d. the division of the tax burden between sales taxes and income taxes.
ANSWER: c.
the division of the tax burden between buyers and sellers.
56
. The initial effect of a tax on the buyers of a good

a. is on the supply of that good.
b. is on the demand for that good.
c. is on both the supply of the good and the demand for the good.
d. is on the price of the good.
ANSWER: b.
is on the demand for that good.
57
. According to the graph shown, the equilibrium price in the market before the tax is imposed is
a. $8.00.
b. $6.00.
c. $5.00.
d. $3.50.
ANSWER: b.
$6.00.
58

. According to the graph, the price buyers will pay after the tax is imposed is
a. $8.00.
b. $6.00.
c. $5.00.
d. $3.50.
ANSWER: a.
$8.00.
59
. According to the graph, the price sellers receive after the tax is imposed is
a. $8.00.
b. $6.00.
c. $5.00.
d. $3.50.
ANSWER: c.
5.00.
60
. According to the graph, the amount of the tax imposed in this market is
a. $1.00.
b. $1.50.
c. $2.50.
d. $3.00.
ANSWER: d.
3.00.
61
. According to the graph, the amount of the tax that buyers would pay would be
a. $1.00.
b. $1.50.
c. $2.00.
d. $3.00.
ANSWER: c.
2.00.
62
. According to the graph, the amount of the tax that sellers would pay would be
a. $1.00.
b. $1.50.
c. $2.00.
d. $3.00.
ANSWER: a.
$1.00.
63
. If buyers are required to pay a $.10 tax per bag on popcorn, the demand for popcorn will
a. shift up by $.10 per bag.
b. shift up by $.05 per bag.
c. shift down by $.10 per bag.
d. shift down by $.05 per bag.
ANSWER: c.
shift down by $.10 per bag.
64

. A tax on the buyers of popcorn
a. increases the size of the popcorn market.
b. reduces the size of the popcorn market.
c. has no effect on the size of the popcorn market.
d. may increase, decrease, or have no effect on the size of the popcorn market.
ANSWER: b.
reduces the size of the popcorn market.
65
. A tax on the buyers of popcorn will

a. reduce the equilibrium price of popcorn, and increase the equilibrium quantity.
b. increase the equilibrium price of popcorn, and reduce the equilibrium quantity.
c. increase the equilibrium price of popcorn, and increase the equilibrium quantity.
d. reduce the equilibrium price of popcorn, and reduce the equilibrium quantity.
ANSWER: b.
increase the equilibrium price of popcorn, and reduce the equilibrium quantity.
66
. A tax on the buyers of popcorn will

a. cause the price the buyer pays and the price the seller receives to rise.
b. cause the price the buyer pays and the price the seller receives to fall.
c. cause the price the buyer pays to rise and the price the seller receives to fall.
d. cause the price the buyer pays to fall and the price the seller receives to rise.
ANSWER: c.
cause the price the buyer pays to rise and the price the seller receives to fall.
67
. Which is the most correct statement about the burden of a tax imposed on buyers of popcorn?
a. Buyers bear the entire burden of the tax.
b. Sellers bear the entire burden of the tax.
c. Buyers and sellers share the burden of the tax.
d. The government bears the entire burden of the tax.
ANSWER: c.
Buyers and sellers share the burden of the tax.
68
. The initial impact of a tax on the sellers of a product

a. is on the supply of the product.
b. is on the demand for the product.
c. is on both the supply of the product and the demand for the product.
d. is on the price of the product.
ANSWER: a.
is on the supply of the product.
69
. According to the graph shown, the equilibrium price in the market before the tax is imposed is
a. $1.00.
b. $3.50.
c. $5.00.
d. $6.00.
ANSWER: c.
$5.00.
70
. According to the graph, the price buyers will pay after the tax is imposed is
a. $1.00.
b. $3.50.
c. $5.00.
d. $6.00.
ANSWER: d. $6.00.
71
. According to the graph, the price sellers receive after the tax is imposed is
a. $1.00.
b. $3.50.
c. $5.00.
d. $6.00.
ANSWER: b.
$3.50.
72

. According to the graph, the amount of the tax imposed in this market is
a. $1.00.
b. $1.50.
c. $2.50.
d. $3.50.
ANSWER: c.
$2.50.
73
. According to the graph, the amount of the tax that buyers would pay would be
a. $1.00.
b. $1.50.
c. $2.50.
d. $3.00.
ANSWER: a.
$1.00.
74
. According to the graph, the amount of the tax that sellers would pay would be
a. $1.00.
b. $1.50.
c. $2.50.
d. $3.00.
ANSWER: b.
$1.50.
75
A tax on the sellers of popcorn

a. leads sellers to supply a smaller quantity at every price.
b. leads buyers to demand a smaller quantity at every price.
c. leads sellers to supply a larger quantity at every price.
d. causes the supply curve to shift to the right.
ANSWER: a.
leads sellers to supply a smaller quantity at every price.
76
. A tax of $.10 per bag on the sellers of popcorn will

a. cause the supply curve of popcorn to shift down by $.10 per bag.
b. cause the supply curve of popcorn to shift up by $.10 per bag.
c. cause the supply curve of popcorn to shift down by $.05 per bag.
d. cause the demand curve of popcorn to shift up by $.10 per bag.
ANSWER: b.
cause the supply curve of popcorn to shift up by $.10 per bag.
77
. A tax on the sellers of popcorn will

a. reduce the size of the popcorn market.
b. increase the size of the popcorn market.
c. affect the price of popcorn, but not the size of the market.
d. not have a predictable effect on the size of the popcorn market.
ANSWER: a.
reduce the size of the popcorn market.
78

