Question 1

Suppose the supply of young workers falls, leading to higher wages for restaurant waitstaff. According to the resource and product market link, what is the most likely effect on the price of restaurant meals?

Accepted Answer

The price of restaurant meals will increase because higher wages raise costs, shifting the supply curve left.

Question 2

A price ceiling is imposed below the equilibrium price in the rental housing market. Which of the following is a direct effect of this policy?

Accepted Answer

A shortage of rental units, where quantity demanded exceeds quantity supplied.

Question 3

Which of the following best describes the indirect effects of a price ceiling on rental housing?

Accepted Answer

Deterioration in quality and increased importance of non-price allocation mechanisms.

Question 4

If a minimum wage is set above the equilibrium wage for low-skill labor, what is the most likely direct effect?

Accepted Answer

Employment of low-skill labor will decrease, resulting in a surplus of labor.

Question 5

Consider a market where the equilibrium wage is $$7 and a minimum wage of 12 is $$imposed. What happens to employment and unemployment?

Accepted Answer

Employment decreases and unemployment increases.

Question 6

A $$1,000 tax is imposed on sellers in the used car market, shifting the supply curve vertically upward. If the new market price is 7$$,400 and sellers net $6,400, what portion of the tax is borne by buyers?

Accepted Answer

$400

Question 7

If a $1,000 tax is imposed on buyers instead of sellers in the used car market, what happens to the incidence of the tax?

Accepted Answer

The incidence is unchanged; buyers and sellers share the burden as before.

Question 8

Which of the following best explains why deadweight loss occurs when a tax is imposed?

Accepted Answer

Because the quantity exchanged in the market falls, reducing total surplus.

Question 9

In the gasoline market, a $$0.50 tax is imposed and the price rises by 0.40. $$What does this indicate about the relative elasticities of demand and supply?

Accepted Answer

Demand is more inelastic than supply, so buyers bear most of the tax.

Question 10

Suppose the marginal tax rate for an individual is 22% and their income increases from $$45,000 to 45$$,100, raising their tax liability from $$5,764 to 5$$,786. What is their marginal tax rate?

Accepted Answer

$$\frac{5,786 - 5,764}{45,100 - 45,000} = 0.22$$

Question 11

According to the Laffer Curve, what happens to tax revenue as the tax rate increases from 0% to the rate that maximizes revenue?

Accepted Answer

Tax revenue increases up to a maximum, then decreases if the rate rises further.

Question 12

A $$4,000 subsidy is granted to college students, shifting the demand curve vertically upward. If the new gross price is 12$$,000 and the net price paid by students is $8,000, who benefits from the subsidy?

Accepted Answer

Both students and colleges benefit; students pay less and colleges receive more.

Question 13

If a price floor is set above the equilibrium price in a market, what is the most likely outcome?

Accepted Answer

A surplus, as quantity supplied exceeds quantity demanded.

Question 14

Which of the following is a likely indirect effect of a minimum wage set above equilibrium?

Accepted Answer

Reduction in non-wage components of compensation.

Question 15

If the supply of a good is highly inelastic and a subsidy is granted to buyers, who is likely to benefit most?

Accepted Answer

Sellers, because the price they receive increases.

Question 16

Which of the following best describes the statutory incidence of a tax?

Accepted Answer

The legal assignment of who is responsible for paying the tax.

Question 17

If a government wants to minimize the deadweight loss from a tax, it should impose the tax on goods with which characteristic?

Accepted Answer

Highly inelastic demand or supply.

Question 18

Which of the following is true about the relationship between resource and product markets?

Accepted Answer

Changes in resource prices affect product market supply and prices.

Question 19

If a price ceiling is set at $$P_1$$ below the equilibrium price $$P_0$$, what is the resulting shortage?

Accepted Answer

$$Q_D - Q_S$$

Applications and Extensions of Demand and Supply: Price Controls, Taxes, and Subsidies

Study Guide - Practice Questions

Study Guide - Flashcards