Chapter 6 - Supply, Demand, and Government Policy

Question 1

What is a price ceiling? Provide an example.

Answer 1

A price ceiling is a legal maximum price. Example: Rent control. If the ceiling is below the equilibrium price, it creates a shortage​.

Question 2

What is a price floor? Provide an example.

Answer 2

A price floor is a legal minimum price. Example: Minimum wage. If the floor is above equilibrium, it creates a surplus​

Question 3

How do taxes affect market outcomes?

Answer 3

Taxes create a wedge between the price buyers pay and the price sellers receive, reducing the equilibrium quantity and shrinking the market

Question 4

Who bears the burden of a tax?

Answer 4

The burden of a tax (tax incidence) depends on the price elasticities of supply and demand. The less elastic side of the market bears a greater share​

Question 5

How do price controls (ceilings and floors) impact market efficiency?

Answer 5

They prevent the market from reaching equilibrium, leading to shortages (ceilings) or surpluses (floors), and necessitate rationing mechanisms​

Question 6

What happens when demand is inelastic and supply is elastic in response to a tax?

Answer 6

Most of the tax burden falls on buyers because they are less responsive to price changes​