. A tax on the sellers of popcorn will
a. reduce the equilibrium price of popcorn, and increase the equilibrium quantity.
b. reduce the equilibrium price of popcorn, and reduce the equilibrium quantity.
c. increase the equilibrium price of popcorn, and increase the equilibrium quantity.
d. increase the equilibrium price of popcorn, and reduce the equilibrium quantity.
ANSWER: d. increase the equilibrium price of popcorn, and reduce the equilibrium quantity.
79
. A tax on the sellers of popcorn will cause

a. the price the buyers pay and the effective price the sellers receive to rise.
b. the price the buyers pay and the effective price the sellers receive to fall.
c. the price the buyers pay to rise, and the effective price the sellers receive to fall.
d. the price the buyers pay to fall, and the price the sellers receive to rise.
ANSWER: c.
the price the buyers pay to rise, and the effective price the sellers receive to fall.
80
. What is true about the burden of a tax imposed on popcorn?

a. Buyers bear the entire burden of the tax.
b. Sellers bear the entire burden of the tax.
c. Buyers and sellers share the burden of the tax.
d. The government bears the entire burden of the tax.
ANSWER: c.
Buyers and sellers share the burden of the tax.
81
. Revenue from the FICA tax is used to

a. help retire the national debt.
b. cover crop insurance claims.
c. pay the salaries of Congressmen.
d. pay for Social Security and Medicare.
ANSWER: d. pay for Social Security and Medicare.
82
. FICA is an example of
a. a payroll tax.
b. a sales tax.
c. a farm subsidy.
d. fire insurance.
ANSWER: a.
a payroll tax.
83
. Congress intended that

a. the entire FICA tax be paid by workers.
b. the entire FICA tax be paid by firms.
c. the entire FICA tax be paid by consumers.
d. half the FICA tax be paid by workers, and half be paid by firms.
ANSWER: d. half the FICA tax be paid by workers, and half be paid by firms.
84

. The key feature of a payroll tax is that it
a. is a tax on poor people.
b. is a tax on corporations.
c. places a wedge between the wage that firms pay and the wage that workers receive.
d. does not affect equilibrium in labor markets.
ANSWER: c.
places a wedge between the wage that firms pay and the wage that workers receive.
85
. When a payroll tax is enacted,

a. the wage received by workers falls and the wage paid by firms rises.
b. the wage received by workers falls and the wage paid by firms falls.
c. the wage received by workers rises and the wage paid by firms falls.
d. the wage received by workers rises and the wage paid by firms rises.
ANSWER: a.
the wage received by workers falls and the wage paid by firms rises.
86
. In the end, tax incidence

a. depends on the legislated burden.
b. is entirely random.
c. depends on the forces of supply and demand.
d. falls entirely on buyers or entirely on sellers.
ANSWER: c.
depends on the forces of supply and demand.
87
. Refer to the graphs given. In which market will the majority of a tax be paid by the buyer?
a. market (a)
b. market (b)
c. market (c)
d. all of the above
ANSWER: b.
market (b)
88
. Refer to the graphs given. In which market will the majority of a tax be paid by the seller?
a. market (a)
b. market (b)
c. market (c)
d. all of the above
ANSWER: a.
market (a)
89

. Refer to the graphs given. In which market will the tax be most equally divided between the buyer
and the seller?
a. market (a)
b. market (b)
c. market (c)
d. all of the above
ANSWER: c.
market (c)
90
. In the graph shown, the equilibrium price before the tax is

a. P0.
b. P1.
c. P2.
ANSWER: b.
P1.
91
INSTRUCTION: 1 RANDOM: Y
. In the graph shown, the price that will be paid after the tax is
a. P0.
b. P1.
c. P2.
d. impossible to determine.
ANSWER: c.
P2.
92

. In the graph shown, the price sellers receive after the tax is
a. P0.
b. P1.
c. P2.
d. impossible to determine.
ANSWER: a.
P0.
93
. In the graph shown, the per unit burden of the tax on buyers is
a. P2 minus P0.
b. P2 minus P1.
c. P1 minus P0.
d. Q1 minus Q0.
ANSWER: b.
P2 minus P1.
94
. In the graph shown, the per unit burden of the tax on the sellers is
a. P2 minus P0.
b. P2 minus P1.
c. P1 minus P0.
d. Q1 minus Q0.
ANSWER: c.
P1 minus P0.
95
. If a tax is imposed on a market with inelastic demand and elastic supply,

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.
ANSWER: a.
buyers will bear most of the burden of the tax.
96
. If a tax is imposed on a market with elastic demand and inelastic supply,

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.
ANSWER: b.
sellers will bear most of the burden of the tax.
97
. Which of the following is the most correct statement about tax burdens?
a. A tax burden falls most heavily on the side of the market that is elastic.
b. A tax burden falls most heavily on the side of the market that is inelastic.
c. A tax burden falls most heavily on the side of the market that is closer to unit elastic.
d. A tax burden is distributed independently of relative elasticities of supply and demand.
ANSWER: b.
A tax burden falls most heavily on the side of the market that is inelastic.
98

