Chapter 6: Supply, Demand, and Government Policies

Question 1

Define ‘Price ceiling’.

Answer 1

A legal maximum on the price at which a good can be sold. If the price ceiling is below the equilibrium price, the price ceiling is binding and a shortage ensues. The goods must then be rationed among buyers.

Question 2

Define ‘Price floor’.

Answer 2

A legal minimum on the price at which a good can be sold. If the price floor is above the equilibrium price, the price floor is binding and a surplus ensues. The goods must then be rationed among sellers.

Question 3

Define ‘Tax incidence’.

Answer 3

The manner in which the burden of a tax is shared among participants in a market.

Question 4

What is an example of a price ceiling? Of a price floor?

Answer 4

Rent control.

Minimum wage.

Question 5

When the government levies a tax on a good, the equilibrium quantity of the good ___. That is, a tax on a market ___ the size of the market.

Answer 5

Falls and shrinks.

Question 6

The incidence of a tax (the division of tax burden) ___ (does/does not) depend on whether the tax is levied on buyers or sellers. It ___ (does/does not) depend on the price elasticities of supply and demand.

Answer 6

Does not and Does.

Question 7

The burden of tax tends to fall on which side of the market?

Answer 7

The side that is least elastic because that side of the market can respond less easily to the tax by changing the quantity bought or sold.