Chapter 6 (Supply, Demand, and Government Policies )

Section A

1. Which of the following statements is correct?

a. A price ceiling is not binding when the price ceiling is set above the
equilibrium price.
b. A price floor is not binding when the price floor is set below the equilibrium
price.
c. A binding price ceiling causes a shortage and a binding price floor causes a
surplus.
d. All of the above are correct.

2. An outcome that can result from either a price ceiling or a price floor is
a. an enhancement of efficiency.
b. undesirable rationing mechanisms.
c. excess supply.
d. excess demand.

3. 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 more
elastic.
b. A tax burden falls most heavily on the side of the market that is less elastic.
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 elasticity of supply and
demand.

4. The presence of price controls in a market usually is an indication that

a. an insufficient quantity of a good or service was being produced in that
market to meet the public’s need.
b. the usual forces of supply and demand were not able to establish an
equilibrium price in that market.
c. policymakers believed that the price that prevailed in that market in the
absence of price controls was unfair to buyers or sellers.
d. policymakers correctly believed that, in that market, price controls would
generate no inequities of their own.

5. A price ceiling will be binding only if it is set

a. equal to equilibrium price.
b. above equilibrium price.
c. below equilibrium price.
d. none of the above; a price ceiling is never binding.

6. A minimum wage that is set above a competitive market's equilibrium wage will
result in
a. an excess demand for labour, that is, unemployment.
b. an excess demand for labour, that is, a shortage of workers.
c. an excess supply of labour, that is, unemployment.
d. an excess supply of labor, that is, a shortage of workers.
 7. 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.

8. The term tax incidence refers to

a. the matter of whether buyers or sellers of a good are required to send tax
payments to the government.
b. the matter of whether the demand curve or the supply curve shifts when the
tax is imposed
c. the distribution of the tax burden between buyers and sellers.
d. All of the above are correct.

9. In a market economy, government intervention

a. will always improve market outcomes.
b. reduces efficiency in the presence of externalities (cảnh quan)
c. may improve market outcomes in the presence of externalities.
d. is necessary to control individual greed.

Section B
Question 1
Using the graph shown, answer the following questions.
a. What was the equilibrium price in this market before the tax?
The equilibrium price in this market before the tax is 10$
b. What is the amount of the tax?
The tax is 3$
c. How much of the tax will the buyers pay?
The tax will the buyers pay is 3$
d. How much of the tax will the sellers pay?
The tax will the sellers pay is 3$
e. How much will the buyer pay for the product after the tax is imposed?
the buyer pay for the product after the tax is 11$
f. How much will the seller receive after the tax is imposed?
the seller receive after the tax is 8$
g. As a result of the tax, what has happened to the level of market activity?
As result of taxation the demand for the product has been decreased which lead to fall in both
equillibrium price and quantity of product.

Question 2
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?

Price
Swith tax

$12.5

$10.0
$7.50

Quantity
80 100

Question 3

a. Using the graph shown, analyze the effect a RM 300 price ceiling would have on the market
for ten-speed bicycles. Would this be a binding price ceiling?
Equilibrium price: 500$
 Shortage: Qd – Qs= 700-300=400
b. Using the graph shown, analyze the effect a RM 700 price floor would have on this market.
Would this be a binding price floor?
Surplus: Qs – Qd = 400
c. Why would policymakers choose to impose a price ceiling or price floor?
Choose to impose a price ceiling: to protect customers and the seller can not change the
price about RM 300
Choose to impose a price floor: to protect sellers and the price of product and services can
not sell at the price below RM 700

Price (RM/unit))
S

700

500

300

D
Quantity

300 500 700

1. Explain how buyers’ willingness to pay, consumer surplus, and the demand curve are related.

They all measure the buyers willingness to pay for a good. The Consumer surplus is just willingness
minus amount the buyer actually pays. The demand curve helps use measure this relationship by
looking at the area below the demand curve and above the price is the sum of the consumer surplus

2. Explain how sellers’ costs, producer surplus, and the supply curve are related.

The Sellers cost is how much they pay to obtain a good. The producers surplus is the amount they
pay minus the cost of providing it. The supply curve

measures this amount by looking at the area above the supply curve.
3. In a supply-and-demand diagram, show producer and consumer surplus at the market
equilibrium.

Producer surplus: The area below the price and above the supply curve measures the producer
surplus in a market

Consumer surplus; The area above the price and below the demand curve measures the producer
surplus in a market

4. It is a hot day, and Bert is thirsty. Here is the value he places on each bottle of water:

Value of first bottle $7

Value of second bottle $5

Value of third bottle $3

Value of fourth bottle $1

a. From this information, derive Bert’s demand schedule. Graph his demand curve for bottled water.

b. If the price of a bottle of water is $4, how many bottles does Bert buy? How much consumer
surplus does Bert get from his purchases? Show Bert’s consumer surplus in your graph.

- Bert buy 2 bottle, if the price of a bottle of water is 4$

- He values his first bottle of water at $7, but pays only $4 for it, so has consumer surplus of $3. He
values his second bottle of water at $5, but pays only $4 for it, so has consumer surplus of $1. Thus
Bert’s total consumer surplus is $3 + $1 = $4,

c. If the price falls to $2, how does quantity demanded change? How does Bert’s consumer surplus
change? Show these changes in your graph.

- If the price falls to $2, from 4$ to 2$, Berts buy three bottles, increase one bottle.

- He gets consumer surplus of $5 from the first bottle ($7 value minus $2 price), $3 from the second
bottle ($5 value minus $2 price), and $1 from the third bottle ($3 value minus $2 price), for a total
consumer surplus of $9. Thus consumer surplus rises by $5 (which is the size of area B) when the
price of a bottle of water falls from $4 to $2.