Chapter 6 - M/C with answers PDF

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Chapter 6 Supply, Demand, and Government Policies TRUE/FALSE 1. Economic policies often have effects that their architects did not intend or anticipate. ANS: T

2. Rent-control laws dictate a minimum rent that landlords may charge tenants. ANS: F

3.

Minimum-wage laws dictate the lowest wage that firms may pay workers.

ANS: T

4.

Price controls are usually enacted when policymakers believe that the market price of a good or service is unfair to buyers or sellers. ANS: T

5.

Price controls can generate inequities.

ANS: T

6.

Policymakers use taxes to raise revenue for public purposes and to influence market outcomes.

ANS: T

7.

If a good or service is sold in a competitive market free of government regulation, then the price of the good or service adjusts to balance supply and demand.

ANS: T

8.

At the equilibrium price, the quantity that buyers want to buy exactly equals the quantity that sellers want to sell. ANS: T

9. A price ceiling is a legal minimum on the price at which a good or service can be sold. ANS: F

10. A price ceiling set above the equilibrium price is not binding. ANS: T

115

116 11.

Chapter 6/Supply, Demand, and Government Policies If a price ceiling is not binding, then it will have no effect on the market.

ANS: T

12. To be binding, a price ceiling must be set above the equilibrium price. ANS: F

13. A price ceiling set below the equilibrium price is binding. ANS: T

14. A price ceiling set below the equilibrium price causes quantity demanded to exceed quantity supplied. ANS: T

15.

A price ceiling set above the equilibrium price causes quantity demanded to exceed quantity supplied.

ANS: F

16.

A binding price ceiling causes quantity demanded to be less than quantity supplied.

ANS: F

17. A price ceiling set below the equilibrium price causes a shortage in the market. ANS: T

18. A price ceiling set above the equilibrium price causes a surplus in the market. ANS: F

19.

A binding price ceiling causes a shortage in the market.

ANS: T

20.

When a binding price ceiling is imposed on a market for a good, some people who want to buy the good cannot do so. ANS: T

21.

Long lines and discrimination are examples of rationing methods that may naturally develop in response to a binding price ceiling. ANS: T

22. Price ceilings are typically imposed to benefit buyers. ANS: T

Chapter 6/Supply, Demand, and Government Policies 23.

117

Binding price ceilings benefit consumers because they allow consumers to buy all the goods they demand at a lower price.

ANS: F

24.

All buyers benefit from a binding price ceiling.

ANS: F

25.

A binding price ceiling may not help all consumers, but it does not hurt any consumers.

ANS: F

26.

When the government imposes a binding price ceiling on a competitive market, a surplus of the good arises, and sellers must ration the scarce goods among the large number of potential buyers.

ANS: F

27.

The rationing mechanisms that develop under binding price ceilings are usually inefficient.

ANS: T

28. Price is the rationing mechanism in a free, competitive market. ANS: T

29. Prices are inefficient rationing devices. ANS: F

30. When free markets ration goods with prices, it is both efficient and impersonal. ANS: T

31.

When a free market for a good reaches equilibrium, anyone who is willing and able to pay the market price can buy the good. ANS: T

32.

If a price ceiling of $2 per gallon is imposed on gasoline, and the market equilibrium price is $1.50, then the price ceiling is a binding constraint on the market.

ANS: F

33.

If a price ceiling of $1.50 per gallon is imposed on gasoline, and the market equilibrium price is $2, then the price ceiling is a binding constraint on the market.

ANS: T

118

Chapter 6/Supply, Demand, and Government Policies

34. A price ceiling caused the gasoline shortage of 1973 in the United States. ANS: T

35. One common example of a price ceiling is rent control. ANS: T

36. The goal of rent control is to help the poor by making housing more affordable. ANS: T

37.

Economists argue that rent control is a highly efficient way to help the poor raise their standard of living.

ANS: F

38.

Because supply and demand are inelastic in the short run, the initial shortage caused by rent control is large.

