question

Relationship between resource and product markets

answer

an increase in demand for a product will increase demand for resources

question

When demand for a product increases, what happens to the demand for the resource

answer

it will increase

question

When the demand for a product decreases, what happens to the demand for the resources

answer

it will decrease

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Price Ceiling

answer

A legally determined maximum price that sellers may charge

question

Price Floor

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A legally determined minimum price that sellers may receive.

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Shortage

answer

A situation in which the quantity demanded is greater than the quantity supplied, more people want than what is in stock

question

Surplus

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A situation in which quantity supplied is greater than quantity demanded, more in stock than what people want

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Example of a common price ceiling

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rent control

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Example of a common price floor

answer

minimum wage

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Deadweight loss

answer

loss of gains from trade

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An effective price floor sets price _______ equilibrium to limit how low the price can fall

answer

above

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An effective price ceiling sets price ______ equilibrium to limit how high the price can rise

answer

below

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What are common secondary effects of price controls

answer

black markets changes in future supply quality deterioration non price methods of rationing inefficient use of good

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Tax Incidence

answer

The distribution of tax burden among taxpayers; who ultimately pays the tax

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Excess burden of taxation

answer

another term for deadweight loss

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Statuary Incidence

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who is legally responsible to pay the tax, this is the tax burden

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Actual Incidence

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who really pays the tax but is not responsible for it

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Marginal Tax Rate

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The extra taxes paid from an additional dollar of income

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Laffer Curve

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a curve illustrating the relationship between the tax rate and tax revenues

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An increase in tax rate may what

answer

may lower revenue

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Subsidy

answer

a grant paid by a government to an enterprise that benefits the public

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An increase in the number of students attending college would tend to

answer

increase the demand for college professors, increase number of college of professors employed, increase wages of college professors

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The term deadweight loss or excess burden is used to describe which of the following

answer

the loss from the elimination of mutually beneficial exchanges that results from the imposition of a tax in a market

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What would happen in a market where a price ceiling was set above equilibrium

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equilibrium price would become the market price

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When a shortage of a good is present due to a price ceiling

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non-price factors will play a greater role in the allocation of the good

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If the government imposes a price floor on the market for milk, what will happen

answer

There will be a surplus of milk

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Correlation with price ceiling

answer

shortage

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Correlation with price floor

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surplus

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Both price floors and price ceilings lead to

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a reduction in quantity traded

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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

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$4000 on the buyers and $1000 on the sellers

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The burden of tax will fall primarily on sellers when

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demand for the product is highly elastic and the supply is relatively inelastic

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When the government increase the tax rate what happens to tax revenue

answer

it depends

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According to the Laffer Curve

answer

when marginal tax rates are high a reduction in tax rates may increase tax revenue

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The actual benefit of a government subsidy is determined primarily by

answer

the elasticities of demand and supply

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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

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$30 to buyers and $20 to sellers

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Which of the following is a true statement regarding the economic impact of a subsidy?

answer

When supply is relatively elastic, the benefits of a subsidy will mainly accrue to buyers.

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An increase in the demand for a product will cause output to

answer

increase and both the demand for and prices of the resources used to produce the product to increase.

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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

answer

allowing the price to rise, so gas was rationed to those willing to pay the most for it.

question

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?

answer

a surplus of unskilled labor

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With a price ceiling above the equilibrium price

answer

the market would be in equilibrium.

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Rent controls generally fix the price of rental housing below market equilibrium. Economic analysis suggests these controls

answer

reduce the future supply of rental housing.

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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.

answer

A $.05 burden is being borne by sellers and $.40 by consumers.

question

The deadweight loss resulting from levying a tax on an economic activity is

answer

the loss of potential gains from trade from activities forgone because of the tax.

question

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

answer

consumers, because the increase in market price will be large relative to the increase in the excise tax.

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The Laffer curve illustrates the principle that

answer

when tax rates are quite high, reducing tax rates will increase tax revenue.

question

A legal minimum wage is an example of

answer

price floor

question

Both price floors and price ceilings, when effective, lead to

answer

a reduction in quantity traded

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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?

answer

price increases, quantity decreases

question

The more elastic the supply of a product, the more likely it is that the burden of a tax will

answer

fall on buyers.

question

The marginal tax rate is defined as

answer

the change in tax liability divided by the change in taxable income.

question

Why does a price floor set above an equilibrium price tend to cause persistent imbalances in the market?

answer

Because quantity supplied exceeds quantity demanded but price cannot fall to remove the surplus.

question

Why does a price ceiling set below an equilibrium price tend to cause persistent imbalances in the market?

answer

Because quantity demanded exceeds quantity supplied but price cannot rise to remove the shortage.

question

Why will price controls will tend to cause misallocation of resources?

answer

Production (or opportunity) cost no longer corresponds to market price.

question

When a tax is imposed on a good, the actual incidence of the tax generally

answer

Is shared between the buyer and seller

question

When will a subsidy on a product generate more actual benefit for consumers (and less for producers)?

answer

When the supply of the product is relatively elastic

question

Which of the following will most likely occur when government price controls fix the price of a good above market equilibrium?

answer

a surplus of the good will develop

question

What happens when a tax is imposed on a good?

answer

The equilibrium quantity of the good always decreases.

question

How would an increase in the price of paper influence the market for college textbooks?

answer

The supply of textbooks would decrease causing the price of textbooks to rise.

question

Why does the imposition of a tax on a good create a deadweight?

answer

The tax reduces the quantity of exchanges between buyers and sellers.

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