CHAPTER 6

END OF SUMMARY
QUESTIONNAIRES
(SUPPLY, DEMAND, AND
GOVERNMENT POLICIES)
CHAPTER 6

CHAPTER QuickQuiz
1. d.
2. c.
3. a.
4. a.
5. d.
6. d.

QUESTIONS FOR REVIEW

1. Another example of a common price ceiling is the imposition of limits on the prices of
prescription medications and laboratory tests. A good illustration of a price floor is the
concept of a minimum wage.
2. When a binding price ceiling exists, there is a shortage of a good. A price ceiling that is
legally binding is one that is set below the market's equilibrium price. This results in a
shortage, as the required quantity exceeds the amount available. This leads to a shortage
because the required quantity is higher than the quantity that is actually available.
3. When the price of an item is not allowed to adjust in order to maintain a state of supply
and demand equilibrium, perhaps another approach must be employed in the allocation of
resources. Sellers may try to appeal to the tastes of the buyers if quantity supplied
exceeds amount demanded, resulting in a surplus of a good, as in the event of a binding
price floor. Sellers may control the good according to their own preferences or make
customers stand in line if the quantity demanded exceeds the quantity supplied, creating a
shortage of the good, as in the case of a legally binding price ceiling.
4. Price regulations are typically opposed by economists since they are essential for
organizing economic activity because they balance supply and demand. The signals that
determine the distribution of a society's resources are disguised whenever policymakers
impose price controls on the people. In addition, price controls frequently end up hurting
the very consumers they are supposed to support.
5. There is no change in either the price paid by customers or the price received by sellers
when a tax paid by buyers is replaced with a tax paid by sellers.
6. When a tax is placed on a product, the price that customers have to pay increases, while
the price that vendors receive declines, and manufacturers produce fewer units.
7. The tax burden is split between buyers and sellers based on the elasticity of supply and
demand. Elasticity refers to a buyer's or seller's willingness to leave the market, which is
based on their available alternatives. A bigger share of the tax burden falls on the side of
the market with fewer choices when a good is taxed since they are less able to leave the
market.

PROBLEMS AND APPLICTAIONS

1. If demand exceeds supply, a shortage of tickets will occur if the $40 price cap per ticket
is less than the equilibrium price. The strategy lowers the number of people who go to
classical music performances since the decreased supply is caused by the price reduction.
2. a. The figure shows how a required price floor was imposed on the cheese market. The
price and quantity would be P1 and Q1, respectively, without the price floor. The
 quantity demanded is Q2, the quantity supplied is Q3, and since the floor is set at Pf,
which is more than P1, there is a surplus of cheese equal to Q3 - Q2.
b. The producers' statement that their overall revenue has reduced is true if demand is
elastic. With elastic demand, a fall in overall revenue would occur if the proportional
decrease in quantity exceeded the proportional increase in price.

c. Producers will profit while taxpayers suffer if the government purchases all excess
cheese at the floor price. Producers' output of cheese would increase to Q3 and their
overall revenue would rise significantly. However, buyers would only buy Q2 units of
cheese, which would leave them in the same situation as before. Taxpayers would suffer
because they would have to pay higher taxes to cover the cost of buying the extra cheese.

3. a. Six million Frisbees are available at the equilibrium price of $8 per Frisbee.
b. The new market price is $10 with a $10 price floor because the price floor is legally
binding. Only 2 million Frisbees are offered at that price due to the low level of demand.
There are ten million more Frisbees available. The new market price is $10 with a $10
price floor because the price floor is legally obligatory. Only 2 million Frisbees are
offered at that price due to the low level of demand. There are ten million more Frisbees
available.
c. A price ceiling of $9 has no impact because the market's equilibrium price is $8, which
is lower than the ceiling. As a result, the equilibrium price is $8 and the equilibrium
number of Frisbees is 6,000,000.
4. a. The beer market is shown in the figure without the tax. The equilibrium price is P1,
and the equilibrium quantity is Q1. Consumers and producers pay the same amount,
according to this statement.
 b. Figure shows that when the tax is implemented, it creates a $2 gap between supply and
demand. Consumers pay P2, while manufacturers receive P2 - $2 as payment. The second
quarter sees a decline in the amount of beer sold.

