ECO182: CUMULATIVE EXAM QUESTIONS AND ANSWERS
WITH COMPLETE SOLUTIONS VERIFIED LATEST UPDATE
Price controls
legal restrictions on how high or low a market price may go
Price ceiling
a maximum price sellers are allowed to charge for a good or service (usually set below
equilibrium)
if below equilibrium —> shortage
Price floor
a minimum price buyers are required to pay for a good or service (usually set above
equilibrium)
if above equilibrium —> surplus
Price ceilings cause predictable side effect
~ inefficiently low quantity
~ inefficient allocation to customers
~ wasted resources
~ inefficiently low quality
~ black markets
Price floors cause predictable side effects
,~ deadweight loss
~ inefficient allocation of sales among sellers
~ wasted resources
~ inefficiently high quality
~ temptation to break the law by selling below the legal price
Governments sometimes control ________ instead of __________
quantity; price
Quota
an upper limit, set by the government, on the quantity of some good that can be bought
or sold; also referred to as a quantity control.
License
the right, conferred by the government, to supply a good
Demand price
the price of a given quantity at which consumers will demand that quantity
Supply price
the price of a given quantity at which producers will supply that quantity
The wedge
the difference between the demand price and the supply price at the quota
equal to the market price of the license when the license is traded
Taxes drive a wedge between
the price buyers pay and the price sellers receive
, When the price elasticity of demand is low and the price elasticity of supply is
high
the burden of an excise tax falls mainly on consumers
When the price elasticity of demand is high and the price elasticity of supply is
low
the burden of an excise tax falls mainly on producers
The Omnibus Budget Reconciliation Act of 1990
applied a 10% federal luxury tax to the retail sale of luxury goods like pleasure boats
with a sales price above $100,000.
If demand of some good is more elastic than supply and a tax is imposed on the
consumption of the good, who will bear more of the burden of the tax
producers, because consumers have a greater ability to change their behavior in
response to the tax
Junk food has been criticized for being too cheap, enticing the poor to adopt
unhealthful lifestyles. Suppose that the city of Bu↵alo imposes a tax on junk
food. What has to be true for the tax to deter most people from eating junk food:
Should junk food demand be elastic, or should it be inelastic
demand should be elastic
If the elasticities of both supply and demand are low
the tax increase won't reduce the quantity of the good sold very much, so tax revenue
will definitely rise.
If the elasticities are high enough
the tax reduces the quantity so much that tax revenue falls
WITH COMPLETE SOLUTIONS VERIFIED LATEST UPDATE
Price controls
legal restrictions on how high or low a market price may go
Price ceiling
a maximum price sellers are allowed to charge for a good or service (usually set below
equilibrium)
if below equilibrium —> shortage
Price floor
a minimum price buyers are required to pay for a good or service (usually set above
equilibrium)
if above equilibrium —> surplus
Price ceilings cause predictable side effect
~ inefficiently low quantity
~ inefficient allocation to customers
~ wasted resources
~ inefficiently low quality
~ black markets
Price floors cause predictable side effects
,~ deadweight loss
~ inefficient allocation of sales among sellers
~ wasted resources
~ inefficiently high quality
~ temptation to break the law by selling below the legal price
Governments sometimes control ________ instead of __________
quantity; price
Quota
an upper limit, set by the government, on the quantity of some good that can be bought
or sold; also referred to as a quantity control.
License
the right, conferred by the government, to supply a good
Demand price
the price of a given quantity at which consumers will demand that quantity
Supply price
the price of a given quantity at which producers will supply that quantity
The wedge
the difference between the demand price and the supply price at the quota
equal to the market price of the license when the license is traded
Taxes drive a wedge between
the price buyers pay and the price sellers receive
, When the price elasticity of demand is low and the price elasticity of supply is
high
the burden of an excise tax falls mainly on consumers
When the price elasticity of demand is high and the price elasticity of supply is
low
the burden of an excise tax falls mainly on producers
The Omnibus Budget Reconciliation Act of 1990
applied a 10% federal luxury tax to the retail sale of luxury goods like pleasure boats
with a sales price above $100,000.
If demand of some good is more elastic than supply and a tax is imposed on the
consumption of the good, who will bear more of the burden of the tax
producers, because consumers have a greater ability to change their behavior in
response to the tax
Junk food has been criticized for being too cheap, enticing the poor to adopt
unhealthful lifestyles. Suppose that the city of Bu↵alo imposes a tax on junk
food. What has to be true for the tax to deter most people from eating junk food:
Should junk food demand be elastic, or should it be inelastic
demand should be elastic
If the elasticities of both supply and demand are low
the tax increase won't reduce the quantity of the good sold very much, so tax revenue
will definitely rise.
If the elasticities are high enough
the tax reduces the quantity so much that tax revenue falls
