Question 1

Suppose the government imposes a price ceiling of $$2 on muffins, while the equilibrium price is 3. $$What will be the result in the market?

Accepted Answer

There will be a shortage of muffins because the price ceiling is binding.

Question 2

Which of the following best describes a price floor?

Accepted Answer

A legal minimum on the price at which a good can be sold.

Question 3

If the government sets a minimum wage above the equilibrium wage, what is the most likely outcome in the labor market?

Accepted Answer

Unemployment will increase as the quantity of labor supplied exceeds the quantity demanded.

Question 4

A $$1.50 tax is imposed on buyers in the pizza market. If the equilibrium price before tax is 10$$, what price do buyers pay after the tax?

Accepted Answer

$11.50

Question 5

Which of the following statements about tax incidence is correct?

Accepted Answer

The side of the market that is less elastic bears more of the tax burden.

Question 6

If demand for insulin is perfectly inelastic, who will bear the burden of a tax imposed on insulin companies?

Accepted Answer

Patients will bear all the tax burden.

Question 7

Consider a market with a binding price floor set above equilibrium. What is the likely result?

Accepted Answer

A surplus as quantity supplied exceeds quantity demanded.

Question 8

Which policy is generally considered more effective at targeting poverty than raising the minimum wage?

Accepted Answer

Earned Income Tax Credit (EITC).

Question 9

Suppose a $30 per unit tax is imposed on bicycles. If supply is elastic and demand is inelastic, who bears most of the tax burden?

Accepted Answer

Buyers bear most of the tax burden.

Question 10

What is the effect of a binding rent control law in the long run?

Accepted Answer

Decrease in quantity supplied and deterioration in quality of apartments.

Question 11

Which of the following is NOT a likely consequence of a binding price ceiling?

Accepted Answer

Surplus of the good.

Question 12

If a price floor is set below the equilibrium price, what happens in the market?

Accepted Answer

The price floor is non-binding and has no effect.

Question 13

Why do economists often oppose price ceilings and price floors?

Accepted Answer

They disrupt the market’s ability to balance supply and demand.

Question 14

A luxury tax is imposed on yachts, which have elastic demand and inelastic supply. Who bears most of the tax burden?

Accepted Answer

Sellers and workers who build yachts.

Question 15

Which of the following best explains why minimum wage increases may not effectively reduce poverty?

Accepted Answer

Most minimum wage earners are teenagers from middle-class families.

Question 16

If a $1.50 tax is imposed on sellers, what happens to the supply curve?

Accepted Answer

It shifts up by $1.50.

Question 17

Which of the following is a real-world example of a price ceiling?

Accepted Answer

Rent control laws.

Question 18

What is the formula for calculating the tax burden on buyers when a per-unit tax is imposed?

Accepted Answer

$$Tax\ burden = P_{buyer} - P_{equilibrium}$$

Question 19

Which of the following best describes the effect of a tax on market equilibrium?

Accepted Answer

It creates a wedge between the price buyers pay and the price sellers receive.

Question 20

If both supply and demand are equally elastic, how is the tax burden shared?

Accepted Answer

The tax burden is shared equally between buyers and sellers.

Government Policies: Price Controls and Tax Incidence in Macroeconomics

Study Guide - Practice Questions