. In 1990, Congress passed a new luxury tax on items such as yachts, private airplanes, furs, jewelry,
and expensive cars. The goal of the tax was
a. to raise revenue from rich people.
b. to prevent rich people from buying luxuries.
c. to force producers of luxury goods to reduce employment.
d. to limit exports of luxury goods to other countries.
ANSWER: a.
to raise revenue from rich people.
99
. The burden of a luxury tax falls

a. more on the rich than on the middle class.
b. more on the poor than on the middle class.
c. more on the middle class than on the rich.
d. equally on the rich, the middle class, and the poor.
ANSWER: c.
more on the middle class than on the rich.
100
. When analyzing the economic effects of government policies,

a. supply and demand are the most useful tools of analysis.
b. one finds that the effects are always those stated in the legislation.
c. supply and demand are not useful, since they apply only to unregulated markets.
d. one usually finds them to be the random outcome of economic shocks.
ANSWER: a.
supply and demand are the most useful tools of analysis.
101
TRUE/FALSE
. Economic policies often have effects that their architects did not intend or anticipate.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
102
When price controls are enacted because policymakers believe that the market price of a good or
service is unfair to buyers, the policies invariably eliminate the unfairness.
ANSWER: F
103
. Policymakers use taxes both to raise revenue for public purposes and to influence market outcomes.
ANSWER: T
104
. A price ceiling is a legal minimum on the price of a good or service.

ANSWER: F
105
. Rent control is an example of a price ceiling.

ANSWER: T
106

.
If a price ceiling of $2 per gallon is imposed on gasoline, but the market equilibrium price is $1.50,
the price ceiling is a binding constraint on the market.
ANSWER: F
107
. If a price ceiling is not binding, it will have no effect on the market.

ANSWER: T
108
If a price ceiling is below equilibrium price, the quantity demanded will exceed the quantity
supplied.
ANSWER: T
109
. A binding price ceiling allows consumers to buy all the goods they demand at a lower price.
ANSWER: F
110
. Rationing mechanisms that develop under price ceilings are usually efficient and equitable.
ANSWER: F
111
Common rationing mechanisms under price ceilings include waiting in long lines and biases of the
sellers.
ANSWER: T
112
. When free markets ration goods with prices it is both efficient and impersonal.
ANSWER: T
113
Long gas lines in the U.S. after OPEC raised the price of crude oil in world markets were caused by
the higher prices of oil and gas.
ANSWER: F
114
. Economists believe that rent control is an efficient way to help the poor raise their standard of living.
ANSWER: F
115
The housing shortages caused by rent control are larger in the long run than in the short run
because both the supply for housing and the demand for housing are more elastic in the long run.
ANSWER: T
116
Rent control may lead to lower rents for those who find housing, but the quality of the housing may
also be lower.
ANSWER: T
117

. In New York City, many rent-controlled apartments have very wealthy tenants.
ANSWER: T
118
If the equilibrium wage rate is $4 per hour, and the minimum wage is $5.15 per hour, a shortage of
labor will be created.
ANSWER: F
119
. A price floor is a legal minimum on the price of a good or service.

ANSWER: T
120
. A binding price floor causes a surplus.

ANSWER: T
121
. A binding minimum wage in a competitive labor market creates unemployment.

ANSWER: T
122
. The minimum wage is binding in the U.S. for all types of labor.
ANSWER: F
123
. The minimum wage has its greatest impact on the market for teenage labor.
ANSWER: T
124
Opponents of the minimum wage note that a high minimum wage creates unemployment, causes
teenagers to drop out of school, and prevents some unskilled workers from getting the on-the-job
training that they need.
ANSWER: T
125
. Most economists are in favor of price controls as a way of allocating resources in the economy.
ANSWER: F
126
. Price controls often hurt those they are trying to help, through creating shortages or surpluses.
ANSWER: T
127
Rent subsidies and wage subsidies are better than price controls at helping the poor because they
have no costs associated with them.
ANSWER: F
128

. Economists use the term tax incidence to refer to who is legally responsible for paying the tax.
ANSWER: F
129
If buyers of a product are required to pay a tax, the demand curve for the product will shift
downward by exactly the size of the tax.
ANSWER: T
130
. A government imposed tax on a market shrinks the size of the market.

ANSWER: T
131
A tax on golf clubs will cause the equilibrium market price of golf clubs to increase, and the
equilibrium quantity sold to decrease.
ANSWER: T
132
. If a tax is imposed on the buyer of a product, the tax incidence will fall entirely on the buyer.
ANSWER: F
133
. If a tax is imposed on a market, buyers will pay less and sellers will receive more.
ANSWER: F
134
. A tax on sellers shifts the supply curve upward by exactly the size of the tax.
ANSWER: T
135
A tax on sellers causes the equilibrium market price to fall, and the equilibrium quantity sold to
increase.
ANSWER: F
136
. When sellers are legally required to pay a tax, the burden of the tax falls solely on the sellers.
ANSWER: F
137
. The incidence of a tax does not depend on whether the tax is levied on buyers or sellers.
ANSWER: T
138
. FICA is an example of a payroll tax.

