ECON 202 Chapter Notes - Chapter 1-9: Price Ceiling, Deadweight Loss, Tax Incidence

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coralsnake291

18 Feb 2019

School

Department

Economics

Course

ECON 202

Professor

michelle matthews

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Study Guide for Exam 2 covering Chapters 6-11

Please know that this is not an exhaustive list, but if you know these concepts, this is 85-90% of the

material you will see.

1. Know price ceilings and price floors, when they are binding and when they are not. Know if

each creates a shortage or a surplus.

a. Price ceiling: legal maximum on the price at which a good can be sold. A price ceiling

above the equilibrium price is not binding. When the equilibrium price is above the

ceiling, it is illegal, and it is binding, which causes a shortage.

b. Price floor: legal minimum on the price at which a good can be sold. A price floor

below the equilibrium price is not binding. When the equilibrium wage is below the

floor, it is illegal, and the price floor is binding, causing a surplus.

2. Know that a tax (per unit) drives a wedge between the price the buyer pays and the price the

seller gets to keep. Know that placing a tax (when no externality is involved) on a good reduces

efficiency (in other words know the effects on consumer surplus, producer surplus and total

surplus.)

3. Know consumer surplus, producer surplus and total surplus. Know that total surplus is a

measure of efficiency. This means if you mess with the market (ex.: tax) then you reduce

efficiency (provided that you are not taxing the market to correct a negative externality).

a. Consumer Surplus: Amount a buyer is willing to pay minus the amount the buyer

actually pays. Consumer surplus = Value to buyers – Amount paid by buyers. (Buyers

gain)

b. Producer Surplus: Amount a seller is paid for a good minus the seller’s cost of

providing it. Price received minus willingness to sell. Producer surplus = Amount

received by sellers – Cost to sellers. (Sellers gain)

c. Total Surplus: Value to buyers – Cost to sellers.

4. Know what the legal incidence of a tax is, as well as the tax incidence. Know that the less

elastic side of the market bears more of the burden of the tax. Know that we can say who has to

turn the tax in (legal incidence), but the shape of demand and supply determine who bears most

of the burden (actual tax incidence).

a. Tax Incidence: Manner in which the burden of a tax is shared among participants in a

market. The government can make the seller or the buyer to pay the tax.

5. Know that efficiency losses (or societal cost) is the deadweight loss.

6. Know the effects on consumer surplus, producer surplus, tariff revenue, total surplus, and

deadweight loss in a big trade graph.

7. Know if we open trade and the world price is below our domestic equilibrium price that we will

be importing units and if the world price is above our domestic equilibrium price that we will be

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Related Questions

QUESTION 16

Positive externalities exist because:

	a.	internal benefits are greater than external benefits.
	b.	internal benefits are greater than social benefits.
	c.	internal benefits are less than external benefits.
	d.	external benefits are greater than social benefits.
	e.	internal benefits are less than social benefits.

QUESTION 17

What is a black market?

	a.	It is an illegal market that emerges when binding price ceilings are in place.
	b.	It is an illegal market that emerges when only binding price ceilings and binding price floors are in place.
	c.	It is an illegal market that emerges when no price controls are present.
	d.	It is an illegal market that emerges when binding and nonbinding price controls are in place.
	e.	It is an illegal market that emerges when binding price floors are in place.

QUESTION 18

The personal decisions of consumers and firms are based on:

	a.	external costs.
	b.	public-good costs.
	c.	third-party costs.
	d.	internal costs.
	e.	social cost.

QUESTION 19

When the price is _________ the equilibrium price, we would expect there to be a _________, causing the market to put _________ pressure on the price until it went back to the equilibrium price.

	a.	below; shortage; downward
	b.	above; shortage; downward
	c.	above; surplus; upward
	d.	above; surplus; downward
	e.	below; surplus; upward

rosewhale311

A recent study found that the demand and supply schedules for flying disks are as follows:

Price	Quantity Demanded	Quantity Supplied
(Dollars per disk)	(Millions of disks)	(Millions of disks)
11	1	15
10	2	12
9	4	9
8	6	6
7	8	3
6	10	1

Complete the first row of the following table by indicating the equilibrium price and the equilibrium quantity of flying disks in the absence of any price controls.

Scenario	Market Price	Market Quantity	Binding or Not Binding
Scenario	(Dollars per disk)	(Millions of disks)	Binding or Not Binding
No Price Control			N/A
Price Floor
Price Ceiling

Flying disk manufacturers persuade the government that flying disk production improves scientists' understanding of aerodynamics and thus is important for national security. A concerned Congress votes to impose a price floor $2 above the equilibrium price.

Complete the second row of the previous table by indicating the new price and quantity of flying disks when Congress imposes a price floor $2 above the equilibrium price. Then indicate whether the price floor is binding or not binding.

Irate college students march on Washington and demand a reduction in the price of flying disks. An even more concerned Congress votes to repeal the price floor and impose a price ceiling $3 below the former price floor.

Complete the final row of the previous table by indicating the new price and quantity of flying disks when Congress imposes a price ceiling $3 below the former price floor. Then indicate whether the price ceiling is binding or not binding.

ochrejackal539

1.) An excise tax on a good typically reduces the net price received by the seller. (TRUE/FALSE)

2.) The burden of an excise tax on gasoline falls entirely on consumers of gasoline. (TRUE/FALSE)

3.) Rent controls are one of the few examples of a price floor in market economies. (TRUE/FALSE)

4.) Imposing a price ceiling below the equilibrium price of a good often leads to_____.

A) A greater supply of the good

B) A black market for the good

C) A rightward shift of the supply curve for the good.

D) A leftward shift of the demand curve for the good.

E) All of these

5.) Which of the following is true of price floors and ceilings?

A) Lead to the same price and quantity as in competitive market.

B) Lead to technical efficiency

C) Cause the demand curve to shift left

D) Usually result from government intervention

E) Cause the supply curve to shift right.

6.) Price ceilings often lead to black markets. (TRUE/FALSE)

7.) When minimum wage is above the equilibrium wage what occurs?

A) There will be a shortage of labor

B) There will be no effect on the number of people employed

C) There will be an increase in unemployment rate

D) There will be a decrease in unemployment rate

8.) An excise tax on a good typically reduces the price paid by the consumer (TRUE/FALSE)

9.) If a price ceiling is below the equilibrium price is imposed on a market, it will cause the quantity demanded to rise and the quantity supplied to fall. (TRUE/FALSE)

10.) Price floors often lead to black markets. (TRUE/FALSE)

11.) If an excise tax is imposed on restaurant meals what occurs?

A) Fewer meals will be produced and sold

B) More meals will be produced and sold

C) Market price of the meals will fall

D) Government tax revenue will fall.

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ECON 202 Chapter Notes - Chapter 1-9: Price Ceiling, Deadweight Loss, Tax Incidence

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