Price Controls Review SheetQuestion 1:Question 2:Taxes HWQuestion 3Figure 6-13The vertical distance between points A and B represents the tax in the market.Refer to Figure 6-13. The per-unit burden of the tax on sellers isQuestion 4Refer to Figure 6-9. How much tax revenue does this tax generate for the government? (hint:draw the tax wedge from the new equilibrium point up to where it hits the original demand curve.This will give you the price that buyers pay and the price that sellers receive.)Question 5Suppose sellers of liquor are required to send $1.00 to the government for every bottleof liquor they sell. Further, suppose this tax causes the price paid by buyers of liquor torise by $0.60 per bottle. Which of the following statements is correct?
The effective price received by sellers is $0.40 per bottle less than it was before the tax.
Sixty percent of the burden of the tax falls on sellers.
This tax causes the demand curve for liquor to shift downward by $1.00 at each quantityof liquor.
All of the above are correct.Question 6When a tax is placed on the sellers of a product, the
size of the market decreases.
effective price received by sellers decreases and the price paid by buyers increases.
supply of the product decreases.
All of the above are correct.Question 7When a tax is placed on the sellers of cell phones,
the size of the cell phone market and the effective price received by sellers bothincrease.
the size of the cell phone market increases, but the effective price received by sellersdecreases.
the size of the cell phone market decreases, but the effective price received by sellersincreases.
the size of the cell phone market and the effective price received by sellers bothdecrease.Question 8Draw a supply and demand diagram for the market for beer (demand is very inelasticand supply is more elastic). (3 points)On your graph show an equilibrium price of $10 and an equilibrium quantity of 100m. (1point)Draw a tax wedge showing a $3 tax that causes the price that buyers pay to increase to$12.50. (2 points)Calculate how much sellers will receive after the tax and add it to your graph. (2 points)What will happen to the quantity exchanged in the market? Make up a quantity and addit to your graph (1 point)Explain what would happen to the quantity if demand had been more elastic? (2 points)Question 9Explain in your own words how the relative elasticity of demand determines who will pay thelarger portion of a tax (buyers or sellers). For example, who will pay more when demand isrelatively elastic? Who will pay more when demand is relatively inelastic?Question 10When a tax is imposed on a market the price that buyers pay will always stay the same ,the price that sellers receive will always increase ,the quantity exchanged in the market will always decrease ,and the difference between the price that buyers pay and the price that sellers receivewill always be equal to equilibrium priceQuestion 11In the late 18th century, the price of bread in New York City was controlled, set at aprice above the market price.a. Draw a diagram showing the effect of the policy. Did the policy act as a price ceilingor price floor? (4 points)b. Explain at least 3 of the likely unintended consequences of the price control. (4points)Question 12Over the past decade, many American candy companies opened factories in Mexicoand Canada to produce candy that is then shipped back to the United States for sale.Explain how U.S. price supports (price floors) for the sugar industry may haveencouraged these moves.Question 13:If a government decides to make health insurance affordable by requiring all healthinsurance companies to cut their prices by 30%, explain what will probably happen tothe number of people covered by health insurance.Question 14:Thinking about the effects of price controls, are you in favor of setting a $2 per gallonprice ceiling on gasoline? What are some of the pros and cons? Explain your answer.
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