Question

Question text

Suppose that there are three types of markets with different degrees of price elasticity. In Market 1, the demand curve is perfectly inelastic and the supply curve is relatively steep. In Market 2, the supply curve is relatively flat and the demand curve is relatively steep. In Market 3, the supply curve is relatively steep and the demand curve is relatively flat. Which of the following statements is (are) correct?

(x) All of the burden of the tax is imposed on the buyer in Market 1.

(y) The majority of a tax will be paid by the buyer in Market 2 because supply is less elastic than demand in that market.

(z) The majority of a tax will be paid by the seller in Market 3 because supply is more elastic than demand in that market.

Select one:

A. (x), (y) and (z)

B. (x) and (y) only

C. (x) and (z) only

D. (y) and (z) only

E. (x) only

Which of the following statements about rent control is (are) correct?

(x) In the rental housing market, the imposition of binding rent controls cause the quantity supplied of rental housing to decrease and quantity demanded of rental housing to increase.

(y)   Over time, housing shortages caused by rent control decrease because the demand and supply curves for housing are more inelastic in the long run.

(z)   Waiting lists, selection by ethnicity or gender, and bribes are mechanisms of rationing that are used by landlords in cities with rent control.

Answer 1

Ans) The tax burden depends upon the elasticity. Tax burden falls more heavily upon the less elastic side of the market. Further, steeper the slope, lesser the elasticity and flatter the slope, more the elasticity.

In market 1, all the tax will be paid by the buyers because demand is inelastic.

In market 2, majority of tax will be paid by buyers because demand is less elastic and supply is more elastic.

In market 3, more burden will fall upon sellers because supply is less elastic and demand is more elastic.

Option e is correct.

Market 1 All Tax paid by - Consumer Stax -

Price received • i Price paid by t buyer by seller s 25 -sttax upon buyers More tax burden Market 2

- Sttax Price paides baring, ha [Market 3] Market 3 H More tax burden upon sellers I Price received by bollos

2) A binding price control is when the price is below the equilibrium price. At this price the demand is more and supply is less, causing shortage.

Over the time the shortage will increase because more people will demand house as the prices are low and land owners will not build new houses i.e.demand and supply will become more elastic.

With rent control, owners start giving houses according to their preference. People will bribe owners to get the houses.

Option x and z are correct.