Q: Which of the following equations represents the deadweight loss created by a tax in a market?

$$DWL = \frac{1}{2} \times (Q^* - Q_t) \times (P_b - P_s)$$

Question 1

Suppose the equilibrium rent for apartments in a city is $$1,200 per month. The government imposes a rent ceiling of 1$$,000 per month. What is the most likely immediate effect in the housing market?

Accepted Answer

A shortage of apartments will occur, as quantity demanded exceeds quantity supplied.

Question 2

Which of the following best describes the opportunity cost of renting an apartment when a rent ceiling creates a shortage?

Accepted Answer

It equals the regulated rent plus the opportunity cost of search activity.

Question 3

A rent ceiling set below the equilibrium rent leads to which of the following outcomes?

Accepted Answer

Deadweight loss due to inefficient underproduction of housing services.

Question 4

Which allocation method for scarce housing under a rent ceiling is considered fair according to the fair results view?

Accepted Answer

None of these methods leads to a fair outcome.

Question 5

If the minimum wage is set above the equilibrium wage rate, what is the most likely effect in the labour market?

Accepted Answer

Unemployment increases as quantity of labour supplied exceeds quantity demanded.

Question 6

Which of the following equations represents the deadweight loss created by a tax in a market?

Accepted Answer

$$DWL = \frac{1}{2} 	imes (Q^* - Q_t) 	imes (P_b - P_s)$$

Question 7

Consider a $$6 tax imposed on sellers of cigarettes. If the equilibrium price before tax is 12$$, after the tax buyers pay $$16 and sellers receive 10. $$How much of the tax is paid by buyers and how much by sellers?

Accepted Answer

Buyers pay $$4, sellers pay 2.$$

Question 8

If demand for a good is perfectly inelastic, who bears the entire burden of a tax imposed on the good?

Accepted Answer

The buyer

Question 9

Which principle of tax fairness states that people should pay taxes according to the benefits they receive from government services?

Accepted Answer

Benefits principle

Question 10

A production quota is imposed on a farm product, reducing output from 16 million to 14 million kilograms and raising price from $$3 to 5 $$per kilogram. What is the likely effect on efficiency?

Accepted Answer

Inefficient underproduction and incentive to cheat.

Question 11

A subsidy of $$20 per tonne is paid to farmers, increasing supply from 40 million to 60 million tonnes and lowering market price from 70 to$$ $50 per tonne. What is the likely effect on efficiency?

Accepted Answer

Inefficient overproduction and deadweight loss.

Question 12

In the market for illegal goods, what happens to the opportunity cost of buying the good when penalties are imposed on buyers?

Accepted Answer

It rises above the market price due to the cost of breaking the law.

Question 13

If both buyers and sellers are penalized for trading an illegal good, what is the effect on equilibrium price and quantity?

Accepted Answer

Price and quantity both decrease.

Question 14

Which of the following best describes the effect of a tax on a good with perfectly elastic supply?

Accepted Answer

The buyer pays the entire tax.

Question 15

Alcohol, tobacco, and gasoline are often taxed heavily. Why do buyers of these items pay most of the tax?

Accepted Answer

Because their demand is inelastic.

Question 16

Which formula represents the equilibrium condition in a market with a tax imposed?

Accepted Answer

$$P_b - P_s = t$$

Question 17

If the supply of a good is perfectly inelastic, who bears the entire burden of a tax imposed on the good?

Accepted Answer

The seller

Question 18

Which of the following is NOT a likely consequence of a rent ceiling set below equilibrium?

Accepted Answer

Increased quantity of housing supplied

Question 19

Which principle of tax fairness justifies high rates of income tax on high incomes?

Accepted Answer

Ability-to-pay principle

Question 20

When a tax is imposed, what happens to the marginal social benefit and marginal social cost at the new equilibrium?

Accepted Answer

Marginal social benefit exceeds marginal social cost.

Government Actions in Markets: Rent Ceilings and Housing Shortages

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