Government Action in Market

What is the market outcome if a rent ceiling is set above the equilibrium rent for housing?

The equilibrium rent will prevail as long as all else remains constant.

What is the name of the time spent looking for someone with whom to do business?

search activity

Refer to Figure 6.1.1. When the demand for rental housing is D1, and a rent ceiling is set at $150 per room, what is the highest rent that would be willingly paid if illegal trading takes place?

$200 a month

Refer to Figure 6.1.2, which shows the market for a good in which the price ceiling is set at $10 per unit. If the price ceiling is strictly enforced, what would be the maximum price willingly paid for the good if illegal trading develops?

$20

Refer to Table 6.1.1, which gives the demand schedule and the supply schedule for the apartment market in Anytown, Alberta. If a rent ceiling of $600 is imposed in the apartment market, what happens in the apartment market?

60 apartments will be supplied.

When is a rent ceiling inefficient?

A rent ceiling is inefficient when it

creates a deadweight loss.

Which of the following events will decrease the deadweight loss from a rent ceiling set below the equilibrium rent?

raising the rent ceiling

According to the fair result view of fairness, what is a fair outcome in the housing market?

A fair outcome

is one that allocates scarce housing resources to the poorest.

How does first-come, first-served allocate scarce housing?

It allocates the housing to those

whose names are on waiting lists.

Refer to Figure 6.2.1, which shows the labour market. What is the equilibrium wage rate per hour in an unregulated market?

$8 per hour

Refer to Figure 6.2.1, which shows the labour market. If the government set the minimum wage rate at $4 per hour, what is the unemployment (in millions of hours) created?

0

The minimum wage rate is set at $15 an hour and 10 million hours of labour are unemployed. If the demand for labour increases and the wage rate rises to $17 per hour, what happens in the labour market?

The wage rate is $17 an hour and unemployment falls to zero.

Refer to Table 6.2.1, which gives the supply and demand schedules for teenage labour in Genoa City, and the Genoa City Council has set a minimum wage at $16 per hour. If a new fast-food restaurant opens and increases the quantity demanded of teenage labour for 400 hours per week at each wage rate, what happens in the market for teenage labour?

The wage rate remains at $16 per hour, but teenage unemployment disappears.

How does a minimum wage set above the equilibrium wage rate influence the market outcome?

Unemployment increases.

The market equilibrium wage rate is $10 an hour, when the government sets a minimum wage rate. What happens in this labour market?

The minimum wage rate is a price ________ that will change the quantity of employment if it is set at ________ an hour.

floor; $12

Which one of the following statements is false?

A minimum wage rate set above the equilibrium wage rate

is a fair wage.

When the government set a price floor for corn, which is above the equilibrium price of corn, which of the following events occurs in the market?

A deadweight loss is created.

The government has set a minimum wage above the market equilibrium wage rate. How does the gap between the minimum wage rate and the market equilibrium wage influence the market outcome?

The closer the minimum wage is to the market equilibrium wage rate

the greater is total surplus.

When a minimum wage frustrates the market mechanism, which of the following situations arises at the quantity of labour employed?

At the quantity of labour employed,

the marginal social benefit exceeds the marginal social cost.

Refer to Figure 6.3.1, which shows the market for frisbees before and after a tax is imposed. What is the buyer's share of the tax on each frisbee?

$0.60

A $10 per-unit tax on game consoles raises the price paid by consumers by $5 per console. The quantity sold before the tax was 5,000 per year. What is the tax revenue?

less than $50,000 per year

Refer to Table 6.3.1, which shows the demand and supply schedules for a good that is not taxed. If the government now taxes this good $2 per unit, what is the seller's share of the tax?

$1.00

Refer to Figure 6.3.2, which shows the market for a good before and after a tax is imposed. What is the government's revenue from the tax on the good?

$400

When the demand for vitamins is elastic, but not perfectly elastic, and the supply is inelastic, but not perfectly inelastic, who pays the tax on vitamins?

Sellers pay most of the tax.

When does the tax on a good not influence the price of the good?

When the demand for the good is perfectly elastic.

Refer to Figure 6.3.3, in which the government plans to introduce a sales tax of $1 per unit. Suppose a tax of $1 is imposed. In which market would the buyer pay the highest portion of the tax?

(d)

Why do governments prefer to tax items that have inelastic demands?

Taxes on items with inelastic demands generate the most tax revenues.

If the demand for a good is perfectly elastic, who pays the tax on the good?

The tax is paid

completely by the sellers.

In a graph of the market for a service, when the government imposes a sales tax on the service, what changes occur in the graph?

The quantity of the service bought occurs where the vertical gap between the demand curve and the supply curve equals the tax.

What is a production quota?

It is the largest quantity of a good that the government allows to be produced in a given period.

What is the effect of a production quota set below the market equilibrium quantity?

The price rises and the marginal social cost of production decreases.

How does an enforced production quota influence the market outcome?

The price rises, and the market is inefficient.

How does an enforced production quota on maple syrup production influence the market outcome?

Buyers' marginal social benefit exceeds producers' marginal social cost.

When the government set a production quota below the equilibrium quantity, is the market outcome efficient?

At the quota quantity, marginal social benefit is ________ marginal social cost, so production is ________.

greater than; inefficient

Refer to Table 6.4.1, which shows the demand and supply schedules for rice. When the government set a rice quota of 2,000 boxes a week, what is the market outcome?

The price is ________ a box, the marginal cost of rice is ________ a box, and the quantity produced is ________ boxes per week.

$1.60; $1.30; 2,000

What is a subsidy?

A payment made by the government to a producer.

How does a subsidy to corn farmers influence the market outcome?

It lowers the price of corn but raises corn farmers' income.

Refer to Figure 6.4.1, which shows the market for tomatoes. When the government introduces a subsidy for tomatoes at $4 a kilogram, how does the market outcome change?

The quantity produced is ________ because ________.

inefficient; marginal social benefit is less than marginal social cost

The government decides to give soybean farmers a subsidy. What changes occur in the market for soybean?

The market price ________ and farmers' marginal cost of production ________.

falls; increases

How do penalties on sellers of an illegal good influence the market outcome?

The market price rises, and the quantity bought decreases.

How do penalties on buyers of an illegal good influence the market outcome?

The market price falls, and the quantity sold decreases.

If the cost of breaking the law is imposed on the sellers of an illegal good, when will this cost have its biggest impact on quantity bought?

When supply is elastic or demand is elastic.

Refer to Table 6.5.1. If the government imposes a $2-per-unit cost of breaking the law on the sellers of the good, what is the new market outcome?

The new price is ________ per unit and the new equilibrium quantity is ________ units.

$9; 300

If buyers of an illegal good are hit with a penalty, how does the market outcome change?

The demand for the good decreases.

If the government bans trading in the secondary concert ticket market and makes the buying and selling of pre-sold concert tickets illegal, what change will occur in the secondary market for concert tickets?

The demand for pre-sold concert tickets will ________ and the supply of pre-sold concert tickets will ________.

decrease; decrease

If the penalty on buyers of an illegal good is greater than the penalty on sellers of an illegal good, how does the market outcome change?

The supply of the good will ________ the demand, and the price of the good will ________

decrease by less than; fall

If the penalty on sellers of an illegal good is greater than the penalty on buyers of an illegal good, how does the market outcome change?

The supply of the good will ________ demand, and the price of the good will ________.

decrease by more than; rise

Which of the following statements argues in favour of prohibition and against taxes on to reduce illegal drug use?

Prohibition sends a signal that might influence preferences.

Which one of the following statements about illegal goods is true?

Taxes generate revenues while prohibition sends a signal that might influence preferences.