Key to Chapter 67.docx

1、Key to Chapter 6 7Chapter 6SOLUTIONS TO TEXT PROBLEMS:Quick Quizzes1. A price ceiling is a legal maximum on the price at which a good can be sold. Examples of price ceilings include rent control, price controls on gasoline in the 1970s, and price ceilings on water during a drought. A price floor is

2、a legal minimum on the price at which a good can be sold. Examples of price floors include the minimum wage and farm-support prices. A price ceiling leads to a shortage, if the ceiling is binding, because suppliers wont produce enough goods to meet demand unless the price is allowed to rise above th

3、e ceiling. A price floor leads to a surplus, if the floor is binding, because suppliers produce more goods than are demanded unless the price is allowed to fall below the floor.2. With no tax, as shown in Figure 6-1, the demand curve is D1 and the supply curve is S. The equilibrium price is P1 and t

4、he equilibrium quantity is Q1. If the tax is imposed on car buyers, the demand curve shifts down by the amount of the tax ($1000) to D2. The downward shift in the demand curve leads to a decline in the equilibrium price to P2 (the amount received by sellers from buyers) and a decline in the equilibr

5、ium quantity to Q2. The price received by sellers declines by P1 - P2, shown in the figure as PS. Buyers pay a total of P2 + $1,000, an increase in what they pay of P2 + $1,000 - P1, shown in the figure as PB.Figure 6-1 If the tax is imposed on car sellers, as shown in Figure 6-2, the supply curve s

6、hifts up by the amount of the tax ($1000) to S2. The upward shift in the supply curve leads to a rise in the equilibrium price to P2 (the amount received by sellers from buyers) and a decline in the equilibrium quantity to Q2. The price paid by buyers declines by P1 - P2, shown in the figure as PB.

7、Sellers receive P2 and pay taxes of $1,000, receiving on net P2 - $1,000, a decrease in what they receive by P1 - (P2 - $1,000), shown in the figure as PS.Figure 6-2Questions for Review1. An example of a price ceiling is the rent control system in New York City. An example of a price floor is the mi

8、nimum wage. Many other examples are possible.2. A shortage of a good arises when there is a binding price ceiling. A surplus of a good arises when there is a binding price floor.3. When the price of a good is not allowed to bring supply and demand into equilibrium, some alternative mechanism must al

9、locate resources. If supply exceeds demand, so that theres a surplus of a good as in the case of a binding price floor, sellers may try to appeal to the personal biases of the buyers. If demand exceeds supply, so that theres a shortage of a good as in the case of a binding price ceiling, sellers can

10、 ration the good according to their personal biases, or make buyers wait in line.4. Economists usually oppose controls on prices because prices have the crucial job of coordinating economic activity by balancing demand and supply. When policymakers set controls on prices, they obscure the signals th

11、at guide the allocation of societys resources. Further, price controls often hurt those they are trying to help.5. A tax paid by buyers shifts the demand curve, while a tax paid by sellers shifts the supply curve. However, the outcome is the same regardless of who pays the tax.6. A tax on a good rai

12、ses the price buyers pay, lowers the price sellers receive, and reduces the quantity sold.7. The burden of a tax is divided between buyers and sellers depending on the elasticity of demand and supply. Elasticity represents the willingness of buyers or sellers to leave the market, which in turns depe

13、nds on their alternatives. When a good is taxed, the side of the market with fewer good alternatives cannot easily leave the market and thus bears more of the burden of the tax.Problems and Applications1. If the price ceiling of $40 per ticket is below the equilibrium price, then quantity demanded e

14、xceeds quantity supplied, so theres a shortage of tickets. The policy decreases the number of people who attend classical music concerts, since supply is lower because of the lower price.2. a. The imposition of a binding price floor in the cheese market is shown in Figure 6-3. In the absence of the

15、price floor, the price would be P1 and the quantity would be Q1. With the floor set at Pf, which is greater than P1, the quantity demanded is Q2, while quantity supplied is Q3, so there is a surplus of cheese in the amount Q3 - Q2.b. The farmers complaint that their total revenue has declined is cor

16、rect if demand is elastic. With elastic demand, the percentage decline in quantity would exceed the percentage rise in price, so total revenue would decline.c. If the government purchases all the surplus cheese at the price floor, producers benefit and taxpayers lose. Producers would produce quantit