5. Reducing the payroll tax paid by firms and utilizing a portion of the additional money to
cut the payroll tax paid by workers would not benefit workers since the cost of a tax is
determined by the elasticity of supply and demand, not by who must pay the tax. Because
the tax wedge would be greater, enterprises and employees, who share the burden of any
tax, would presumably be worse off.
6. If the government levies a $500 tax on luxury cars, consumers will only see a little price
rise of less than $500. Both producers and consumers pay taxes because taxes increase
the price that consumers pay and decrease the price that producers receive. The only
exceptions would be if either the supply or demand curves were totally elastic or
perfectly inelastic, in which case consumers would be responsible for paying all taxes and
their costs would rise by a precise $500.
7. a. Whether the tax is levied on producers or consumers, the outcome will be the same.
When there is no tax, the demand curve is shown in Figure below as D1 and the supply
curve as S1. If producers are subject to the tax, the supply curve will change to S2 by the
tax amount (50 cents). Thus, Q2 represents the equilibrium quantity, P2 represents the
price consumers pay, and P2 – $0.50 represents the amount producers receive. If the tax
is instead imposed on consumers, the demand curve shifts to D2 by the tax's amount (50
cents). The downward shift in the demand curve when the tax is levied on consumers is
equal in size to the upward movement in the supply curve when the tax is levied on
producers. Once more, Q2 represents the equilibrium quantity, P2 (with tax) represents
the price consumers pay, and P2 – $0.50 represents the amount producers receive.
 b. The less gasoline will be used because to this tax, the more elastic the demand curve is.
A greater reduction in supply in reaction to a rise in gas prices is indicated by a higher
demand elasticity. The figure below shows the outcome. While D2 shows an inelastic
demand curve, D1 shows an elastic demand curve. The tax will cause a greater decrease
in sales volume when demand is elastic.

c. Because they pay more for less gasoline, users of gasoline suffer as a result of the tax.
d. The tax also has an adverse effect on oil industry workers. Some workers can lose their
jobs as a result of the decreased gasoline production. Workers' wages might decrease as a
result of producers receiving less money.
8. a. The minimum wage's effects are depicted in the graph. In the absence of the minimum
wage, w1 would be equal to the market rate and Q1 workers would be hired. When the
minimum wage (mw) is set higher than w1, the market wage is mw, the total number of
employees employed is Q2, and the total number of unemployed people is Q3 minus Q2.
The area of the rectangle ABCD, which is equal to mw multiplied by Q2, represents the
entire amount paid in wages to employees.

b. A higher minimum wage would result in less employment. Demand elasticity alone
determines how much of an impact there will be on employment. Because there is a labor
excess, the supply elasticity is irrelevant.
c. Increasing the minimum wage would result in a rise in unemployment. The size of the
unemployment rate increase is dependent on both the supply and demand elasticities. The
elasticity of demand determines the change in quantity of labor required, the elasticity of
 supply determines the change in quantity of labor supplied, and the difference between
the quantities supplied and demanded of work is the unemployment rate.
d. The increase in the minimum wage would result in an increase in the total wages paid
to unskilled workers if there were an inelastic demand for their services. In a situation of
inelastic demand, the decline in employment would be less than the rise in wages, raising
total wage payments. However, as the percentage decline in employment would be
greater than the percentage gain in income, if the demand for unskilled labor were elastic,
overall wage payments would decline.
9. The whole tax burden will be placed on the team's owners because the supply of seats is
inelastic and perfect. The graph below demonstrates that the exact amount of the tax will
be deducted from the price that ticket buyers pay.

10. a. Equilibrium Price

2P = 300 - P
2P + P = 300
3P = 300
3P/3 = 300/3
P = $100
Equilibrium Quantity
= 300 - P
= 300 - 100
= 200
b. There will be a price binding if the price ceiling of $90, which is less than the price of
$100, is enforced.
Market Price = $90

Quantity Supplied
= 2P
= 2 * 90
= 180

Quantity Demanded
= 300 - P
= 300 -90
= 210
When demand exceeds supply, there is a shortage; in contrast, there is a surplus when
supply exceeds demand.