ANSWER: T
139

.
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.
ANSWER: F
140
Lawmakers can decide whether the buyer or the seller must send a tax to the government, but they
cannot legislate the true burden of a tax.
ANSWER: T
141
Who pays the majority of a tax levied on a product depends on whether the tax is placed on the
buyer or the seller.
ANSWER: F
142
. In general, a tax burden falls more heavily on the side of the market that is more inelastic.
ANSWER: T
143
When Congress decided to "stick it to the rich" by imposing a luxury tax, they succeeded in
burdening the rich with most of the tax.
ANSWER: F
144
Most of the burden of a luxury tax falls on the middle class workers who supply luxury goods
rather than on the rich who buy them.
ANSWER: T
145
. When analyzing government policies, supply and demand are not very useful tools.
ANSWER: F
146
SHORT ANSWER
.
What are the two kinds of price controls used in the United States, and how are they different? What
are real world examples of these two kinds of price controls?
ANSWER: The two kinds of price controls used in the United States are price ceilings and price floors.
Price ceilings set a maximum price that can be charged for a good or service, and price floors set a
minimum price that can be paid for a good or service. The control of gasoline prices in the 1970s
and rent control are examples of price ceilings, and the minimum wage law is an example of a price
floor.
TYPE: S KEY1: C OBJECTIVE: 1 RANDOM: Y
147
Using supply-demand diagrams, show the difference between a non-binding price ceiling and a
binding price ceiling in the wheat market.
ANSWER: The diagrams should look like panels (a) and (b) of Figure 6-1 in the text. (Also diagram 6-1
included.)
148

TYPE: S KEY1: G SECTION: 1 OBJECTIVE: 1 RANDOM: Y
. Who benefits from a binding price ceiling? Who is hurt by a binding price ceiling?
ANSWER: The buyers of the good or service subject to a price ceiling benefit from the ceiling, if they are
still able to purchase the product. Sellers of a good or service subject to a price ceiling are hurt by
the ceiling, as are the workers who produce the product, and those buyers unable to purchase the
product because of the shortage caused by the price ceiling. In the long run, even successful buyers
of the product may be hurt by the price ceiling because of deterioration in the quality of the
product, as often occurs under rent control.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y
149
150
Using the graph shown, analyze the effect a $300 price ceiling would have on the market for tenspeed bicycles. Would this be a binding price ceiling? Why would policymakers choose to impose a
price ceiling?
ANSWER: For this example, a $300 price ceiling would cause a shortage of 4,000 bicycles. Since the
equilibrium price in the market is $500, this would be a binding price ceiling. More than one reason
may exist for policymakers to impose a price ceiling in a market. Often this is done in an attempt to
increase equity.
.
If prices are prevented from rationing a product because of a binding price ceiling, how is the scarce
product rationed among potential buyers?
ANSWER: Mechanisms for rationing a product subject to a binding price ceiling include rationing
through long lines and rationing by discrimination according to race, age, sex, family circumstances,
etc. As an alternative to informal rationing mechanisms, government may enforce a formal rationing
system of some sort.
151

.
What is the goal of rent control, and what do economists think of rent control as a mechanism for
achieving the goal?
ANSWER: The goal of rent control is to help the poor by making housing more affordable. Economists
often criticize rent control as a highly inefficient way of helping the poor raise their standard of
living.
152
153
Using the graph shown, analyze the effect a $70 price floor would have on the market for tennis
shoes. Would this be a binding price floor? Why would policymakers choose to impose a price
floor?
ANSWER: For this example, a $70 price floor would cause a surplus of 400 pairs of tennis shoes. Since the
equilibrium price in the market is $50, this would be a binding price floor. More than one reason
may exist for policymakers to impose a price floor in a market. Often times this is done in an
attempt to increase equity.
. How do the effects of rent control differ in the short run and the long run?
ANSWER: In the short run, the primary effect of rent control is to reduce rents. Shortages created are
small. In the long run, rent control creates greater housing shortages, reduces the supply of housing,
and also reduces the quality of housing.
154
. What is the origin and purpose of the minimum wage law in the United States?
ANSWER: The U.S. minimum wage law was instituted with the Fair Labor Standards Act of 1938. The
purpose of the minimum wage is to ensure workers a minimally adequate standard of living.
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
155

. Who benefits from a binding price floor? Who is hurt by a binding price floor?
ANSWER: A binding price floor benefits the sellers of the good or service who are still able to sell their
product at the higher price. A binding price floor hurts the buyers of the good or service, and those
sellers who are no longer able to sell their product at the higher price because of the surplus created
by the price floor.
156
. Why are economists nearly always opposed to price controls?

ANSWER: Economists oppose price controls because they obscure the price signals that normally guide
the allocation of societys scarce resources. Also, price controls often hurt those very individuals
they are designed to help.
157
. To what does the term "tax incidence" refer?

