Homework 4 Answer Key section 1 Notes Correct answers highlighted in green explanation provided when deemed necessary Q1 A price ceiling will be binding only if it is set equal to the equilibrium price above the equilibrium price below the equilibrium price either above or below the equilibrium price the quantity of baby formula demanded will increase the quantity of baby formula supplied will decrease a shortage of baby formula will develop All of the above are correct Q2 If a binding price ceiling is imposed on the baby formula market then relative to the initial equilibrium Explanation A binding ceiling means that the initial equilibrium price was above that ceiling Therefore at the price ceiling the quantity of formula demanded will be larger than the initial equilibrium quantity the quantity supplied will be smaller and a shortage will develop Q3 Suppose the government has imposed a price ceiling on cellular phones Which of the following events could transform the price ceiling from one that is binding to one that is not binding Cellular phones become more popular Traditional land line phones become more expensive The components used to produce cellular phones become more expensive A technological advance makes cellular phone production less expensive Explanation If a ceiling is initially binding then the price that would be the equilibrium price without the ceiling must be larger than that ceiling For the ceiling to become non binding there must be an event that causes the equilibrium price to decrease Let s analyze each of the four events described as potential answers and see their effect over price If cellular phones become more popular then demand will shift to the right This would cause the price for which quantity supplied is equal to quantity demanded to rise even further and therefore the ceiling would remain binding If landlines which are a substitute of cell phones become more expensive then the demand for cell phones will again shift to the right with the same effect described in the previous paragraph If the components of cell phones become more expensive that is if the price of inputs increases supply will shift to the left which causes an increase in the price for which quantity supplied is equal to quantity demanded Finally if a technological advance makes cell phone production cheaper then supply will shift to the right which causes a decrease in the price for which quantity supplied is equal to quantity demanded and may make the ceiling non binding if the shift is large enough Q4 A price floor will be binding only if it is set equal to the equilibrium price above the equilibrium price below the equilibrium price either above or below the equilibrium price Q5 Suppose the government has imposed a price floor on the market for soybeans Which of the following events could transform the price floor from one that is not binding into one that is binding Farmers use improved draught resistant seeds which lowers the cost of growing soybeans The number of farmers selling soybeans decreases Consumers income increases and soybeans are a normal good The number of consumers buying soybeans increases Explanation If a floor is initially not binding then the price for which quantity supplied is equal to quantity demanded must be larger than that floor For the floor to become binding there must be an event that causes that price to decrease If farmers use improved seeds then supply will shift to the right This would cause the price for which quantity supplied is equal to quantity demanded to decrease and therefore may make the floor binding You can check that all of the other three events lead to an increase in the price for which quantity supplied is equal to quantity demanded and therefore keep the floor not binding Consider the following supply and demand diagram You will need it for question 6 7 and 8 Q6 Which of the following price ceilings would be binding in this market Q7 Which of the following price floors would be binding in this market 8 10 12 14 6 8 10 12 DS1020304050607080quantity2468101214161820price Q8 If the government imposes a price ceiling of 8 on this market then there will be no shortage a shortage of 10 units a shortage of 20 units a shortage of 40 units Q9 Over time housing shortages caused by rent control increase because the demand for and supply of housing are less elastic in the long run increase because the demand for and supply of housing are more elastic in the long run decrease because the demand for and supply of housing are less elastic in the long run decrease because the demand for and supply of housing are more elastic in the long run Explanation This was addressed directly in class Q10 If the government removes a tax on a good the quantity of the good sold will increase decrease not change All of the above are possible Explanation As we have seen in class when the government levies a tax on a good the quantity sold decreases Therefore if the tax is removed quantity must increase Q11 If a tax is levied on the sellers of a product then there will be a n downward shift of the demand curve upward shift of the demand curve movement up and to the left along the demand curve movement down and to the right along the demand curve Explanation When a tax is levied on sellers the supply shifts to the left see for example the graph in question 12 The new supply intersects the demand curve at a point that is above and to the left of the initial equilibrium that is there has been a movement along the demand curve Q12 Consider the following supply and demand diagram where D represents demand S represent supply and S after tax represents the supply after a tax has been levied on sellers Fill in the blanks The equilibrium price before the tax was levied was 5 After the tax is levied buyers pay 6 for the good while sellers receive 3 5 The tax levied per unit is 2 5 The tax burden of buyers is 1 while the tax burden of sellers is 1 5 As a consequence of the tax being levied equilibrium quantity decreased by 10 units Q13 The incidence of a tax falls more heavily on consumers than producers if demand is more inelastic than supply producers than consumers if supply is more inelastic than demand consumers than producers if supply is more elastic than demand All of the above are correct SDS after tax510152025303540455055606570quantity0 511 522 533 544 555 566 57price Q14 Suppose that the demand for digital cameras is elastic and the supply of digital cameras is