ECON101 Unit 5

Question 1

What is the connection between price/rent ceilings and the equilibrium?

Answer 1

Set above equilibrium rent = NO effect

Set below equilibrium rent = Housing shortage, increased search activity, black market

Question 2

The legal price does not eliminate the shortage so…

Answer 2

Increased search activity = higher unregulated opportunity cost
Black market = illegal arrangement above ceiling

Question 3

Fairness of a rent ceiling in terms of rules and results:

Answer 3

Unfair rules b/c blocks voluntary exchange

Unfair results b/c does not benefit the poor

Question 4

How is scarce housing allocated when there is a price ceiling?

Answer 4

Lottery, discrimination, first come first serve (All not fair)

Question 5

What happens when there underproduction from price ceiling?

Answer 5

• MSB exceeds MSC = deadweight loss
• Decreases supply = inefficient
• Producer and consumer surplus shrinks

Question 6

What is the connection between price floors (min wage) and equilibrium?

Answer 6

Set below equilibrium wage = NO effect

Set above equilibrium wage rate = powerful, quantity supplied by workers exceed quantity demanded by employers

Question 7

Issues with the minimum wage being above the equilibrium?

Answer 7

• Quantity of labour hired is less than in an unregulated market
• # of unemployed increases

Question 8

What is a production quota?

Answer 8

An upper limit to the quantity of a good that may be produced during a specified period.

Question 9

What is a subsidy?

Answer 9

A payment made by the government to a producer.

Question 10

What do production quotas create?

In terms of … MSB, MSC, and inefficiency

Answer 10

MSB = market price, which has increased.
MSC has decreased.
Production is inefficient and producers have an incentive to cheat (i.e. overproduce)

Question 11

What do subsidies cause?

In terms of.. efficiency, MSB, MSC

Answer 11

MSB = market price, which has fallen
MSC increases then exceeds MSB
Inefficiency due to overproduction

Question 12

What is tax incidence?

Answer 12

The division of the burden of a tax between buyers and sellers

Question 13

How are price raises connected to who pays the tax?

Answer 13

Full amount of the tax, buyers pay the tax.
Lesser amount than the tax, buyers and sellers share the burden of the tax.
Doesn’t rise at all, sellers pay the tax.

Question 14

Tax and how it connects to elasticity of demand:

Answer 14

Perfectly inelastic demand = buyers pay entire tax (demand curve is vertical)
Perfectly elastic demand = sellers pay entire tax (demand curve is horizontal)

Question 15

The more inelastic the demand….

Answer 15

The larger is the buyers share of the tax

Question 16

Tax and how it connects to elasticity of supply:

Answer 16

Perfectly inelastic supply = sellers pay entire tax

Perfectly elastic supply = buyers pay entire tax

Question 17

The more elastic the supply …

Answer 17

The larger is the buyers share of the tax

Question 18

How does imposing tax create inefficiency?

Answer 18

Without tax.. MSB = MSC and it is efficient
Tax decreases quantity, raises buyers price, and lowers sellers price
With tax … MSB exceeds MSC

Question 19

What are the two concepts of fairness?

Answer 19

The benefits principle = impose tax on who benefits most by services
Ability to pay = how easily they can bear the burden of the tax