ANSWER: Tax incidence refers to how the burden of a tax is shared by buyers and sellers.
158
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?
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?
ANSWER: A. $10
B. $3
C. $1
D.$2
E. $11
F. $8
G.As a result of the tax, the level of market activity has fallen, from 100 units being bought and sold
to only 90 units being bought and sold.
159
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?
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?
ANSWER: A. $10.00
B. $5.00
C. $2.50
D.$2.50
E. $12.50
F. $7.50
G.As a result of the tax, the level of market activity has fallen, from 100 units being bought and sold
to only 80 units being bought and sold.
160
How does a tax affect market activity? How does a tax affect the amount paid by buyers and the
amount received by sellers as a result of a tax on a good?
ANSWER: A tax reduces market activity. When a good is taxed, the equilibrium quantity of the good sold
is smaller than without the tax. When a tax is imposed, the amount paid by buyers for the taxed
good increases, and the amount received by sellers falls.
TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 3, 4 RANDOM: Y
161

. How does the legal tax liability affect the incidence of taxation?
ANSWER: The incidence of taxation is the same regardless of whether it is the buyer or the seller who has
the legal responsibility of turning the tax over to the government, i.e., taxes on buyers and taxes on
sellers are equivalent.
162
. How does elasticity affect the burden of a tax? Justify your answer using supply-demand diagrams.
ANSWER:
163
A tax burden falls more heavily on the side of the market that is less elastic.
.
One economist called rent control "the best way to destroy a city, other than bombing." What do you
think he meant by that?
ANSWER: While it is true that the major impact of rent control in the short run is to reduce rents, in the
long run, rent control has many effects that help "destroy a city." Because buyers and sellers respond
to incentives, buyers will supply less housing in the long run because of lower rents. Many existing
apartment buildings will deteriorate, both because some landlords can no longer afford to maintain
the apartments, and because there is excess demand for apartments in general. In some cases,
164

landlords simply abandon apartment buildings because they cannot earn a profit operating them at
the controlled rents. The shortage of apartments is made more severe in the long run as the demand
for rental housing increases in response to the low rents. Hence, the number of homeless people in
the city is likely to increase. Market power on the side of landlords may lead to discrimination and
bribery. These conditions lead to further costly regulation and social programs.
.
Using a supply-demand diagram, show a labor market with a binding minimum wage. Now, use
the diagram to show those who are helped by the minimum wage, and those who are hurt by the
minimum wage.
ANSWER:
165
Those helped by the minimum wage are the workers who are still employed, but now receive the
higher wage. In the diagram, those would be measured by the quantity of labor demanded at the
minimum wage. Those who are hurt by the minimum wage are those who are now unemployed.
These workers are measured as the difference between the quantity of labor supplied and the
quantity demanded at the minimum wage. The perceptive student might note that the unemployed
group can be divided into those who lose their jobs as a result of the minimum wage (the
competitive equilibrium quantity of labor minus the quantity demanded at the minimum wage),
and those who enter the market as a result of the higher wage, but cannot find employment
(quantity of labor supplied at the minimum wage minus the competitive equilibrium quantity). The
buyers of the labor (employers) are also worse off because they have to pay a higher wage for labor,
hence, hire a smaller quantity.

. What are common arguments offered for and against the minimum wage?
ANSWER: Advocates of the minimum wage often recognize that it has some adverse effects, but they
believe that the adverse effects are small, and that a higher minimum wage makes the poor better
off by providing a minimally acceptable standard of living. Opponents of the minimum wage
believe that it is not the best way to combat poverty, noting that a high minimum wage causes
unemployment, encourages teenagers to drop out of school, and prevents some unskilled workers
from getting on-the-job training. They also point out that the minimum wage is a poorly targeted
policy, since many minimum-wage earners are teenagers from middle-class homes working at parttime jobs for extra spending money, rather than poor heads of households.
166
What are the advantages of rent subsidies and wage subsidies as alternatives to rent control and
minimum wage laws? Are these alternatives costless to society?
ANSWER: Rent subsidies do not cause reductions in the quantity of housing supplied and, therefore, do
not lead to housing shortages. Wage subsidies do not discourage firms from hiring workers and,
therefore, do not lead to unemployment. These alternatives are not costless, however, since they
require government expenditures, hence, taxes.
167
Suppose that the government places a tax of $5 per tire on the buyers of automobile tires. Use a
supply-demand diagram to show the effect of the tax on the tire market, and the incidence of
taxation on buyers and sellers. Now suppose that the government switches it to a tax of $5 per tire
on the sellers of automobile tires. Use a second supply-demand diagram to show the effects of this
tax on the tire market, and the incidence of taxation on buyers and sellers. Can you say anything
about the relative effects of the two alternative taxes on the tire market and on the incidence of
taxation?
ANSWER:
168
The student should be able to use the two diagrams to show that the buyers tax and the sellers tax
are exactly equivalent in terms of impact on the market and the division of the burden of the tax
between buyer and seller.
.
Why didnt the 1990 luxury tax which Congress placed on buyers of yachts, private airplanes, furs,
jewelry, expensive cars, and similar items succeed in raising revenue primarily from the rich?
ANSWER: Even though the items affected by the luxury tax are, indeed, bought primarily by the
wealthiest taxpayers, the price elasticity of demand for luxury goods is high relative to the price
elasticity of supply. Hence, when the tax was imposed on those goods, there was a significant
reduction in quantity demanded and only a slight increase in equilibrium market price. The burden
of the tax fell mostly on the suppliers, who suffered a substantial reduction in the price they
received, and a substantial reduction in the quantity sold and in total revenue.
169

.
Using a demand-supply diagram, show how OPEC raising oil prices in the 1970s combined with a
government imposed price ceiling on gasoline created a shortage of gasoline.
ANSWER: The graph should look like the following.
170
TYPE: S KEY1: C SECTION: 1 OBJECTIVE:3 RANDOM: Y
ANSWER: a. usually enacted when policymakers believe that the market price of a good or service is unfair to
buyers or sellers.
2
ANSWER: c. can generate inequities of their own.

