Chapter Six Quiz: http://www.swlearning.com/economics/mankiw/mankiw3e/mankiw3e.html

1. Define price ceiling
Legal maximum on the price of a good or service, cannot rise above level

i.e. rent control - price is below the equilibrium therefore
Quantity demand > Quantity supply = shortage

- sellers must ration good/service to buyers ex. In a command economy (communist government) prices are usually controlled using price ceilings. However, this creates shortages and a high rise in prices due to pent up demand after the price ceilings are removed

2. Define price floor

• a legal minimum at which the price of a good can be sold.
• Quantity demand < Quantity supply = surplus
• i.e. minimum wage law - price is set above the equilibrium to give workers with no skills an opportunity to have affordable living.
• Minimum wage can create unemployment because there will be a surplus of workers, since the price of labor remains above the equilibrium price

3. How do price ceiling affect market outcomes?
If the price ceiling is set bellow the market equilibrium it will cause shortages because the demand would increase while while the supply would stay constant or decrease.
Ex. The equilibrium price of apples is at 5 $, and the government imposes a price ceiling of 3 $. Supply and demand would naturally move the price up to 5$, but because they are restricted by the price ceiling, the quantity demand exceeds the quantity supply. this will create a shortage of apples

4. What are the long-run and short run issues related to rent control?
In the short run rent control helps provided affordable homes to more people, but in the long run because it is a price ceiling it will create a shortage in supply, because investors in homes will be less willing to invest when their profits are being cut by a price ceiling.
5. What are the issues surrounding rent control in New York City?
Rent control is very common for many appartments in NYC, and many tenants depend on such price ceilings to be able to afford the neighborhoods they live in. However, the wealthy benefit greatly from these low rent prices, since they have to pay a much smaller sum for their appartments in pricy neighborhoods. many are unwilling to give up rent control because the high rent prices that will follow will affect low income families the hardest, and many will ahve to give up their appartments for more affordable residencies. But many state that rent control, instead of eliminating inequality, helps promote it by allowing landlords to discriminate. Since rent control appartments are a scarcity because of the price controls, they are able to decide who recieves the appartment. this only further promotes inequality, and low income families dont always recieve the appartment price they need.

6. How do price floors affect market outcomes?
If the price floor is set above the market equilibrium it will causes a surplus because the demand would stay constant or decrease while the supply would increase.

• Two outcomes:
• 1) The price floor is set below the equilibrium, in which case it has no affect because prices will adjust to supply and demand
• 2) The price floor is set above the market eq., this is called abinding price floor, which creates a surplus .

7. Examine the issues surrounding minimum wage.

• Minimum wage is beneficial to low skilled workers and is set to help increase the average living standard.
• But minimum wage is also a price floor and like all price floors creates a surplus (in this case unemployment). For example if a car maker has to pay their workers a minimum price it can be more profitable for them to use robots and have less employees resulting in unemployment.

Minimum wage may also increases legal/illegal immigration of low skilled workers into a country when it has a high minimum wage.
-this does not affect those workers whose skills and experience allow them to work well above the minimum wage

8. Discuss an economist’s perspective on price controls and price ceilings, if the Ten Principals of Economics state that sometimes governments can improve market outcomes, why do they view these types of controls the way they do?
Economists usually oppose price controls because of the fact that they disturb the natural function of the laws of supply and demand within a market. by altering natural decisions made by producers and consumers, the allocation of society's resources is distorted. When governments try to improve market outcomes, they dont often realize that price controls often end up hurting those who they intend to help. While it is believed that minimum wage helps protect workers rights and ensure better standards of living, it alkso creates more unemployment. Price ceilings should normally help consumers buy goods at lower prices, but they will usually find a shortage of those goods

9. Define tax incidence.
- the study of who bears the burden of taxation (buyers or sellers?)
Tax incidence depends on price elasticity of demand and price elasticity of supply.-

10. How do taxes on buyers affect market outcomes? Explain with examples.
- Initial impact: tax creates less incentive to buy, demand curve shifts to the left. Supply curve is not affected because sellers have the same incentive to provide
- Tax shifts the demand curve by exactly the size of the tax (because to induce buyers to demand any given quantity, the market price must now be as much as the tax lower to make up for the effect of the tax)
- Equilibrium price falls, equilibrium quantity falls : sellers sell less, buyers buy less
- Size of market reduced!
- tax incidence: Although buyers send the entire tax to the government, buyers and sellers share the burden
- Because equilibrium price falls sellers receive less than they did without the tax. Buyers pay sellers a lower price but the effective price (including the tax) rises, making them worse off than before the tax was imposed.

11. How do taxes on sellers affect market outcomes? Explain with examples.
- Initial impact: Tax raises the cost of selling and leads sellers to supply a smaller quantity at every price so the supply curve shifts to the left. The quantity demanded is the same so the demand curve does not change.
- The effective price to sellers (the amount sellers get to keep after paying the tax) is lower as much as the quantity of the tax. To induce sellers to supply any given quantity, the market price must be as much as the tax higher to compensate, so the supply curve shifts by exactly the size of the tax.
- The equilibrium price rises and equilibrium quantity falls.
- Size of market reduced!
- tax incidence: Although sellers send the entire tax to the government, buyers and sellers share the burden
- Because equilibrium price rises buyers pay more than they did without the tax. Sellers receive more but the effective price (after paying the tax) falls.


12. What are some of the issues surrounding the payroll tax?

• The burden of the tax cannot be easy distributed
• The burden will not be 50/50 between the employees and employer
• Instead the burden will follow the laws of supply and demand