1. Describe some of the trade-offs faced by each of
a. a family deciding whether to buy a new car
b. a member of Congress deciding how much
to spend on national parks
c. a company president deciding whether to
open a new factory
d. a professor deciding how much to prepare
e. a recent college graduate deciding whether
to go to graduate school
2. You are trying to decide whether to take a vacation. Most of the costs of the vacation (airfare, hotel, and forgone wages) are measured in
dollars, but the benefits of the vacation are psychological. How can you compare the benefits
to the costs?
3. You were planning to spend Saturday working
at your part-time job, but a friend asks you to
go skiing. What is the true cost of going skiing?
Now suppose you had been planning to spend
the day studying at the library. What is the cost
of going skiing in this case? Explain.
4. You win $100 in a basketball pool. You have
a choice between spending the money now or
putting it away for a year in a bank account
that pays 5 percent interest. What is the opportunity
cost of spending the $100 now?
5. The company that you manage has invested
$5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction
of competing products has reduced
the expected sales of your new product to
$3 million. If it would cost $1 million to finish development and make the product, should
you go ahead and do so? What is the most that
you should pay to complete development?
6. The Social Security system provides income for people over age 65. If a recipient of Social
Security decides to work and earn some
income, the amount he or she receives in Social Security benefits is typically reduced.
a. How does the provision of Social Security
affect people’s incentive to save while
b. How does the reduction in benefits associated with higher earnings affect people’s
incentive to work past age 65?
7. A 1996 bill reforming the federal government’s antipoverty programs limited many welfare recipients to only two years of benefits.
a. How does this change affect the incentives
b. How might this change represent a trade-off between equality and efficiency?
8. Your roommate is a better cook than you are,
but you can clean more quickly than your roommate can. If your roommate did all the cooking and you did all the cleaning, would
your chores take you more or less time than if
you divided each task evenly? Give a similar example of how specialization and trade can
make two countries both better off.
9. Explain whether each of the following government activities is motivated by a concern about
equality or a concern about efficiency. In the
case of efficiency, discuss the type of market
a. regulating cable TV prices
b. providing some poor people with vouchers
that can be used to buy food
c. prohibiting smoking in public places
d. breaking up Standard Oil (which once
owned 90 percent of all oil refineries) into
several smaller companies
e. imposing higher personal income tax rates
on people with higher incomes
f. instituting laws against driving while intoxicated
10. Discuss each of the following statements from the standpoints of equality and efficiency.
a. “Everyone in society sho uld be guaranteed
the best healthcare possible.”
b. “When workers are laid off, they should be
able to collect unemployment benefits until
they find a new job.”
11. In what ways is your standard of living different
from that of your parents or grandparents
when they were your age? Why have these changes occurred?
12. Suppose Americans decide to save more of
their incomes. If banks lend this extra saving to businesses, which use the funds to build new factories, how might this lead to faster growth
in productivity? Who do you suppose benefits
from the higher productivity? Is society getting
a free lunch?
13. In 2010, President Barack Obama and Congress enacted a healthcare reform bill in the United States. Two goals of the bill were to provide
more Americans with health insurance (via subsidies for lower-income households financed
by taxes on higher-income households) and
to reduce the cost of healthcare (via various
reforms in how healthcare is provided).
a. How do these goals relate to equality and efficiency?
b. How might healthcare reform increase productivity in the United States?
c. How might healthcare reform decrease productivity in the United States?
14. During the Revolutionary War, the American colonies could not raise enough tax revenue
to fully fund the war effort; to make up this difference, the colonies decided to print more money. Printing money to cover expenditures
is sometimes referred to as an “inflation tax.”
Who do you think is being “taxed” when more money is printed? Why?
15. Imagine that you are a policymaker trying to decide whether to reduce the rate of inflation.
To make an intelligent decision, what would
you need to know about inflation, unemployment, and the trade-off between them?
16. A policymaker is deciding how to finance the construction of a new airport. He can either
pay for it by increasing citizens’ taxes or by
printing more money. What are some of the
short-run and long-run consequences of each option?
1. Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow
of goods and services and the flow of dollars
for each of the following activities.
a. Selena pays a storekeeper $1 for a quart of milk.
b. Stuart earns $4.50 per hour working at a fastfood restaurant.
c. Shanna spends $30 to get a haircut.
d. Sally earns $10,000 from her 10 percent ownership
of Acme Industrial.
2. Imagine a society that produces military goods and consumer goods, which we’ll call “guns”
a. Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a
b. Show a point that is impossible for the economy to achieve. Show a point that is feasible
c. Imagine that the society has two political parties, called the Hawks (who want a
strong military) and the Doves (who want a smaller military). Show a point on your production possibilities frontier that the Hawks
might choose and a point the Doves might choose.
d. Imagine that an aggressive neighboring country reduces the size of its military. As a result, both the Hawks and the Doves reduce
their desired production of guns by the same amount. Which party would get the bigger “peace dividend,” measured by the increase
in butter production? Explain.
3. The first principle of economics discussed in Chapter 1 is that people face trade-offs. Use
a production possibilities frontier to illustrate society’s trade-off between two “goods”—a
clean environment and the quantity of industrial output. What do you suppose determines
the shape and position of the frontier? Show
what happens to the frontier if engineers
develop a new way of producing electricity
that emits fewer pollutants.
4. An economy consists of three workers: Larry, Moe, and Curly. Each works ten hours a day
and can produce two services: mowing lawns
and washing cars. In an hour, Larry can either mow one lawn or wash one car; Moe can either mow one lawn or wash two cars; and Curly
can either mow two lawns or wash one car.
a. Calculate how much of each service is produced under the following circumstances,
which we label A, B, C, and D:
? All three spend all their time mowing
? All three spend all their time washing
? All three spend half their time on each
? Larry spends half h is time on each activity,
while Moe only washes cars and Curly
only mows lawns. (D)
b. Graph the production possibilities frontier
for this economy. Using your answers to
part (a), identify points A, B, C, and D on
c. Explain why the production possibilities frontier has the shape it does.
d. Are any of the allocations calculated in part
(a) inefficient? Explain.
5. Classify the following topics as relating to microeconomics or macroeconomics.
a. a family’s decision about how much income
b. the effect of government regulations on auto emissions
c. the impact of higher national saving on economic growth
d. a firm’s decision about how many workers
e. the relationship between the inflation rate
and changes in the quantity of money
6. Classify each of the following statements as positive or normative. Explain.
a. Society faces a short-run trade-off between
inflation and unemployment.
b. A reduction in the rate of money growth will reduce the rate of inflation.
c. The Federal Reserve should reduce the rate
of money growth.
d. Society ought to require welfare recipients to look for jobs.
e. Lower tax rates encourage more work and
7. If you were president, would you be more interested in your economic advisers’ positive views or their normative views? Why?
1. Maria can read 20 pages of economics in an hour. She can also read 50 pages of sociology in
an hour. She spends 5 hours per day studying.
a. Draw Maria’s production possibilities frontier
for reading economics and sociology.
b. What is Maria’s opportunity cost of reading
100 pages of sociology?
2. American and Japanese workers can each produce 4 cars a year. An American worker can
produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers.
a. For this situation, construct a table analogous
to the table in Figure 1.
b. Graph the production possibilities frontier of
the American and Japanese economies.
c. For the United States, what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity cost of a car? Of grain? Put this information in a table analogous to Table 1.
d. Which country has an absolute advantage in producing cars? In producing grain?
e. Which country has a comparative advantage
in producing cars? In producing grain?
f. Without trade, half of each country’s workers produce cars and half produce grain. What quantities of cars and grain does each country produce?
g. Starting from a position without trade, give
an example in which trade makes each country better off.