3
ANSWER: d. price ceiling.

4
ANSWER: a. price floor.

5
ANSWER: b. the equilibrium price is below the ceiling.

6
ANSWER: a. has no effect

7
ANSWER: b. panel (b).

8
ANSWER: b. panel (b)

9
ANSWER: b. the equilibrium price must be above the price ceiling.

10
ANSWER: d. the actual price will equal the price ceiling.

11
ANSWER: a. the quantity demanded of peaches will be greater than the quantity supplied.
12
ANSWER: b. a shortage of computers.

13
ANSWER: b. develop a way of rationing the product, because there will be a shortage.
14
ANSWER: a. a shortage of 20 units.

15
ANSWER: c. 5.00.
16
ANSWER: b. a surplus of 35.

17
ANSWER: a. $6.00.
18
ANSWER: a. is inefficient, because it wastes buyers time.

19
ANSWER: c. the fact that the U.S. government had imposed a price ceiling on gasoline.
20
ANSWER: d. the supply of gasoline to decrease.

21
ANSWER: d. a shortage will occur at the price ceiling of P2.

TYPE: M KEY1: C SECTION: 1 OBJECTIVE: 1 GRAPH FORMAT: M RANDOM: N
22
ANSWER: a. allowing price to equate the demand for water with the supply of water.
23
ANSWER: c. allows farmers to lease water during dry spells.

24
ANSWER: b. a common example of a price ceiling.

25
ANSWER: c. a highly inefficient way to help the poor raise their standard of living.
26
ANSWER: a. panel (a)

27

28
ANSWER: c. price
29
ANSWER: a. bring the total price of an apartment (including the bribe) closer to the equilibrium price.
30
ANSWER: a. with shortages and waiting lists, they have no incentive to maintain and improve their property.
31
ANSWER: c. Many well-to-do people live in rent-controlled apartments.

32
ANSWER: a. it is higher than the equilibrium market price.

33
ANSWER: b. the price floor is lower than the equilibrium market price.
34
ANSWER: c. a surplus.
35

36
ANSWER: c. a surplus of wheat.

INSTRUCTION: 4 RANDOM: N
37
ANSWER: b. a price floor.

38
ANSWER: c. the lowest price employers may pay for labor.

39
ANSWER: d. 1938.
40
ANSWER: c. a minimally adequate standard of living.

41
ANSWER: d. $5.15 per hour.

42
ANSWER: b. Some states have legislation which establishes a higher minimum wage than the federal law.
43
ANSWER: a. Workers determine the supply of labor, and firms determine the demand for labor.
44
ANSWER: c. the quantity demanded of labor will be less than the quantity supplied.
45
ANSWER: d. their equilibrium wages are well above the minimum wage.
46
ANSWER: d. the market for teenage labor.

47
ANSWER: a. low because teenagers are among the least skilled and least experienced workers.
48
ANSWER: a. depresses teenage employment by 1 to 3 percent.

49
ANSWER: b. believe that adverse effects are small, and generally a higher minimum wage makes the poor
better off.
50
ANSWER: d. Prices make an equitable distribution of goods and services among consumers possible.
51
ANSWER: b. they view the markets outcome as unfair.

52
ANSWER: c. Price controls often hurt those they are designed to help.
53
ANSWER: d. raise living standards of the working poor without creating unemployment.
54
ANSWER: c. a wage subsidy.

55
ANSWER: a. All governments, federal, state, and local, rely on taxes to raise revenue for public purposes.
56
ANSWER: c. the division of the tax burden between buyers and sellers.
57
ANSWER: b. is on the demand for that good.

58
ANSWER: b. 6.00.
59
ANSWER: a. $8.00.
60
ANSWER: c. 5.00.
61
ANSWER: d. 3.00.
62
ANSWER: c. 2.00.
63
ANSWER: a. $1.00.
64
ANSWER: c. shift down by $.10 per bag.

65
ANSWER: b. reduces the size of the popcorn market.

66
ANSWER: b. increase the equilibrium price of popcorn, and reduce the equilibrium quantity.
67
ANSWER: c. cause the price the buyer pays to rise and the price the seller receives to fall.
68
ANSWER: c. Buyers and sellers share the burden of the tax.

69
ANSWER: a. is on the supply of the product.

70
ANSWER: c. 5.00.
71
ANSWER: d. 6.00.
72
ANSWER: b. 3.50.
73
ANSWER: c. 2.50.
74
ANSWER: a. $1.00.
75
ANSWER: b. 1.50.
76
ANSWER: a. leads sellers to supply a smaller quantity at every price.

77
ANSWER: b. cause the supply curve of popcorn to shift left (or up) by $.10 per bag.
78
ANSWER: a. reduce the size of the popcorn market.

79
ANSWER: d. increase the equilibrium price of popcorn, and reduce the equilibrium quantity.
80
ANSWER: c. the price the buyers pay to rise, and the effective price the sellers receive to fall.

81
ANSWER: c. Buyers and sellers share the burden of the tax.

82
ANSWER: d. pay for Social Security and Medicare.

83
ANSWER: a. a payroll tax.

84
ANSWER: d. half the FICA tax be paid by workers, and half be paid by firms.
85
ANSWER: c. places a wedge between the wage that firms pay and the wage that workers receive.
86
ANSWER: a. the wage received by workers falls and the wage paid by firms rises.
87
ANSWER: c. depends on the forces of supply and demand.

