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CHAPTER 6: Markets in Action (Pg. 122-124, 126-128, and 130-133)
Answers to the Review Quizzes
Review Quizzes Page 126
1. When the supply of housing decreases, the short-run supply curve for housing shifts to the
left. This causes the equilibrium rental price to increase and the equilibrium quantity of
housing units to decrease in the short run.
2. An increase in the rental price for housing units motivates landlords to increase the quantity
of housing units available and motivates renters to rent less housing space. If the market is
unregulated, the housing units are allocated to those who are willing to pay at least the
equilibrium rental rates.
3. If the long-run supply curve for housing units is perfectly elastic, then more housing will
eventually be produced and the rental price will return to the original rental rate.
4. A rent ceiling is a specific example of a price ceiling. Rent ceilings are laws that prohibit
suppliers (landlords) from charging prices (rental rates) higher than some specified level. If a
rent ceiling is set above the equilibrium rental rate, it will have no impact on the equilibrium
rental price and quantity of housing.
5. If the rent ceiling is below the equilibrium rental price for housing, the quantity of housing
units demanded by renters exceeds the quantity supplied by landlords. Since landlords are
not forced to supply more units than the supply curve would indicate for the rent ceiling
price, the quantity of housing units actually rented equals the quantity supplied, rather than
the quantity demanded. This causes a shortage to develop in the rental housing market.
6. With an effective price ceiling, some means for allocation of housing units (other than by
price) becomes necessary. The shortage of housing units causes renters’ search efforts to
increase, which imposes an opportunity cost on renters and raises the effective rental price
for housing units. Black markets also develop, where housing units are allocated at higher
than the regulated rental prices. Over time, those who have lived a long time in the rentcontrolled area will benefit, since they will be the households that have acquired housing at
the lower price, despite their income-levels. Newcomers will be at a disadvantage.
Review Quizzes Page 129
1. Demand for unskilled labour constantly declines because technological advances constantly
increase the productivity of skilled workers relative to unskilled workers. In an unregulated
labour market, decreases in the demand for unskilled labour causes a short-run decline in
wages as the demand curve shifts leftward along a positively sloped, short-run supply curve
of labour.
2. If the long run supply of labour is perfectly elastic, wages will eventually return to their
original level.
3. When a price floor is applied to the labour market, this is called a minimum wage law. If the
minimum wage is set below the equilibrium wage level, then the law has no impact on the
labour market equilibrium wage and quantity.
4. If the minimum wage is set above the equilibrium wage level, the ability of the competitive
market to allocate resources efficiently is thwarted. In the case of a minimum wage law, a
decrease in demand cannot cause the wage to fall, so the quantity supplied of unskilled
labourers exceeds the quantity demanded, resulting in unemployment.
Review Quizzes Page 134
1. The more elastic the demand curve becomes for a given supply curve: (i) the rise in the after
tax price paid by the buyer becomes smaller, (ii) the deadweight loss to society becomes
bigger, and (iii) the burden of the tax paid by the buyer becomes smaller. The wedge
between the price received by the seller and the price paid by the buyer causes the marginal
benefits of the last unit sold to be higher than its marginal cost, and the market will underproduce the good or service being taxed.
2. The more elastic the supply curve becomes for a given demand curve: (i) the fall in the aftertax price received by the seller becomes smaller; (ii) the deadweight loss to society becomes
bigger; and (iii) the burden of the tax paid by the seller becomes smaller. The wedge
between the price received by the seller and the price paid by the buyer causes the marginal
benefits of the last unit sold to be higher than its marginal cost, and the market will underproduce the good or service being taxed.
3. The imposition of a tax on a market causes a wedge to be driven between the price received
by the seller and the price paid by the buyer. This causes the marginal benefits of the last
unit sold to be higher than its marginal cost, and the market will under-produce the good or
service being taxed. If more of the good or service were produced, the marginal benefits
gained would be greater than the marginal costs incurred, and net benefits to society would
increase.
Review Quizzes Page 137
1. A bumper crop from ideal weather conditions shifts the momentary supply curve rightward,
increasing the equilibrium quantity, lowering the market price, and decreasing total farm
revenues. A poor harvest from poor weather conditions shifts the momentary supply curve
leftward, decreasing the equilibrium quantity, raising the market price, and raising total farm
revenues.
