Name That Policy
The government sets a maximum legal price for a good or service.
What is a price ceiling?
Draw and label a market in equilibrium. Identify the equilibrium price and quantity.
As approved by Doc D. P & Q labeled on axis. P* and Q* labeled. Equilibrium labeled. S & D curves labeled.
A $1 per-unit tax is placed on a product. 200 units are sold after the tax. How much tax revenue would be generated? Show your work.
Tax Revenue = $1 x 200 = $200
The government sets a minimum legal price for a good or service.
What is a price floor?
Draw a market with a price ceiling. Label whether it is a shortage or a surplus.
As approved by Doc D. P & Q labeled on axis. P* and Q* labeled. Equilibrium labeled. S & D curves labeled. A horizontal line under the equilibrium. Labeled as a shortage.
A $2.25 subsidy is given. 300 units are sold. What is the cost to the government for this subsidy? Show your work.
Government Cost = $2 x 300 = $600
The government limits how many units of a product can be sold or produced.
What is a quota (or quantity control)?
Draw a market where a price ceiling is set above equilibrium. Label what happens to the market.
As approved by Doc D. Ceiling above equilibrium has no effect; Q and P stay at equilibrium; no shortage or surplus; explain why it’s a “non-binding” price control.
The elasticity coefficient for demand is 0.8. The elasticity coefficient for supply is 1.6. Who is going to bear more of the tax burden?
Consumers bear more of the burden, due to the demand curve being more inelastic than the supply curve.
The government provided financial support to encourage production or consumption.
What is a subsidy?
Draw a market that is currently efficient and then show what happens when a $2 per-unit tax is imposed. Label the price buyers pay, price sellers receive, government revenue, and deadweight loss.
As approved by Doc D. P & Q labeled on axis. P* and Q* labeled. Equilibrium labeled. S & D curves labeled. Tax rectangle between Pb and Ps $2 high; DWL triangle between reduced quantity and curves.
The equilibrium price for a good is $10. A tax causes buyers to pay $11 and sellers to receive $9. How much is the tax? Who shares the majority of the tax burden? Show your work.
Tax = $11 - $9 = $2 tax per unit. Buyers and sellers share the tax burden equally.
A tax on expensive, nonessential goods such as yachts or private jets, intended to make the wealthy pay more.
What is a luxury tax?
Draw a quota limiting production below equilibrium quantity. Label DWL and explain how prices change.
As approved by Doc D. P & Q labeled on axis. P* and Q* labeled. Equilibrium labeled. S & D curves labeled. Vertical Quota creates DWL; price increases due to limited supply.
After a tax, quantity falls from 100 to 80 units. The tax is $4 per unit. What is the deadweight loss? Show your work.
DWL = ( (100 - 80) x $4 ) / 2 = $40