Taxes, Subsidies, Floors, and Ceilings
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Taxes, Subsidies, Floors, and Ceilings

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Questions and Answers

What occurs to producer surplus when a binding price floor is implemented above the equilibrium price?

  • Producer surplus remains unchanged.
  • Producer surplus increases due to higher prices. (correct)
  • Producer surplus decreases because of reduced demand.
  • Producer surplus becomes negative.

    • What is the outcome of imposing a binding price ceiling below the equilibrium price?

  • It creates a shortage in the market. (correct)
  • It causes a decrease in consumer surplus.
  • It has no impact on the market equilibrium.
  • It results in an increase in total surplus.

    • What happens to total surplus when a binding price floor is established?

  • Total surplus decreases. (correct)
  • Total surplus is eliminated.
  • Total surplus increases.
  • Total surplus remains the same.

    • How does a non-binding price ceiling affect a competitive market?

    <p>It has no effect on the market outcome.</p> Signup and view all the answers

    When a tax is imposed on a good, who bears the heavier burden when demand is more elastic than supply?

    <p>Producers absorb more of the tax cost.</p> Signup and view all the answers

    What effect does a binding price floor have on consumer behavior?

    <p>Consumers reduce their quantity demanded.</p> Signup and view all the answers

    In a competitive market, a binding price ceiling leads to which of the following?

    <p>A deadweight loss.</p> Signup and view all the answers

    What happens to producer surplus when a binding price ceiling is enacted?

    <p>Producer surplus decreases due to losses in revenue.</p> Signup and view all the answers

    A binding price floor set above equilibrium is likely to cause which of the following?

    <p>A surplus of goods.</p> Signup and view all the answers

    What is the main consequence of deadweight loss in the market?

    <p>Loss of economic efficiency.</p> Signup and view all the answers

    What is the expected effect on consumer surplus when a $3 tax is imposed on buyers?

    <p>Consumer surplus will decrease due to increased effective price paid.</p> Signup and view all the answers

    How does a tax on sellers generally affect the total surplus in the market?

    <p>Total surplus will decrease because of the deadweight loss created by the tax.</p> Signup and view all the answers

    What impact does a subsidy to buyers have on the equilibrium price received by sellers?

    <p>The price received by sellers will increase due to the higher demand.</p> Signup and view all the answers

    What is likely to happen to producer surplus when a $2 subsidy is provided to sellers?

    <p>Producer surplus will increase as it directly benefits sellers.</p> Signup and view all the answers

    Which condition is most likely to lead to deadweight loss?

    <p>A decrease in supply due to taxation.</p> Signup and view all the answers

    After a $3 tax on buyers, how is the new demand curve expected to behave?

    <p>The new demand curve will shift leftward, indicating decreased demand at all price levels.</p> Signup and view all the answers

    What is the anticipated effect on total surplus when a $2 subsidy is given to buyers?

    <p>Total surplus will increase because both consumer and producer surpluses rise.</p> Signup and view all the answers

    How does the imposition of a tax on buyers most directly affect the supply curve?

    <p>The supply curve remains unchanged as the tax is on buyers.</p> Signup and view all the answers

    When a $2 tax is placed on sellers, what is the likely change in consumer prices?

    <p>Consumer prices will rise as sellers try to maintain profit margins.</p> Signup and view all the answers

    Study Notes

    Taxes, Subsidies, Floors and Ceilings

    • A tax imposed on buyers shifts the demand curve down by the amount of the tax.

    • A tax imposed on sellers shifts the supply curve up by the amount of the tax.

    • A subsidy to buyers shifts the demand curve up by the amount of the subsidy.

    • A subsidy to sellers shifts the supply curve down by the amount of the subsidy.

    • A binding price floor set above the equilibrium price creates a surplus.

    • A binding price ceiling set below the equilibrium price creates a shortage.

    • A non-binding price ceiling has no effect on the market outcome.

    • The burden of a tax falls more heavily on the side of the market with the less elastic demand/supply.

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    Description

    This quiz covers the concepts of taxes, subsidies, price floors, and price ceilings in economics. Understand how these factors affect demand and supply curves, market equilibrium, and the distribution of tax burdens. Test your knowledge on how these elements interact in economic theory.

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