2. A subsidy increases the price received by sellers, shifts the supply curve rightward, and
places a wedge between the marginal benefit and marginal cost to society of producing the
good. The subsidy creates in a dead weight loss to society, a higher equilibrium quantity
sold, over-production of the farm product, and a lower price paid by the consumers. The
subsidy increases farm revenues to all farmers.
3. A production quota increases the price paid by buyers, decreases the quantity supplied by
sellers, and places a wedge between the marginal benefit and marginal cost to society of
producing the good. A production quota results in a dead weight loss to society, a lower
equilibrium quantity sold, and a higher price received by the sellers. The production quota
increases farm revenues to some farmers and decreases farm revenues to other farmers.
Review Quizzes Page 139
1. If the penalty is levied on the seller, the penalty is added to the minimum price required for
supplying the good or service. The demand curve remains unchanged but the supply curve
shifts leftward, so that the vertical distance between the initial supply curve and the supply
curve with the penalty equals the dollar value of the penalty. In this case, the equilibrium
price of the product rises and the equilibrium quantity decreases.
2. If the penalty is levied on the buyer, the penalty is subtracted from the maximum willingness
to pay for the good. The supply curve remains unchanged and the demand curve shifts
leftward, so that the vertical distance between the initial demand curve with the demand
curve with the penalty equals the dollar value of the penalty. In this case, the equilibrium
price of the product falls and the equilibrium quantity decreases.
3. If buyers and sellers face penalties, both the demand and supply curves shift leftward. If the
shift in the supply curve is larger, the equilibrium price rises and quantity decreases; if the
shift in the demand curve is larger, the price falls and quantity decreases; if the shifts are the
same magnitude, the price is unchanged and the quantity decreases.
4. To reduce the consumption of drugs, they can be legalized and taxed. Legalizing and then
taxing drugs has the benefit of raising funds for the government that could be used to help
educate people about the danger of consuming drugs. However, if very high taxes are
necessary to reduce the consumption of illegal drugs to the level of use when they were
banned, this will cause buyers and sellers to engage in unreported trade in the black market
and avoid the tax through tax evasion. Also, legalizing drugs may signal official approval for
its use, shifting the buyers’ demand curve to the right, increasing drug use.
Answers to the Problems
1. a. Equilibrium price is $200 a month and the equilibrium quantity is 10,000 housing units.
b. The quantity rented is 5,000 housing units. The quantity of housing rented is equal to the
quantity supplied at the rent ceiling.
c. The shortage is 10,000 housing units. At the rent ceiling, the quantity of housing
demanded is 15,000, but the quantity supplied is 5,000, so there is a shortage of 10,000
housing units.
d. The maximum price that someone is willing to pay for the 5,000th unit available is $300
a month. The demand curve tells us the maximum price willingly paid for the 5,000th
unit.
2. a. Equilibrium price is $450 a month and the equilibrium quantity is 20,000 housing units.
b. The quantity rented is 10,000 housing units. The quantity of housing rented is equal to
the quantity supplied at the rent ceiling.
c. The shortage of housing is 20,000 housing units. At the rent ceiling, the quantity of
housing demanded is 30,000, but the quantity supplied is 10,000, so there is a shortage of
20,000 housing units.
d. The maximum price that someone is willing to pay for the 10,000th unit available is $600
a month. The demand curve tells us the maximum price that someone is willing to pay
for the 10,000th unit.
3. a. The equilibrium wage rate is $4 an hour, and employment is 2,000 hours a month.
b. Unemployment is zero. Everyone who wants to work for $4 an hour is employed.
c. They work 2,000 hours a month. A minimum wage rate is the lowest wage rate that a
person can be paid for an hour of work. Because the equilibrium wage rate exceeds the
minimum wage rate, the minimum wage is ineffective. The wage rate will be $4 an hour
and employment is 2,000 hours.
d. There is no unemployment. The wage rate rises to the equilibrium wage - the quantity of
labour demanded equals the quantity of labour supplied. So, there is no unemployment.
e. At $5 an hour, 1,500 hours a month are employed and 1,000 hours a month are
unemployed. The quantity of labour employed equals the quantity demanded at $5 an
hour. Unemployment is equal to the quantity of labour supplied at $5 an hour minus the
quantity of labour demanded at $5 an hour. The quantity supplied is 2,500 hours a
month, and the quantity demanded is 1,500 hours a month. So, 1,000 hours a month are
unemployed.
f. The wage rate is $5 an hour, and unemployment is 500 hours a month. At the minimum
wage of $5 an hour, the quantity demanded is 2,000 hours a month and the quantity
supplied is 2,500 hours a month. So, 500 hours a month are unemployed.
