Micro-Economics

HW for CH6:

Lovers of classical music persuade Congress to impose a price ceiling of $40 per concert ticket. As a result of this policy, do more or fewer people attend classical music concerts and why?

- The answer is fewer.

For simplicity sake, we'll assume one aggregate supply and demand curve, where the equilibrium point is at a price at $50, which is above the $40 ceiling. Clearly the current price must be above $40 or else there would not be a need for price ceiling.

At the $50 equilibruim, supply and demand units are the same. Let's say 500,000 seats.

If a price ceiling is put into place to $40, the suppliers will offer less (let's say 400,000 seats) and the buyers would demand more (600,000). What would happen is that there would be only 400,000 seats sold (since supply is capped at 400,000) and there would be an unmet demand for 200,000 seats (600,000 wanted vs 400,000 available).

If the government places a $500 tax on luxury cars, will the price paid by consumers rise more than $500, less than $500, or exactly $500? Explain the allocation of tax payments between consumers and producers.

- If the government imposes a $500 tax on luxury cars, the price paid by consumers will rise less than $500, in general.

The burden of any tax is shared by both producers and consumers, the price paid by consumers rises and the price received by producers falls, with the difference between the two equal to the amount of the tax.

The only exception would be if the supply curve were perfectly elastic, in which case consumers would bear the full burden of the tax and the price paid by consumers would rise by exactly $500.

Congress and the president decide that the United States should reduce air pollution by reducing its use of gasoline. They impose a $0.50 tax on each gallon sold.

A. Should they impose this tax on producers or consumers? Explain carefully using a supply-anddemand diagram.

- In theory, it...