Question

1. The demand for good B is perfectly inelastic. A sales tax is levied on sellers. A(n) ________ in the elasticity of the supply in the market for good B would tend to __________ tax revenue from that tax.

a.       increase; have no effect on                 d.      increase; decrease

b.      decrease; decrease e.       increase; increase

c.       decrease; increase

2. Use the following information to answer the following questions.

Market for flat-screen TVs:

Demand: Qd = 2,600 – 5P

Supply: Qs = –1,000 + 10P

Suppose a price ceiling of $150 is imposed. Calculate the black-market price.

3. Give one unintended consequence of rent controls

4. A non-binding price floor is imposed on the market. Will the surplus increase or decrease over time? Explain.

Answer 1

1) If sales tax is levied on sellers, an increase in elasticity would decrease tax revenue from that tax because tax burden tends to fall more on less elastic side of the market.

Option D is correct.

2) Qd = 2,600 - 5P

Qs = -1,000 + 10P

At equilibrium, demand = supply

2,600 - 5P = -1,000 + 10P

3,600 = 15P

P = 240

At this Price, Q = 1,400

At price ceiling of $150, there is supply of 100 units. At this quantity supplied, consumers wants to pay a price of $500. Thus, black market occurs where price ceiling is $150 and consumers wants to pay $500. Black market price is thus $500.

3) Rent control is an example of price ceiling imposed on tenants such that they cannot charge an amount as rent more than price ceiling. At this price ceiling, there is more demand than supply which creates shortage of houses. If there is shortage of house, which will reduce availability of houses to needy people. Shortage of houses will raise rent while not raising the supply of house.

4) Non binding price floor is imposed at lower price than the equilibrium price. It will create shortage of goods but would not have any impact on market.