ANS: F

39. The primary effect of rent control in the short run is to reduce rents. ANS: T

40.

The housing shortages caused by rent control are larger in the long run than in the short run because both the supply of housing and the demand for housing are more elastic in the long run. ANS: T

41. The effects of rent control in the long run include lower rents and lower-quality housing. ANS: T

42.

Rent control may lead to lower rents for those who find housing, but the quality of the housing may also be lower. ANS: T

43.

In a free market, the price of housing adjusts to eliminate the shortages that give rise to undesirable landlord behavior.

ANS: T

44. A price floor is a legal minimum on the price at which a good or service can be sold. ANS: T

Chapter 6/Supply, Demand, and Government Policies 45.

119

A price floor set above the equilibrium price is not binding.

ANS: F

46. If a price floor is not binding, then it will have no effect on the market. ANS: T

47. To be binding, a price floor must be set above the equilibrium price. ANS: T

48.

A price floor set below the equilibrium price is binding.

ANS: F

49.

A price floor set below the equilibrium price causes quantity supplied to exceed quantity demanded.

ANS: F

50. A price floor set above the equilibrium price causes quantity supplied to exceed quantity demanded. ANS: T

51. A binding price floor causes quantity supplied to be less than quantity demanded. ANS: F

52. A price floor set below the equilibrium price causes a surplus in the market. ANS: F

53. A price floor set above the equilibrium price causes a surplus in the market. ANS: T

54.

A binding price floor causes a shortage in the market.

ANS: F

55.

When a binding price floor is imposed on a market for a good, some people who want to sell the good cannot do so.

ANS: T

56.

Discrimination is an example of a rationing mechanism that may naturally develop in response to a binding price floor. ANS: T

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Chapter 6/Supply, Demand, and Government Policies

57. Price floors are typically imposed to benefit buyers. ANS: F

58. Binding price floors benefit sellers because they allow sellers to sell all the goods they want at a higher price. ANS: F

59. Not all sellers benefit from a binding price floor. ANS: T

60.

A binding price floor may not help all sellers, but it does not hurt any sellers.

ANS: F

61.

The rationing mechanisms that develop under binding price floors are usually efficient.

ANS: F

62.

When a free market for a good reaches equilibrium, anyone who is willing and able to sell at the market price can sell the good.

ANS: T

63.

If the equilibrium price of an airline ticket is $400 and the government imposes a price floor of $500 on airline tickets, then fewer airline tickets will be sold than at the market equilibrium. ANS: T

64.

If the equilibrium price of an airline ticket is $500 and the government imposes a price floor of $400 on airline tickets, then fewer airline tickets will be sold than at the market equilibrium.

ANS: F

65. One common example of a price floor is the minimum wage. ANS: T

66. The goal of the minimum wage is to ensure workers a minimally adequate standard of living. ANS: T

67.

The United States is the only country in the world with minimum-wage laws.

ANS: F

Chapter 6/Supply, Demand, and Government Policies 68. States in the U.S. may mandate minimum wages above the federal level. ANS: T

69. In the labor markets, workers determine the supply of labor and firms determine the demand. ANS: T

70.

In an unregulated labor market, the wage adjusts to balance labor supply and labor demand.

ANS: T

71. A binding minimum wage causes the quantity of labor demanded to exceed the quantity of labor supplied. ANS: F

72.

A binding minimum wage creates unemployment.

ANS: T TOP: Minimum wage | Unemployment 73.

A binding minimum wage may not help all workers, but it does not hurt any workers.

ANS: F

74.

A binding minimum wage raises the incomes of those workers who have jobs, but it lowers the incomes of workers who cannot find jobs.

ANS: T

75. The economy contains many labor markets for different types of workers. ANS: T

76. The impact of the minimum wage depends on the skill and experience of the worker. ANS: T

77.

Workers with high skills and much experience are not typically affected by the minimum wage.

