ECON104 Macroeconomics Analysis (Homework Ch 6)

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1. The language of price controls

Suppose that, in a competitive market without government regulations, the equilibrium price of gasoline is $3.00 per gallon.

Complete the following table by indicating whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding.

2. Price controls in the Florida orange market

The following graph shows the annual market for Florida oranges, which are sold in units of 90-pound boxes.

Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph.

Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

In this market, the equilibrium price ____ per box, and the equilibrium quantity of oranges is ____ million boxes.

For each of the prices listed in the following table, determine the quantity of oranges demanded, the quantity of oranges supplied, and the direction of pressure exerted on prices in the absence of any price controls.

True or False: A price ceiling above $25 per box is not a binding price ceiling in this market.

True

False

Because it takes many years before newly planted orange trees bear fruit, the supply curve in the short run is almost vertical. In the long run, farmers can decide whether to plant oranges on their land, to plant something else, or to sell their land altogether. Therefore, the long-run supply of oranges is much more price sensitive than the short-run supply of oranges.

Assuming that the long-run demand for oranges is the same as the short-run demand, you would expect a binding price ceiling to result in a ____ that is ____ in the long run than in the short run.

3. Effects of rent control

Rent controls force landlords to price apartments below the equilibrium price level. An immediate effect is a shortage (excess demand) of apartments, because the quantity of apartments demanded is greater than the quantity supplied at the regulated price.

When cities prevent landlords from charging market rents, which of the following are common long-run outcomes? Check all that apply.

Efficient use of housing space results.

Landlords earn lower profits from renting housing units, but the rent charged has no effect on either the quantity or quality of rental units.

The quality of rental housing units falls.

The future supply of rental housing units increases.

4. Minimum wage legislation

The following graph shows the labor market in the fast-food industry in the fictional town of Supersize City.

Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph.

Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

In this market, the equilibrium hourly wage is _____, and the equilibrium quantity of labor is _____ thousand workers.

Suppose a senator introduces a bill to legislate a minimum hourly wage of $6. This type of price control is called a ____.

For each of the wages listed in the following table, determine the quantity of labor demanded, the quantity of labor supplied, and the direction of pressure exerted on wages in the absence of any price controls.

True or False: A minimum wage above $10 per hour is a binding minimum wage in this market.

• True
• False

5. Calculating tax incidence

Suppose that the U.S. government decides to charge cola consumers a tax. Before the tax, 40,000 cases of cola were sold every week at a price of $7 per case. After the tax, 34,000 cases of cola are sold every week; consumers pay $8 per case (including the tax), and producers receive $4 per case.

The amount of the tax on a case of cola is ___ per case. Of this amount, the burden that falls on consumers is ____ per case, and the burden that falls on producers is _____ per case.

True or False: The effect of the tax on the quantity sold would have been smaller if the tax had been levied on producers.

• True
• False

6. Who should pay the tax?

The following graph shows the labor market for research assistants in the fictional country of Academia. The equilibrium wage is $10 per hour, and the equilibrium number of research assistants is 100.

Suppose the government has decided to institute a $4-per-hour payroll tax on research assistants and is trying to determine whether the tax should be levied on the employer, the workers, or both (such that half the tax is collected from each side).

Use the graph input tool to evaluate these three proposals. Entering a number into the Tax Levied on Employers field (initially set at zero dollars per hour) shifts the demand curve down by the amount you enter, and entering a number into the Tax Levied on Workers field (initially set at zero dollars per hour) shifts the supply curve up by the amount you enter. To determine the before-tax wage for each tax proposal, adjust the amount in the Wage field until the quantity of labor supplied equals the quantity of labor demanded. You will not be graded on any changes you make to this graph.

Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

For each of the proposals, use the previous graph to determine the new number of research assistants hired. Then compute the after-tax amount paid by employers (that is, the wage paid to workers plus any taxes collected from the employers) and the after-tax amount earned by research assistants (that is, the wage received by workers minus any taxes collected from the workers).

Suppose the government doesn’t want to discourage employers from hiring research assistants and, therefore, wants to minimize the share of the tax paid by the employers. Of the three tax proposals, which is best for accomplishing this goal?

The proposal in which the entire tax is collected from workers

The proposal in which the tax is collected from each side evenly

The proposal in which the tax is collected from employers

None of the proposals is better than the others

7. Effect of a tax on buyers and sellers

The following graph shows the daily market for jeans. Suppose the government institutes a tax of $40.60 per pair. This places a wedge between the price buyers pay and the price sellers receive

Fill in the following table with the quantity sold, the price buyers pay, and the price sellers receive before and after the tax.

Using the data you entered in the previous table, calculate the tax burden that falls on buyers and on sellers, respectively, and calculate the price elasticity of demand and supply over the relevant ranges using the midpoint method. Enter your results in the following table.

The burden of the tax falls more heavily on the _____ elastic side of the market.

7. Effect of a tax on buyers and sellers

The following graph shows the daily market for jeans. Suppose the government institutes a tax of $40.60 per pair. This places a wedge between the price buyers pay and the price sellers receive.

Fill in the following table with the quantity sold, the price buyers pay, and the price sellers receive before and after the tax.

Using the data you entered in the previous table, calculate the tax burden that falls on buyers and on sellers, respectively, and calculate the price elasticity of demand and supply over the relevant ranges using the midpoint method. Enter your results in the following table.

The burden of the tax falls more heavily on the ____ elastic side of the market.

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This set of mobile-enabled problems (powered by Aplia) covers the consequences of price ceilings and price floors by comparing the free-market equilibrium price and quantity with price and quantity outcomes when controls are binding or nonbinding. It also covers the effects of a tax on a market and how elasticities relate to the tax burden on buyers and sellers.