17、y Q3 of cheese, and their total revenue would increase substantially. But consumers would buy only quantity Q2 of cheese, so they are in the same position as before. Taxpayers lose because they would be financing the purchase of the surplus cheese through higher taxes. Figure 6-33. a. The equilibriu

18、m price of frisbees is $8 and the equilibrium quantity is 6 million frisbees.b. With a price floor of $10, the new market price is $10 since the price floor is binding. At that price, only 2 million frisbees are sold, since thats the quantity demanded.c. If theres a price ceiling of $9, it has no ef

19、fect, since the market equilibrium price is $8, below the ceiling. So the equilibrium price is $8 and the equilibrium quantity is 6 million frisbees.4. a. Figure 6-4 shows the market for beer without the tax. The equilibrium price is P1 and the equilibrium quantity is Q1. The price paid by consumers

20、 is the same as the price received by producers.Figure 6-4Figure 6-5b. When the tax is imposed, it drives a wedge of $2 between supply and demand, as shown in Figure 6-5. The price paid by consumers is P2, while the price received by producers is P2 - $2. The quantity of beer sold declines to Q2.5.

21、Reducing the payroll tax paid by firms and using part of the extra revenue to reduce the payroll tax paid by workers would not make workers better off because the division of the burden of a tax depends on supply and demand, not who must pay the tax. Since the tax wedge would be larger, its likely t

22、hat both firms and workers, who share the burden of any tax, would be worse off.6. If the government imposes a $500 tax on luxury cars, the price paid by consumers will rise less than $500, in general. The burden of any tax is shared by both producers and consumersthe price paid by consumers rises a

23、nd the price received by producers falls, with the difference between the two equal to the amount of the tax. The only exceptions would be if the supply curve were perfectly elastic or the demand curve were perfectly inelastic, in which case consumers would bear the full burden of the tax and the pr

24、ice paid by consumers would rise by exactly $500.7. a. It doesnt matter whether the tax is imposed on producers or consumersthe effect will be the same. With no tax, as shown in Figure 6-6, the demand curve is D1 and the supply curve is S1. If the tax is imposed on producers, the supply curve shifts

25、 up by the amount of the tax (50 cents) to S2. Then the equilibrium quantity is Q2, the price paid by consumers is P2, and the price received (after taxes are paid) by producers is P2 - 50 cents. If the tax is instead imposed on consumers, the demand curve shifts down by the amount of the tax (50 ce

26、nts) to D2. The downward shift in the demand curve (when the tax is imposed on consumers) is exactly the same magnitude as the upward shift in the supply curve when the tax is imposed on producers. So again, the equilibrium quantity is Q2, the price paid by consumers is P2 (including the tax paid to

27、 the government), and the price received by producers is P2 - 50 cents.Figure 6-6Figure 6-7b. The more elastic is the demand curve, the more effective this tax will be in reducing the quantity of gasoline consumed. Greater elasticity of demand means that quantity falls more in response to the rise i

28、n the price of gasoline. Figure 6-7 illustrates this result. Demand curve D1 represents an elastic demand curve, while demand curve D2 is more inelastic. To get the same tax wedge between demand and supply requires a greater reduction in quantity with demand curve D1 than for demand curve D2.c. The

29、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 gasoline being produced, some workers may lose their jobs. With a lower price received by producers, wages of workers might

30、 decline.8. a. Figure 6-8 shows the effects 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 minimum wage (wm) imposed above w1, the market wage is wm, the number of employed workers is Q2, and the number of workers who a

31、re unemployed is Q3 - Q2. Total wage payments to workers are shown as the area of rectangle ABCD, which equals wm times Q2.b. An increase in the minimum wage would decrease employment. The size of the effect on employment depends only on the elasticity of demand. The elasticity of supply doesnt matt

32、er, because theres a surplus of labor.c. The increase in the minimum wage would increase unemployment. The size of the rise in unemployment depends on both the elasticities of supply and demand. The elasticity of demand determines the quantity of labor demanded, the elasticity of supply determines the quantity of labor supplied, and the difference between the quantity supplied and demanded of labor is the amount of unemployment.d. If the demand for unskilled labor were inelastic, the rise in the minimum wage would increase total wage payments to unskilled labor. With inelastic d