ANS: T

78. The minimum wage has its greatest impact on the market for teenage labor. ANS: T

79.

The minimum wage is more often binding for teenagers than for other members of the labor force.

ANS: T

121

122 80.

Chapter 6/Supply, Demand, and Government Policies Studies by economists have found that a 10 percent increase in the minimum wage decreases teenage employment 10 percent.

ANS: F

81. A large majority of economists favor eliminating the minimum wage. ANS: F

82.

Advocates of the minimum wage admit that it has some adverse effects, but they believe that these effects are small and that a higher minimum wage makes the poor better off.

ANS: T

83.

If the equilibrium wage is $4 per hour and the minimum wage is $5.15 per hour, then a shortage of labor will exist. ANS: F

Figure 6-17 pri ce 100 S 90 80 70 60 50 40 30 20 10 D 10

20

30

40

50

60

70

80

90 10 0

q uant it

84. Refer to Figure 6-17. A price ceiling set at $30 would result in a shortage of 20 units. ANS: F

85. Refer to Figure 6-17. A price ceiling set at $70 would result in a shortage of 40 units. ANS: F

86. Refer to Figure 6-17. A price floor set at $60 would result in a surplus of 20 units. ANS: T

87.

Refer to Figure 6-17. A price floor set at $40 would result in a surplus of 20 units.

ANS: F

Chapter 6/Supply, Demand, and Government Policies 88.

123

Most economists are in favor of price controls as a way of allocating resources in the economy.

ANS: F

89.

When policymakers set prices by legal decree, they obscure the signals that normally guide the allocation of society’s resources.

ANS: T

90. Price controls often hurt those they are trying to help. ANS: T

91.

Rent subsidies and wage subsidies are better than price controls at helping the poor because they have no costs associated with them. ANS: F

92.

The term tax incidence refers to how the burden of a tax is distributed among the various people who make up the economy.

ANS: T

93. A tax on sellers shifts the supply curve but not the demand curve. ANS: T

94. A tax on sellers shifts the supply curve to the left. ANS: T

95.

A tax on sellers increases supply.

ANS: F

96. A tax on sellers and an increase in input prices affect the supply curve in the same way. ANS: T

97.

A tax of $1 on sellers shifts the supply curve upward by exactly $1.

ANS: T

98. A tax of $1 on sellers always increases the equilibrium price by $1. ANS: F

124 99.

Chapter 6/Supply, Demand, and Government Policies A tax on sellers reduces the size of a market.

ANS: T

100. A tax on sellers increases the quantity of the good sold in the market. ANS: F

101. If a tax is imposed on the sellers of a product, then the tax burden will fall entirely on the sellers. ANS: F

102. A tax on sellers usually causes buyers to pay more the good and sellers to receive less for the good than they did before the tax was levied. ANS: T

103. A tax on buyers shifts the demand curve and the supply curve. ANS: F

104. A tax on buyers shifts the demand curve to the right. ANS: F

105. A tax on buyers decreases demand. ANS: T

106. A tax of $1 on buyers shifts the demand curve downward by exactly $1. ANS: T

107. A tax of $1 on buyers always decreases the equilibrium price by $1. ANS: F

108. A tax on buyers increases the size of a market. ANS: F

109. A tax on buyers decreases the quantity of the good sold in the market. ANS: T

110. If a tax is imposed on the buyers of a product, then the tax burden will fall entirely on the buyers. ANS: F

Chapter 6/Supply, Demand, and Government Policies

125

111. A tax on buyers usually causes buyers to pay more the good and sellers to receive less for the good than they did before the tax was levied. ANS: T

112. Whether a tax is levied on sellers or buyers, taxes discourage market activity. ANS: T

113. Whether a tax is levied on sellers or buyers, taxes encourage market activity. ANS: F

114. Whether a tax is levied on sellers or buyers, buyers and sellers usually share the burden of taxes. ANS: T

115. Taxes levied on sellers and taxes levied on buyers are equivalent. ANS: T

116. The wedge between the buyers’ price and the sellers’ price is the same, regardless of whether the tax is levied on buyers or sellers. ANS: T