Shortage/Surplus=Quantity Demanded - Quantity Supplied

= 210 - 180
= 30 (shortage)

c. There will be no price binding if the price floor of $90, which is less than the price of
$100, is enforced.
Market Price = $100

Quantity Supplied
= 2P
= 2 * 100
= 200

Quantity Demanded
= 300 - P
= 300 - 100
= 200
Given that the quantity supplied and the quantity required, 200, are equal. Therefore,
neither a shortage nor a surplus exist.

d. The new supply curve once a $30 tax is implemented is as follows:

Qty supplied = Qty demanded

Price:
2 (P-30) = 300 - P
2P - 60 = 300 - P
2P + P = 300 + 60
3P/3 = 360/3
P= 120
Qty supplied:
= 2 (P-30)
= 2 (120 - 30)
= 2 (90)
=180
Qty demanded:
= 300 - P
= 300 - 120
= 180
Given that the quantity supplied and demanded, 180, are equal. There is neither a
shortage nor a surplus as a result.
CHAPTER 10
END OF SUMMARY
QUESTIONNAIRES
(EXTERNALITIES)
CHAPTER 4

CHAPTER QuickQuiz
1. c.
2. b.
3. a.
4. c.
5. b.
6. c.
QUESTIONS FOR REVIEW
1. Alcohol consumption, dog barking, and pollution are a few examples of negative
externalities. Restoring ancient structures, investigating cutting-edge technologies, and
providing education are a few examples of positive externalities.

2. The demand schedule explains that as price increases, the demanded quantity decreases,
and vice versa. The demand curve refers to the line connecting the points in the demand
schedule by a graph. The demand curve slope downward because of the inverse
relationship between prices and quantity demanded.

3. The demand curve for a product changes when consumer tastes change. A change in the
price of a product causes a movement along a specific demand curve, and it typically
leads to some change in the quantity demanded, but it does not shift the demand curve.

4. Pumpkin juice is considered as an inferior good. Harry's demand curve for pumpkin juice
will shift to the right.

5. A table that lists the quantity supplied at each price is called a supply schedule. A graph
that displays the amount supplied at each price is called a supply curve. Since the supply
curve is a graphical depiction of the supply schedule, it is sometimes referred to as a
supply schedule.

6. The supply curve shifts as a result of a change in producer technology. Movement along
the supply curve results from a change in price

7. When market supply and demand are in balance, prices become stable. This is known as
equilibrium. In general, a surplus of goods or services leads to lower prices, which
increases demand, whereas a shortfall or undersupply raises prices, which decreases
demand.

8. When the price of beer increases, the supply of pizza increases, the demand for pizza
declines, the quantity supplied increases, the quantity demanded decreases, and the price
of the pizza on the market increases.

9. Prices dictate three things: first, what commodities are to be created and in what
quantities; second, how the goods are to be produced; and third, who will purchase the
items.
PROBLEM AND APPLICATIONS (On paper)
CHAPTER 5
END OF SUMMARY
QUESTIONNAIRES
(ELASTICITY AND ITS
APPLICATION)
CHAPTER 5

CHAPTER QuickQuiz
1. a.
2. b.
3. d.
4. c.
5. a.
6. b.

QUESTIONS FOR REVIEW

1. . The amount by which the quantity demanded alters in response to a price change is
measured by the price elasticity of demand. The degree to which the amount demanded
alters in response to variations in consumer income is measured by the income elasticity
of demand.

2. The four determinants of the price elasticity of demand are the following:
1) Availability of substitutes
2) If the good is a luxury or a necessity
3) The proportion of income spent on the good
4) How much time has elapsed since the time the price changed.

3. If the elasticity is greater than 1, it means that the demand is elastic. If the elasticity
equals zero, the demand is inelastic.

4. When the amount given and needed are equal, equilibrium has been attained. The sum
that a manufacturer makes from the sale of several commodities is referred to as total
income.

5. Total revenue will fall with a price rise whereas total revenue will increase with a price
decrease.

6. A good with an income elasticity less than zero is considered an inferior good and has
negative income elasticity.
 7. The price elasticity is calculated by dividing the percentage change in quantity supplied
by the percentage change in price.

8. The price elasticity of supply is zero, if a fixed quantity of a good is available and no
more can be made.

9. The storm that caused the destruction of half of the fava bean crop is more likely to hurt
fava bean farmers if the demand for fava beans is very elastic.

PROBLEM AND APPLICATIONS (On paper)