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ECON 2304 Chapter Notes - Chapter 6: Luxury Tax, Tax Incidence, Price Ceiling

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School
University of Houston
Department
Economics
Course
ECON 2304
Professor
Yewande Olapade

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Document Summary

Chapter 6 textbook notes: supply, demand, and government. Analyze various types of government policies using tools of supply and demand. Price ceiling a legal maximum on the price at which a good can be sold: bad incentive for sellers. Price floor a legal minimum on the price at which a good can be sold: bad incentive for buyers. Price ceiling is above the equilibrium point: not binding, price ceiling has no effect on the price of quantity sold. Price ceiling is below the equilibrium point: binding constraint, the quantity demanded of a good is higher than the quantity supplied. This leads to a shortage: could negatively affect the buyers even though it was meant to help. Example: price ceiling on gas (cause of shortage: rise in gas prices cause gas supply curve to shift left. Equilibrium move above the price ceiling: due to price ceiling and high gas price, suppliers supply less amount of gas.

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Related Questions

The following table contains the demand schedule and supply schedule for a market for a particular good. Suppose sellers of the good successfully lobby Congress to impose a price floor $3 above the equilibrium price in this market.

Price Quantity Demanded Quantity Supplied
$0 15 0
$1 13 3
$2 11 6
$3 9 9
$4 7 12
$5 5 15
$6 3 18

Following the imposition of a price floor $3 above the equilibrium price, irate buyers convince Congress to repeal the price floor and to impose a price ceiling $1 below the former price floor. The resulting market price is

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
(Dollars per disk) (Millions of disks)
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.

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.