117. The tax incidence depends on whether the tax is levied on buyers or sellers. ANS: F

118. Lawmakers can decide whether the buyers or the sellers must send a tax to the government, but they cannot legislate the true burden of a tax. ANS: T

119. A tax on golf clubs will cause buyers of golf clubs to pay a higher price, sellers of golf clubs to receive a lower price, and fewer golf clubs to be sold. ANS: T

120. FICA is an example of a payroll tax, which is a tax on the wages that firms pay their workers. ANS: T

126

Chapter 6/Supply, Demand, and Government Policies

121. Since half of the FICA tax is paid by firms and the other half is paid by workers, the burden of the tax must fall equally on firms and workers. ANS: F

122. Buyers and sellers always share the burden of a tax equally. ANS: F

123. Buyers and sellers rarely share the burden of a tax equally. ANS: T

124. Who bears the majority of a tax burden depends on whether the tax is placed on the buyers or the sellers. ANS: F

125. Who bears the majority of a tax burden depends on the relative elasticity of supply and demand. ANS: T

126. If the demand curve is very elastic and the supply curve is very inelastic in a market, then the sellers will bear a greater burden of a tax imposed on the market, even if the tax is imposed on the buyers. ANS: T

127. If the demand curve is very inelastic and the supply curve is very elastic in a market, then the sellers will bear a greater burden of a tax imposed on the market, even if the tax is imposed on the buyers. ANS: F

128. A tax burden falls more heavily on the side of the market that is less elastic. ANS: T

129. The tax burden falls more heavily on the side of the market that is more inelastic. ANS: T

130. A tax on a market with elastic demand and elastic supply will shrink the market more than a tax on a market with inelastic demand and inelastic supply will shrink the market. ANS: T

131. Most labor economists believe that the supply of labor is much more elastic than the demand. ANS: F

Chapter 6/Supply, Demand, and Government Policies

127

132. Workers, rather than firms, bear most of the burden of the payroll tax. ANS: T

133. Most of the burden of a luxury tax falls on the middle class workers who produce luxury goods rather than on the rich who buy them. ANS: T

Sec00 - Supply, Demand, and Government Policies MULTIPLE CHOICE 1.

Which of the following is not correct? a. Economists have two roles: scientist and policy adviser. b. As scientists, economists develop and test theories to explain the world around them. c. Economic policies rarely have effects that their architects did not intend or anticipate. d. As policy advisers, economists use their theories to help change the world for the better.

ANS: C

2.

Rent-control laws dictate a. the exact rent that landlords must charge tenants. b. a maximum rent that landlords may charge tenants. c. a minimum rent that landlords may charge tenants. d. a minimum rent and a maximum rent that landlords may charge tenants.

ANS: B

3.

Minimum-wage laws dictate a. the exact wage that firms must pay workers. b. a maximum wage that firms may pay workers. c. a minimum wage that firms may pay workers. d. a minimum wage and a maximum wage that firms may pay workers.

ANS: C

4.

Price controls are usually enacted a. as a means of raising revenue for public purposes. b. when policymakers believe that the market price of a good or service is unfair to buyers or sellers. c. when policymakers detect inefficiencies in a market. d. All of the above are correct.

ANS: B

128 5.

Chapter 6/Supply, Demand, and Government Policies The presence of a price control in a market for a good or service usually is an indication that a. an insufficient quantity of the good or service was being produced in that market to meet the public’s need. b. the usual forces of supply and demand were not able to establish an equilibrium price in that market. c. policymakers believed that the price that prevailed in that market in the absence of price controls was unfair to buyers or sellers. d. policymakers correctly believed that, in that market, price controls would generate no inequities of their own.

ANS: C

6.

Price controls a. always produce a fair outcome. b. always produce an efficient outcome. c. can generate inequities of their own. ...