Ch 6 Worksheet — Government Policy

Question a

If the city sets a rent ceiling of $500/month, what are Q_d and Q_s?

Q_d (thousands)

Q_s (thousands)

Hint Plug P = $500 into each equation. Remember Q_d uses the demand equation, Q_s uses supply.

Explanation Q_d = (1500 − 500) / 200 = 5 thousand.
Q_s = (500 − 300) / 100 = 2 thousand.
At the $500 ceiling, 5,000 families want apartments but only 2,000 are available.

Question b

What is the shortage caused by the $500 rent ceiling?

Shortage (thousand units)

Hint Shortage = Q_d − Q_s at the ceiling price.

Explanation Shortage = 5 − 2 = 3 thousand apartments. 5,000 families want apartments but only 2,000 are available.

Question c

If a price floor of $1,000 is set, what is the surplus?

Surplus (thousand units)

Hint Find Q_d and Q_s at P = $1,000, then subtract.

Explanation Q_d = (1500 − 1000) / 200 = 2.5. Q_s = (1000 − 300) / 100 = 7. Surplus = 7 − 2.5 = 4.5 thousand units unsold.

Question d

If a $300/unit tax is placed on landlords, what is the new equilibrium quantity and buyer price?

New Q (thousands)

Buyer Price P_b ($)

Hint Tax shifts supply up by $300. New supply: P = 600 + 100Q. Set equal to demand.

Explanation 1500 − 200Q = 600 + 100Q → 900 = 300Q → Q = 3.
P_b = 1500 − 200(3) = $900.
P_s = 900 − 300 = $600. Buyers pay $200 more than before, sellers receive $100 less.

Question e

What percentage of the $300 tax burden falls on buyers vs. sellers?

Buyer burden (%)

Seller burden (%)

Hint Buyer burden = P_b − P*. Seller burden = P* − P_s. Express each as a percentage of the $300 tax.

Explanation Buyers bear $200 / $300 = 66.7%. Sellers bear $100 / $300 = 33.3%.

Demand is steeper (slope −200) than supply (slope 100), making demand relatively more inelastic — so buyers bear more of the tax.

Question 1

A price ceiling is binding when it is set:

Above the equilibrium price Below the equilibrium price At the equilibrium price At the price where supply equals zero

Hint "Binding" means the law actually constrains the market from reaching equilibrium.

Explanation A ceiling below equilibrium prevents the market from reaching P*. Above equilibrium, the market naturally settles below the ceiling — it's irrelevant.

Question 2

Rent control (a form of price ceiling) in the long run typically causes:

Increased construction of new housing Higher quality rental units Housing shortages and deteriorating building quality Lower demand for housing

Hint If landlords can't charge enough, what happens to their incentive to maintain or build?

Explanation Below-market rents discourage new construction and maintenance. Shortages worsen over time as supply shrinks and demand grows.

Question 3

A minimum wage above the equilibrium wage causes:

A shortage of workers An increase in employment Unemployment (surplus of labor) Higher productivity

Hint The minimum wage is a price floor in the labor market. Floor above equilibrium creates a surplus.

Explanation At above-equilibrium wage: Q_s of labor (workers wanting jobs) > Q_d of labor (firms hiring) → unemployment.

Question 4

When a tax is placed on sellers, which statement is TRUE?

Only sellers bear the economic burden The buyer price rises and seller price falls The tax doesn't affect the market price Quantity traded increases

Hint Tax creates a wedge between P_b and P_s. The burden is shared.

Explanation P_b rises above P*, P_s falls below P*. The legal incidence (who writes the check) does not equal the economic incidence.

Question 5

Tax incidence depends primarily on:

Whether the tax is legally placed on buyers or sellers The relative elasticities of supply and demand The size of the tax only Government preference

Hint The side that is MORE inelastic bears MORE of the tax.

Explanation Relative elasticities determine burden split. The more inelastic side can't easily escape the tax by changing behavior, so they absorb more.

Question 6

In a market with perfectly elastic demand and normal upward-sloping supply, a tax is borne:

Entirely by buyers Entirely by sellers Equally by both By the government

Hint Perfectly elastic demand = horizontal demand curve. Buyers won't pay any more than P*.

Explanation Perfectly elastic demand means buyers will buy zero if price rises at all. Sellers must absorb the entire tax.

Question 7

If a $500 rent ceiling is set in a market where equilibrium rent is $400, the ceiling is:

Binding and creates a shortage Non-binding — the market stays at equilibrium Binding and creates a surplus Non-binding but still causes shortages

Hint Compare the ceiling to equilibrium price. Is the ceiling above or below?

Explanation Ceiling ($500) > P* ($400), so the market equilibrium ($400) is already below the ceiling. The ceiling doesn't constrain anything.

Question 8

A $10 tax in a market where supply is perfectly inelastic is borne:

Entirely by buyers Entirely by sellers Equally by both By neither — quantity drops to zero

Hint Perfectly inelastic supply = vertical supply curve. Sellers can't reduce quantity.

Explanation Sellers can't escape the tax by reducing quantity (Q is fixed). They absorb the full $10. Buyers pay the same price as before.

Question 9

A price floor set below the equilibrium price has no effect on the market.

Hint If the floor is below where the market naturally settles, does it constrain anything?

Explanation True. The market equilibrium is already above the floor, so the floor is non-binding. The market operates as if the floor doesn't exist.

Question 10

Whether a tax is levied on buyers or sellers, the economic outcome (prices, quantities, burden) is the same.

Hint This is one of the key insights of Ch 6 — legal incidence does not equal economic incidence.

Explanation True. The tax wedge between P_b and P_s is the same regardless of who legally pays. The burden split depends only on elasticities.

Question 11

Price ceilings always help consumers.

Hint Some consumers benefit from the lower price, but what about those who can't find the good?

Explanation False. While some consumers pay less, the shortage means many can't buy at all. Plus, quality may deteriorate. Total consumer welfare often falls.

Question 12

A tax on a good with perfectly elastic supply falls entirely on consumers.

Hint Perfectly elastic supply = horizontal supply curve. Sellers won't accept less than their minimum price.

Explanation True. With perfectly elastic supply, sellers exit if price falls at all. The entire tax is passed to buyers as a higher price.

Practice Worksheet

Short Answer — The Housing Market

Multiple Choice

True or False