Chapter 4

Question 1

price floor=?

Answer 1

surplus

Question 2

price ceiling=?

Answer 2

shortage

Question 3

effects of rent control

Answer 3

• shortages and black markets will develop
• the future supply of housing will decline
• the quality of housing will deteriorate
• non-price methods of rationing with increase in importance
• inefficient use of housing will result
• long-term renters will benefit at the expense of newcomers

Question 4

minimum wage effects

Answer 4

• direct effect: reduces employment of low-skilled labor
• indirect effect: reduction in non-wage component of compensation
• a higher minimum wage does little to help the poor
• surplus labor = unemployment

Question 5

the primary sources of black markets

Answer 5

• evasion of a price control
• evasion of a tax
• legal prohibition on the production and exchange of a good

Question 6

importance of the legal system

Answer 6

• provides secure property rights and unbiased enforcement of contracts, enhances the operation of markets
• markets can be counted on to function efficiently only when property rights are secure and contracts enforced in an even-handed manner

Question 7

tax incidence

Answer 7

how the burden of a tax is actually shared between buyers (who pay more than they purchase) and sellers (who receive less for what they sell)

Question 8

the deadweight loss of taxation

Answer 8

the loss of gains from trade to buyers and sellers that occurs when a tax is imposed

Question 9

the Laffer curve

Answer 9

the relationship between tax rates and revenues (like apples and oranges)

Question 10

proportional taxes

Answer 10

everybody pays the same amount (ex. 10%)

Question 11

regressive taxes

Answer 11

pay a certain amount only (even if you make a lot of money, you don’t keep paying; you just pay the certain amount)

Question 12

progressive taxes

Answer 12

a tax in which the average tax rate rises with income (ex. tax brackets)