Chapter 6 (Supply, Demand, and Government Policies)

Section A:
1. d 2. b 3. b 4. c
5. c 6. c 7. b 8. c
9. c
Section B:
Q 1: Using the graph shown, answer the following questions.
a. What was the equilibrium price in this market before the tax?
The equilibrium price in this market before the tax was $10.
b. What is the amount of the tax?
The amount of the tax is $2.
c. How much of the tax will the buyers pay?
The buyers will pay $1 of the tax.
d. How much of the tax will the sellers pay?
The sellers will pay $1 of the tax.
e. How much will the buyer pay for the product after the tax is imposed?
The buyer will pay $11 for the product after the tax is imposed.
f. How much will the seller receive after the tax is imposed?
The seller will receive $9 after the tax is imposed.
g. As a result of the tax, what has happened to the level of market activity?
As a result of the tax, the level of market activity has decreased from 100 to 90.
Q 2: Using the graph shown, answer the following questions.
What was the equilibrium price in this market before the tax?
The equilibrium price in this market before the tax was $10.00.
What is the amount of the tax?
The amount of the tax is $2.50.
How much of the tax will the buyers pay?
The buyers will pay $12.50 for the product after the tax is imposed.
How much of the tax will the sellers pay?
The sellers will receive $7.50 after the tax is imposed.
How much will the buyer pay for the product after the tax is imposed?
The buyer will pay $12.50 for the product after the tax is imposed.
How much will the seller receive after the tax is imposed?
The seller will receive $7.50 after the tax is imposed.
As a result of the tax, what has happened to the level of market activity?
As a result of the tax, the level of market activity has decreased from 100 to 80.

Price
Swith tax

$12.50

$10.00
$7.50

Quantity
80 100
Q 3:

Using the graph shown, analyze the effect a RM 300 price ceiling would have on the
market for ten-speed bicycles. Would this be a binding price ceiling?
A RM 300 price ceiling on the market for ten-speed bicycles would be below the equilibrium
price. This would be a binding price ceiling because it is set below the market-clearing
price. This would lead to a shortage of ten-speed bicycles as the quantity demanded would
exceed the quantity supplied at this price.
Using the graph shown, analyze the effect a RM 700 price floor would have on this
market. Would this be a binding price floor?
A RM 700 price floor on this market would be above the equilibrium price. This would be
a binding price floor because it is set above the market-clearing price. This would lead to a
surplus of ten-speed bicycles as the quantity supplied would exceed the quantity demanded at
this price.
Why would policymakers choose to impose a price ceiling or price floor?
Policymakers might choose to impose a price ceiling or price floor for various reasons.
A price ceiling is often used when policymakers believe that the market price of a good or
service is too high and wish to protect consumers from high prices. Conversely, a price
floor is often used when policymakers believe that the market price is too low and wish to
protect producers by ensuring they receive a minimum amount for their product or service.
However, these interventions can lead to inefficiencies in the market, such as shortages or
surpluses.

Price (RM/unit))
S

700

500

300

D
Quantity

300 500 700