88
ANSWER: b. market (b)

89
ANSWER: a. market (a)

90
ANSWER: c. market (c)

91
ANSWER: b. P1.
92
ANSWER: c. P2.
93
ANSWER: a. P0.
94
ANSWER: b. P2 minus P1.

95
ANSWER: c. P1 minus P0.

96
ANSWER: a. buyers will bear most of the burden of the tax.

97
ANSWER: b. sellers will bear most of the burden of the tax.

98
ANSWER: b. A tax burden falls most heavily on the side of the market that is inelastic.
99
ANSWER: a. to raise revenue from rich people.

100
ANSWER: c. more on the middle class than on the rich.

101
ANSWER: a. supply and demand are the most useful tools of analysis.
102
ANSWER: T
103
ANSWER: F
104
ANSWER: T
105
ANSWER: F
106
ANSWER: T
107
ANSWER: F
108
ANSWER: T
109
ANSWER: T
110
ANSWER: F
111
ANSWER: F
112
ANSWER: T

113
ANSWER: T
114
ANSWER: F
115
ANSWER: F
116
ANSWER: T
117
ANSWER: T
118
ANSWER: T
119
ANSWER: F
120
ANSWER: T
121
ANSWER: T
122
ANSWER: T
123
ANSWER: F
124
ANSWER: T
125
ANSWER: T
126
ANSWER: F
127
ANSWER: T
128
ANSWER: F

129
ANSWER: F
130
ANSWER: T
131
ANSWER: T
132
ANSWER: T
133
ANSWER: F
134
ANSWER: F
135
ANSWER: T
136
ANSWER: F
137
ANSWER: F
138
ANSWER:
T
139
ANSWER: T
140
ANSWER: F
141
ANSWER: T
142
ANSWER: F
143
ANSWER: T
144
ANSWER: F
145
ANSWER: T
146
ANSWER: F
147
ANSWER: The two kinds of price controls used in the United States are price ceilings and price floors. Price
ceilings set a maximum price that can be charged for a good or service, and price floors set a minimum price that
can be paid for a good or service. The control of gasoline prices in the 1970s and rent control are examples of
price ceilings, and the minimum wage law is an example of a price floor.
TYPE: S KEY1: C OBJECTIVE: 1 RANDOM: Y
148
ANSWER: The diagrams should look like panels (a) and (b) of Figure 6-1 in the text. (Also diagram 6-1
included.)
149
ANSWER: The buyers of the good or service subject to a price ceiling benefit from the ceiling, if they are still
able to purchase the product. Sellers of a good or service subject to a price ceiling are hurt by the ceiling, as are
the workers who produce the product, and those buyers unable to purchase the product because of the shortage
caused by the price ceiling. In the long run, even successful buyers of the product may be hurt by the price
ceiling because of deterioration in the quality of the product, as often occurs under rent control.
150
ANSWER:
For this example, a $300 price ceiling would cause a shortage of 4,000 bicycles. Since the equilibrium price in the
market is $500, this would be a binding price ceiling. More than one reason may exist for policymakers to
impose a price ceiling in a market. Often this is done in an attempt to increase equity.
151
ANSWER: Mechanisms for rationing a product subject to a binding price ceiling include rationing through
long lines and rationing by discrimination according to race, age, sex, family circumstances, etc. As an alternative
to informal rationing mechanisms, government may enforce a formal rationing system of some sort.
152
ANSWER: The goal of rent control is to help the poor by making housing more affordable. Economists often
criticize rent control as a highly inefficient way of helping the poor raise their standard of living.
153
ANSWER:
For this example, a $70 price floor would cause a surplus of 400 pairs of tennis shoes. Since the equilibrium price
in the market is $50, this would be a binding price floor. More than one reason may exist for policymakers to
impose a price floor in a market. Often this is done in an attempt to increase equity.
154
ANSWER: In the short run, the primary effect of rent control is to reduce rents. Shortages created are small. In
the long run, rent control creates greater housing shortages, reduces the supply of housing, and also reduces the
quality of housing.
155
ANSWER: The U.S. minimum wage law was instituted with the Fair Labor Standards Act of 1938. The
purpose of the minimum wage is to ensure workers a minimally adequate standard of living.
156
ANSWER: A binding price floor benefits the sellers of the good or service who are still able to sell their
product at the higher price. A binding price floor hurts the buyers of the good or service, and those sellers who
are no longer able to sell their product at the higher price because of the surplus created by the price floor.
157
ANSWER: Economists oppose price controls because they obscure the price signals that normally guide the
allocation of societys scarce resources. Also, price controls often hurt those very individuals they are designed
to help.
158
ANSWER: Tax incidence refers to how the burden of a tax is shared by buyers and sellers.
159
ANSWER:
A.
$10
B.
$3
C.
$1
D.
$2
E.
$11
F.
$8
G.
As a result of the tax, the level of market activity has fallen, from 100 units being bought and
sold to only 90 units being bought and sold.
160
ANSWER:
A.
$10.00
B.
$5.00
C.
$2.50
D.
$2.50
E.
$12.50
F.
$7.50
G.
As a result of the tax, the level of market activity has fallen, from 100 units being bought and
sold to only 80 units being bought and sold.
161
ANSWER: A tax reduces market activity. When a good is taxed, the equilibrium quantity of the good sold is
smaller than without the tax. When a tax is imposed, the amount paid by buyers for the taxed good increases,
and the amount received by sellers falls.
TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 3, 4 RANDOM: Y
162
ANSWER: The incidence of taxation is the same regardless of whether it is the buyer or the seller who has the
legal responsibility of turning the tax over to the government, i.e., taxes on buyers and taxes on sellers are
equivalent.
163
ANSWER:
ANSWER: While it is true that the major impact of rent control in the short run is to reduce rents, in the long
run, rent control has many effects that help "destroy a city." Because buyers and sellers respond to incentives,
buyers will supply less housing in the long run because of lower rents. Many existing apartment buildings will
deteriorate, both because some landlords can no longer afford to maintain the apartments, and because there is
excess demand for apartments in general. In some cases, landlords simply abandon apartment buildings because
they cannot earn a profit operating them at the controlled rents. The shortage of apartments is made more severe
in the long run as the demand for rental housing increases in response to the low rents. Hence, the number of
homeless people in the city is likely to increase. Market power on the side of landlords may lead to
discrimination and bribery. These conditions lead to further costly regulation and social programs.
164
165
ANSWER:
166
ANSWER: Advocates of the minimum wage often recognize that it has some adverse effects, but they believe
that the adverse effects are small, and that a higher minimum wage makes the poor better off by providing a
minimally acceptable standard of living. Opponents of the minimum wage believe that it is not the best way to
combat poverty, noting that a high minimum wage causes unemployment, encourages teenagers to drop out of
school, and prevents some unskilled workers from getting on-the-job training. They also point out that the
minimum wage is a poorly targeted policy, since many minimum-wage earners are teenagers from middle-class
homes working at part-time jobs for extra spending money, rather than poor heads of households.
167
ANSWER: Rent subsidies do not cause reductions in the quantity of housing supplied and, therefore, do not
lead to housing shortages. Wage subsidies do not discourage firms from hiring workers and, therefore, do not
lead to unemployment. These alternatives are not costless, however, since they require government expenditures,
hence, taxes.
168
ANSWER:
169
ANSWER: Even though the items affected by the luxury tax are, indeed, bought primarily by the wealthiest
taxpayers, the price elasticity of demand for luxury goods is high relative to the price elasticity of supply. Hence,
when the tax was imposed on those goods, there was a significant reduction in quantity demanded and only a
slight increase in equilibrium market price. The burden of the tax fell mostly on the suppliers, who suffered a
substantial reduction in the price they received, and a substantial reduction in the quantity sold and in total
revenue.
170
ANSWER: The graph should look like the following.

