Question

1. Lovers of classical music persuade Congress to impose a (binding) price ceiling of $40 per concert ticket. As a result of this policy, do more or fewer people attend classical music concerts?**Assume an ordinary upward-sloping supply curve and downward-sloping demand curve.** a) fewer people b) more people c) its impossible to say

2. Suppose the government imposes a binding price ceiling in the baby formula market. As a result, is there a shortage or surplus of baby formula? a) a shortage b) a surplus c)its impossible to say

3. What will NECESSARILY happen to the total revenues of baby formula producers as a result of this price ceiling? a) they will go up b) they will go down c) its impossible to say for certain

4. If, instead of a price ceiling, the government had imposed a binding price FLOOR in the baby formula market, what would NECESSARILY have happened to the total revenues of baby formula producers as a result of the price floor? a) they would have gone up b) they would have gone down c) its impossible to say for certain

5. How would a $50,000 luxury tax on private jets affect the price of private jets? a) Due to a surplus, the price will decrease. b) The price will increase by exactly $50,000. c) The price will increase, but by less than $50,000.
   d) The price may increase, decrease, or stay the same. It is impossible to say.

  

Answer 1

(1) (a)

A binding price ceiling imposed less than equilibrium price will increase quantity demanded, but will decrease quantity supplied. Since consumers can buy only what producers will sell, market quantity will decrease.

(2) (a)

A binding price ceiling imposed less than equilibrium price will increase quantity demanded, but will decrease quantity supplied, creating a shortage.

(3) (b)

Due to price ceiling, market price will fall and market quantity will fall, so revenue (= price x quantity) will fall.

(4) (c)

A price floor imposed above equilibrium price will decrease quantity demanded, but will increase quantity supplied. Since producers can sell only what consumers will buy, market quantity will fall. Since price will be higher but quantity will be lower, revenue may increase or decrease (or remain the same).

(5) (c)

Demand for luxury goods is elastic, so the tax will increase price, and since buyers and sellers will bear a portion of tax incidence each, price paid by buyers will increase but by less than the full tax amount.