Solutions to text problems: Chapter 6 Quick Quizzes



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SOLUTIONS TO TEXT PROBLEMS: Chapter 6
Quick Quizzes
1. A price ceiling is a legal maximum on the price at which a good can be sold. Examples of price ceilings include rent control, price controls on gasoline in the 1970s, and price ceilings on water during a drought. A price floor is a legal minimum on the price at which a good can be sold. Examples of price floors include the minimum wage and farm-support prices. A price ceiling leads to a shortage, if the ceiling is binding, because suppliers won’t produce enough goods to meet demand unless the price is allowed to rise above the ceiling. A price floor leads to a surplus, if the floor is binding, because suppliers produce more goods than are demanded unless the price is allowed to fall below the floor.
2. With no tax, as shown in Figure 1, the demand curve is D1 and the supply curve is S. The equilibrium price is P1 and the equilibrium quantity is Q1. If the tax is imposed on car buyers, the demand curve shifts down by the amount of the tax ($1000) to D2. The downward shift in the demand curve leads to a decline in the equilibrium price to P2 (the amount received by sellers from buyers) and a decline in the equilibrium quantity to Q2. The price received by sellers declines by P1 P2, shown in the figure as  PS. Buyers pay a total of P2 + $1,000, an increase in what they pay of P2 + $1,000 - P1, shown in the figure as  PB.

Figure 1
If the tax is imposed on car sellers, as shown in Figure 2, the supply curve shifts up by the amount of the tax ($1000) to S2. The upward shift in the supply curve leads to a rise in the equilibrium price to P2 (the amount received by sellers from buyers) and a decline in the equilibrium quantity to Q2. The price paid by buyers declines by P1 - P2, shown in the figure as PB. Sellers receive P2 and pay taxes of $1,000, receiving on net P2 - $1,000, a dcrease in what they receive by P1 - (P2 - $1,000), shown in the figure as PS.
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