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Chapter 6

Supply, Demand, and Government Policies

Price controls are

A legal maximum price at which a good can be sold is a

A legal minimum price at which a good can be sold is a

2Chapter 6/Supply, Demand, and Government Policies

If a price ceiling is not binding,

A price ceiling which is not binding

TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

In the figure shown, a binding price ceiling is shown in

Chapter 6/Supply, Demand, and Government Policies3

If a price ceiling is a binding constraint on the market,

. If a price ceiling is a binding constraint,

. A binding price ceiling in the computer market will cause

. A binding price ceiling will make it necessary to

4Chapter 6/Supply, Demand, and Government Policies

Chapter 6/Supply, Demand, and Government Policies5

. Rationing by long lines

6Chapter 6/Supply, Demand, and Government Policies

Chapter 6/Supply, Demand, and Government Policies7

. Californias drought-emergency water bank

. Economists generally hold that rent control is

8Chapter 6/Supply, Demand, and Government Policies

. Under rent control, bribery is a mechanism to

Chapter 6/Supply, Demand, and Government Policies9

. A price floor is binding if

. A price floor is not binding if

. A binding price floor causes

10Chapter 6/Supply, Demand, and Government Policies

. In panel (b), at the actual price there will be

. The minimum wage is an example of

. Minimum wage laws dictate

. The U.S. Congress first instituted a minimum wage in

. The minimum wage was instituted in order to ensure workers

Chapter 6/Supply, Demand, and Government Policies11

. Which of the following is a correct statement about the labor market?

. If the minimum wage is above the equilibrium wage,

12Chapter 6/Supply, Demand, and Government Policies

. The equilibrium wages of teenagers tend to be

. In general, advocates of the minimum wage

. Which of the following is NOT a function of prices in a market system?

Chapter 6/Supply, Demand, and Government Policies13

. Unlike minimum wage laws, wage subsidies

. The earned income tax credit is an example of

. Which is the most accurate statement about taxes and government?

14Chapter 6/Supply, Demand, and Government Policies

. The initial effect of a tax on the buyers of a good

Chapter 6/Supply, Demand, and Government Policies15

16Chapter 6/Supply, Demand, and Government Policies

. A tax on the buyers of popcorn will

. A tax on the buyers of popcorn will

. The initial impact of a tax on the sellers of a product

Chapter 6/Supply, Demand, and Government Policies17

18Chapter 6/Supply, Demand, and Government Policies

A tax on the sellers of popcorn

. A tax of $.10 per bag on the sellers of popcorn will

. A tax on the sellers of popcorn will

Chapter 6/Supply, Demand, and Government Policies19

. A tax on the sellers of popcorn will cause

. What is true about the burden of a tax imposed on popcorn?

. Revenue from the FICA tax is used to

. Congress intended that

20Chapter 6/Supply, Demand, and Government Policies