SOLUTIONS TO TEXT PROBLEMS:
Problems and Applications
2. a. The imposition of a binding price floor in the cheese market is shown in Figure 3. In the
absence of the price floor, the price would be P and the quantity would be Q. With the 11
floor set at P, which is greater than P, the quantity demanded is Q, while quantity f12
supplied is Q, so there is a surplus of cheese in the amount Q – Q. 332
b. The farmers’ complaint that their total revenue has declined is correct if demand is elastic.
With elastic demand, the percentage decline in quantity would exceed the percentage rise
in price, so total revenue would decline.
c. If the government purchases all the surplus cheese at the price floor, producers benefit
and taxpayers lose. Producers would produce quantity Q of cheese, and their total 3
revenue would increase substantially. But consumers would buy only quantity Q of 2
cheese, so they are in the same position as before. Taxpayers lose because they would
be financing the purchase of the surplus cheese through higher taxes.
3. a. The equilibrium price of Frisbees is $8 and the equilibrium quantity is 6 million Frisbees.
b. With a price floor of $10, the new market price is $10 since the price floor is binding. At
that price, only 2 million Frisbees are sold, since that’s the quantity demanded.
c. If there’s a price ceiling of $9, it has no effect, since the market equilibrium price is $8,
below the ceiling. So the equilibrium price is $8 and the equilibrium quantity is 6 million
7. a. It doesn’t matter whether the tax is imposed on producers or consumers;the effect will be
the same. With no tax, as shown in Figure 6, the demand curve is D and the supply 1
curve is S. If the tax is imposed on producers, the supply curve shifts up by the amount 1
of the tax (50 cents) to S. Then the equilibrium quantity is Q, the price paid by 22
consumers is P, and the price received (after taxes are paid) by producers is P– 50 cents. 22
If the tax is instead imposed on consumers, the demand curve shifts down by the amount of the tax (50 cents) to D. The downward shift in the demand curve (when the tax is 2
imposed on consumers) is exactly the same magnitude as the upward shift in the supply curve when the tax is imposed on producers. So again, the equilibrium quantity is Q, the 2
price paid by consumers is P (including the tax paid to the government), and the price 2
received by producers is P– 50 cents. 2
b. The more elastic is the demand curve, the more effective this tax will be in reducing the quantity of gasoline consumed. Greater elasticity of demand means that quantity falls more in response to the rise in the price of gasoline. Figure 7 illustrates this result. Demand curve D represents an elastic demand curve, while demand curve D is more 12
inelastic. To get the same tax wedge between demand and supply requires a greater reduction in quantity with demand curve D than for demand curve D. 12
c. The consumers of gasoline are hurt by the tax because they get less gasoline at a higher
d. Workers in the oil industry are hurt by the tax as well. With a lower quantity of gasoline
being produced, some workers may lose their jobs. With a lower price received by
producers, wages of workers might decline.
9. a. Figure 9 shows the effect of a price floor on hamburgers. The price floor reduces the quantity demanded and increases the quantity supplied, leading to a surplus of hamburgers.
b. Figure 10 shows the effect of a tax on hamburger consumers. The tax reduces the demand for hamburgers from D1 to D2. The result is a fall in the price sellers receive for hamburgers from P1 to P2, and a decline in the quantity of
hamburgers from Q1 to Q2.
c. Figure 11 shows the effect of a subsidy to chicken producers. Since the price of chicken sandwiches falls, the demand for hamburgers will decline. This leads to a decrease in the price of hamburgers from P1 to P2 and a decline
in the quantity of hamburgers from Q1 to Q2.
d. Figure 12 shows the effect of a tax on hamburger producers. The tax on hamburgers reduces the supply of hamburgers from S1 to S2. The result is a rise in the price of hamburgers from P1 to P2, and a decline in the quantity
of hamburgers from Q1 to Q2.