Q: Which of the following equations correctly represents the shortage created by a binding price ceiling?

$$\text{Shortage} = Q_d - Q_s$$

Question 1

Suppose the equilibrium price of a gallon of milk is $$3. The government imposes a price ceiling of 2 $$per gallon. What will be the likely outcome in the milk market?

Accepted Answer

There will be a shortage of milk because quantity demanded exceeds quantity supplied at $2.

Question 2

A city government enacts rent control, setting a maximum rent below the current equilibrium. According to the supply and demand model, what is a likely long-run effect?

Accepted Answer

A larger shortage of apartments as both supply and demand become more elastic over time.

Question 3

Which of the following best describes a binding price floor?

Accepted Answer

A legal minimum set above the equilibrium price, resulting in a surplus.

Question 4

If the government imposes a tax of $1 per unit on sellers, what happens to the supply curve?

Accepted Answer

The supply curve shifts upward by $1 at every quantity.

Question 5

Suppose the demand for insulin is highly inelastic, while the supply is highly elastic. If a tax is imposed on insulin, who will bear most of the tax burden?

Accepted Answer

Buyers will bear most of the tax burden.

Question 6

A minimum wage is an example of which type of price control, and what is its typical effect in a competitive labor market?

Accepted Answer

A price floor that, if binding, creates a surplus of labor (unemployment).

Question 7

If a $0.50 tax is imposed on buyers, what happens to the demand curve?

Accepted Answer

The demand curve shifts downward by $0.50 at every quantity.

Question 8

Which of the following equations correctly represents the shortage created by a binding price ceiling?

Accepted Answer

$$	ext{Shortage} = Q_d - Q_s$$

Question 9

Consider a market where the government imposes a price floor of $$4, but the equilibrium price is 3. $$What will happen in this market?

Accepted Answer

There will be a surplus because quantity supplied exceeds quantity demanded at $4.

Question 10

Which of the following statements about tax incidence is correct?

Accepted Answer

The division of the tax burden depends on the relative elasticities of supply and demand, not on who the tax is legally imposed upon.

Question 11

Suppose the government wants to raise tax revenue by taxing a good with highly elastic demand and inelastic supply. What is the likely outcome?

Accepted Answer

Sellers will bear most of the tax burden, and the quantity sold will decrease only slightly.

Question 12

A city is considering a rent subsidy instead of rent control. According to economic theory, what is a likely advantage of a rent subsidy over a rent control policy?

Accepted Answer

A rent subsidy increases affordability without creating a shortage of apartments.

Question 13

If the government imposes a tax that creates a wedge between the price buyers pay ($$P_b) $$and the price sellers receive ($$P_s$$), which equation correctly represents the size of the tax?

Accepted Answer

$$	ext{Tax} = P_b - P_s$$

Question 14

Which of the following is an unintended consequence of rent control in the long run?

Accepted Answer

A significant shortage of rental housing as both supply and demand become more elastic.

Question 15

Suppose a tax is imposed on a market with perfectly inelastic demand. What will be the effect on the equilibrium quantity and who will bear the tax burden?

Accepted Answer

The equilibrium quantity will not change, and buyers will bear the entire tax burden.

Question 16

Which of the following best explains why price controls can lead to inefficient allocation of resources?

Accepted Answer

Price controls obscure price signals, leading to shortages or surpluses and misallocation.

Question 17

A government imposes a $$2 tax on each unit of a good. If the price buyers pay increases by 1.20 $$and the price sellers receive falls by $0.80, what does this indicate about the relative elasticities of supply and demand?

Accepted Answer

Demand is less elastic than supply; buyers bear a greater share of the tax burden.

Question 18

Which of the following is true regarding the effect of a binding price ceiling on the allocation of goods?

Accepted Answer

Goods may not go to the buyers who value them most, leading to inefficiency.

Question 19

If the government wants to minimize the deadweight loss from a tax, which type of good should it tax?

Accepted Answer

A good with inelastic supply and inelastic demand.

Supply, Demand, and Government Policies: Price Controls and Tax Incidence

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