Economics: Price Floors and Taxes

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Questions and Answers

What happens to the supply curve when the price is set lower than Chrissy's cost?

Prices for other producers will also drop.

Supply will increase significantly.

Producers will incur losses but remain in the market.

Chrissy will leave the market. (correct)

Which of the following statements about the supply schedule is accurate?

The supply schedule is unaffected by the marginal cost of producers.

Jack enters the market only when prices reach $10 or higher. (correct)

The supply schedule aligns with the highest cost of production.

It indicates that higher production correlates to lower prices.

How would the quantity supplied respond if the price increases to $30?

Quantity supplied would increase to 2. (correct)

Quantity supplied would remain at 1.

No suppliers would increase their output.

Only Jack would supply any quantity.

In the context of the supply curve, what does the height of the curve represent?

The cost of the marginal seller. Signup and view all the answers

Which price level allows all three producers to participate in the market?

$35 Signup and view all the answers

What occurs when the price of hotel rooms rises to $120?

A surplus is created in the market for hotel rooms. Signup and view all the answers

Which statement best describes the impact of price controls on economic activity?

They typically alter the natural allocation of resources. Signup and view all the answers

What is the effect of a $1.50 tax on buyers regarding the demand curve?

The demand curve shifts to the left. Signup and view all the answers

What is a common misconception about the impact of price controls intended to help the poor?

They can sometimes exacerbate the problems they aim to solve. Signup and view all the answers

How much would the price have to fall for buyers to purchase the same quantity after the tax is implemented?

$1.50 Signup and view all the answers

When the government imposes a tax on a good, what is one possible effect on the market?

It can be absorbed entirely by buyers or sellers. Signup and view all the answers

What is the primary purpose of levying taxes on goods and services?

To generate revenue for government functions. Signup and view all the answers

At what price are buyers still willing to purchase 500 pizzas after the tax is introduced?

$8.50 Signup and view all the answers

What would happen to the quantity of pizzas demanded if the price remains at $10.00 after a $1.50 tax is imposed on buyers?

The quantity demanded would decrease. Signup and view all the answers

What is the initial price before tax in the market for pizzas?

$10.00 Signup and view all the answers

How does the elasticity of supply affect firms' ability to leave the market when a tax is imposed?

More elastic supply makes it easier for firms to exit the market. Signup and view all the answers

What happens to the deadweight loss (DWL) when supply is more elastic?

DWL increases as firms leave the market more easily. Signup and view all the answers

What is the effect of inelastic demand on consumers when a tax raises prices?

Consumers have a harder time leaving the market. Signup and view all the answers

As the size of the tax increases, what generally occurs to the tax revenue and DWL?

Both tax revenue and DWL increase. Signup and view all the answers

In what context does inelastic demand lead to a smaller deadweight loss?

When consumers are less responsive to price changes. Signup and view all the answers

Which of the following best describes the relationship between tax size and surplus-maximizing quantity?

Increasing tax reduces surplus-maximizing quantity. Signup and view all the answers

What role does elasticity play in consumer behavior when faced with taxation?

Lower elasticity results in consumer resistance to market exits. Signup and view all the answers

How does the concept of deadweight loss relate to market efficiency?

DWL represents lost economic welfare due to market distortions. Signup and view all the answers

What does a perfectly inelastic demand curve imply about consumers' price sensitivity?

Consumers have no sensitivity to price changes. Signup and view all the answers

In the context of demand elasticity, what is indicated by a price elasticity of demand greater than 1?

Demand is elastic. Signup and view all the answers

How is elasticity represented mathematically in relation to percentage changes?

Elasticity = % change in Q / % change in P Signup and view all the answers

What does a flatter demand curve suggest regarding its elasticity?

It has higher elasticity. Signup and view all the answers

If the demand curve is vertical, what is the elasticity of demand?

Zero Signup and view all the answers

What characterizes a perfectly elastic demand curve?

Quantity demanded can change significantly with no change in price. Signup and view all the answers

For which range of price elasticity of demand is demand considered inelastic?

< 1 Signup and view all the answers

Given a linear demand curve, what happens to its slope in relation to elasticity?

Slope remains constant while elasticity changes. Signup and view all the answers

If a price change leads to a less than proportionate change in quantity demanded, what classification of demand does this imply?

Inelastic demand Signup and view all the answers

What is the effect of a significant price drop in an inelastic demand situation?

Quantity demanded increases only slightly. Signup and view all the answers

Study Notes

Price Floor

A price floor is a minimum price set by the government for a good or service
If the price floor is set above the equilibrium price, it will create a surplus
A surplus is a situation where the quantity supplied exceeds the quantity demanded
The surplus in the hotel room market is 60 rooms, as the quantity supplied is 120 rooms and the quantity demanded is 60 rooms

Taxes

Taxes are levied on goods and services by the government to generate revenue
Taxes can be paid by buyers or sellers
Taxes can be a percentage of the price or a specific amount per unit sold

Effects of a Tax on Buyers

A tax on buyers shifts the demand curve to the left
The amount of the shift is equal to the amount of the tax
This causes the equilibrium price to be higher than it would have been without the tax
The equilibrium quantity is also lower than it would have been without the tax

Cost and the Supply Curve

The supply curve shows the relationship between the price of a good and the quantity supplied
The height of the supply curve at each quantity reflects the cost of the marginal seller
The marginal seller is the seller who would leave the market if the price were any lower

Deadweight Loss (DWL) and the Elasticity of Supply

The more elastic the supply, the easier it is for firms to leave the market when a tax is imposed
When a tax reduces the price that sellers receive, the quantity falls below the surplus-maximizing quantity
This results in a greater deadweight loss

Deadweight Loss (DWL) and the Elasticity of Demand

When demand is inelastic, it is harder for consumers to leave the market when a tax is imposed
This is because consumers are less sensitive to price changes when demand is inelastic
The flatter the demand curve, the greater the elasticity
The steeper the demand curve, the smaller the elasticity

Perfectly Inelastic Demand

Perfectly inelastic demand occurs when the quantity demanded does not change at all in response to a price change
The demand curve is vertical
Consumers are not sensitive to price changes
The elasticity of demand is 0

Inelastic Demand

Inelastic demand occurs when the quantity demanded changes by a smaller percentage than the price change
The demand curve is relatively steep
Consumers are relatively sensitive to price changes
The elasticity of demand is greater than 1

Perfectly Elastic Demand

Perfectly elastic demand occurs when the quantity demanded changes infinitely in response to any price change
The demand curve is horizontal
Consumers are extremely sensitive to price changes
The elasticity of demand is infinity

Elasticity of a Linear Demand Curve

The elasticity of a linear demand curve is not constant
The elasticity is greater at higher prices (lower quantities) and smaller at lower prices (higher quantities)
The steeper the demand curve, the smaller the elasticity of demand

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Description

This quiz covers key concepts related to price floors, taxes, and their effects on markets. Understand the implications of government interventions, like how price floors can lead to surpluses and the impact of taxes on demand and supply curves. Test your knowledge on these fundamental economic principles!