4. a. The equilibrium wage rate is $7.50 an hour, and employment is 7,000 hours a month.
b. Unemployment is zero. Everyone who wants to work for $7.50 an hour is employed.
c. They work 7,000 hours a month. A minimum wage rate is the lowest wage rate that a
person can be paid for an hour of work. Because the equilibrium wage rate exceeds the
minimum wage rate, the minimum wage is ineffective. The wage rate will be $7.50 an
hour and employment is 7,000 hours.
d. There is no unemployment. The wage rate rises to the equilibrium wage - the quantity of
labour demanded equals the quantity of labour supplied. So, there is no unemployment.
e. At $8 an hour, 6,000 hours a month are employed and 2,000 hours a month are
unemployed. The quantity of labour employed equals the quantity demanded at $8 an
hour. Unemployment is equal to the quantity of labour supplied at $8 an hour minus the
quantity of labour demanded at $8 an hour. The quantity supplied is 8,000 hours a
month, and the quantity demanded is 6,000 hours a month. So, 2,000 hours a month are
unemployed.
f. The wage rate is $8 an hour, and unemployment is 4,000 hours a month. At the
minimum wage of $8 an hour, the quantity demanded is 4,000 hours a month and the
quantity supplied is 8,000 hours a month. So, 4,000 hours a month are unemployed.
5. a. With no tax on brownies, the price is 60 cents a brownie and 4 million a day are
consumed.
b. The price is 70 cents a brownie, and 3 million brownies a day are consumed. Consumers
and producers each pay 10 cents of the tax on a brownie. The tax decreases the supply of
brownies and raises the price of a brownie. With no tax, producers are willing to sell 3
million brownies a day at 50 cents a brownie. But with a 20 cent tax, they are willing to
sell 3 million brownies a day only if the price is 20 cents higher at 70 cents a brownie.
6. a. With no tax on roses, the price is $14 a bunch and 80 bunches a week are bought.
b. The price is $18 a bunch, and 60 bunches a week are bought. Buyers pay $4 of the tax on
a bunch of roses and sellers pay $2 of the tax on roses. The tax decreases the supply of
roses and raises the price of a bunch of roses. With no tax, producers are willing to sell
80 bunches a week for $14 a bunch. But, with a $6 a bunch tax, they are willing to sell
80 bunches a week only if the price is $6 a bunch higher at $20 a bunch. That is, the
price at which producers are willing to sell 40 bunches a week when the tax is $6 a bunch
is $16 a bunch; the price at which producers are willing to sell 60 bunches a week when
the tax is $6 a bunch is $18 a bunch.
At $18 a bunch, the quantity demanded is 60 bunches a week. $18 a bunch is the price
when the tax is $6 a bunch at which they are willing to sell 60 bunches a week. So, the
quantity sold is 60 bunches a week. The price has risen from $14 a bunch to $18 a
bunch, so buyers pay $4 of the $6 tax. Sellers pay the other $2 of tax.
7. With a subsidy on rice, the price is $1.20 a box, the marginal cost $1.50 a box, and the
quantity produced is 3,000 boxes a week. The subsidy of $0.30 lowers the price at which
each quantity in the table is supplied. For example, rice farmers will supply 3,000 boxes a
week if the price is $1.50 minus $0.30, which is $1.20. With a subsidy, the market
equilibrium occurs at $1.20 a box. At this price, the quantity demanded is 3,000 boxes and
the quantity supplied is 3,000 boxes. The marginal cost of producing rice is given by the
supply schedule. The marginal cost of supplying 3,000 boxes a week is $1.50 a box.
8. With a quota of 2,000 boxes a week, the price is $1.60 a box, the marginal cost $1.30 a box,
and the quantity produced is 2,000 boxes a week. The quota decreases the quantity supplied
to 2,000 boxes a week. The price willingly paid for 2,000 boxes a week is $1.60 (given by
the demand schedule). The marginal cost of producing 2,000 boxes of rice is given by the
supply schedule. The marginal cost of supplying 2,000 boxes a week is $1.30 a box.