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Questions

2.A.6

Read chapter 6, the sections on tnaxes

Before beginning this assignment, please read chapter 6 and refer to it as you form your answers.

• Explain why a binding price floor (like the minimum wage) decreases the number of people who get to sell something.
• Explain why a binding price ceiling (like rent control) decreases the number of people who get to buy something.
• Explain why a nonbinding price control (you may pick either a nonbinding price floor or a nonbinding price ceiling) has no impact on the market.
• Your textbook says that a tax drives a wedge between the price that buyers pay and the price that sellers receive. Explain what that means in your own words.
• Suppose that the government decides to put a tax of 10% on alcohol. Explain why the price of alcohol will increase as a result of this tax and why that increase will be less than 10%.

2.A.8

Read chapter 8

Before beginning this assignment, please read chapter 8 and refer to it as you form your answers.

1. Draw a supply and demand diagram that demonstrates the effect of a tax. Label each axis, the supply curve, the demand curve, the price the buyers pay (on the axis), the price the sellers receive after the tax and the quantity bought/sold (on the axis).

2. Label the government revenue collected by the tax on your diagram.

3. Label the deadweight loss associated by the tax on your diagram.

4. Explain why taxes create a deadweight loss.