3. Pat and Kris are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Pat takes 4 hours
to brew a gallon of root beer and 2 hours to
make a pizza. Kris takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza.
a. What is each roommate’s opportunity cost
of making a pizza? Who has the absolute advantage in making pizza? Who has the comparative advantage in making pizza?
b. If Pat and Kris trade foods with each other, who will trade away pizza in exchange for
c. The price of pizza can be expressed in terms
of gallons of root beer. What is the highest
price at which pizza can be traded that
would make both roommates better off?
What is the lowest price? Explain.
4. Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year.
a. What is the opportunity cost of producing a
car in Canada? What is the opportunity cost
of producing a bushel of wheat in Canada? Explain the relationship between the opportunity costs of the two goods.
b. Draw Canada’s production possibilities frontier. If Canada chooses to consume 10 million
cars, how much wheat can it consume without trade? Label this point on the production possibilities frontier.
c. Now suppose that the United States offers to buy 10 million cars from Canada in exchange
for 20 bushels of wheat per car. If Canada continues to consume 10 million cars, how
much wheat does this deal allow Canada to consume? Label this point on your diagram. Should Canada accept the deal?
5. England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour.
a. Which country has the absolute advantage in
the production of each good? Which country
has the comparative advantage?
b. If England and Scotland decide to trade,
which commodity will Scotland trade to
c. If a Scottish worker could produce only 1
sweater per hour, would Scotland still gain
from trade? Would England still gain from
6. The following table describes the production possibilities of two cities in the country of Baseballia:
Pairs of Red Socks Pairs of White Socks
per Worker per Hour per Worker per Hour
Boston 3 3
Chicago 2 1
a. Without trade, what is the price of white
socks (in terms of red socks) in Boston? What
is the price in Chicago?
b. Which city has an absolute advantage in the production of each color sock? Which city has
a comparative advantage in the production of
each color sock?
c. If the cities trade with each other, which color
sock will each export?
d. What is the range of prices at which trade can
7. Suppose that in a year an American worker
can produce 100 shirts or 20 computers, while
a Chinese worker can produce 100 shirts or
a. Graph the production possibilities curve for
the two countries. Suppose that without trade
the workers in each country spend half their
time producing each good. Identify this point
in your graph.
b. If these countries were open to trade, which
country would export shirts? Give a specific
numerical example and show it on your
graph. Which country would benefit from
c. Explain at what price of computers (in terms
of shirts) the two countries might trade.
d. Suppose that China catches up with
American productivity so that a Chinese
worker can produce 100 shirts or 20 computers. What pattern of trade would you
predict now? How does this advance
in Chinese productivity affect the economic
well-being of the citizens of the two
8. An average worker in Brazil can produce an ounce of soybeans in 20 minutes and an ounce
of coffee in 60 minutes, while an average worker
in Peru can produce an ounce of soybeans in
50 minutes and an ounce of coffee in 75 minutes.
a. Who has the absolute advantage in coffee? Explain.
b. Who has the comparative advantage in coffee? Explain.
c. If the two countries specialize and trade
with each other, who will import coffee? Explain.
d. Assume that the two countries trade and that
the country importing coffee trades 2 ounces
of soybeans for 1 ounce of coffee. Explain why both countries will benefit from this trade.
9. Are the following statements true or false? Explain in each case.
a. “Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods.”
b. “Certain very talented people have a comparative advantage in everything they do.”
c. “If a certain trade is good for one person, it
can’t be good for the other one.”
d. “If a certain trade is good for one person, it is always good for the other on
e. “If trade is good for a country, it must be
good for everyone in the country.”
10. The United States exports corn and aircraft to the rest of the world, and it imports oil and clothing from the rest of the world. Do you think this pattern of trade is consistent with the principle of comparative advantage? Why or why not?
11. Bill and Hillary produce food and clothing. In an hour, Bill can produce 1 unit of food or 1 unit
of clothing, while Hillary can produce 2 units
of food or 3 units of clothing. They each work
10 hours a day.
a. Who has an absolute advantage in producing food? Who has an absolute advantage in producing clothing? Explain.
b. Who has a comparative advantage in producing food? Who has a comparative advantage
in producing clothing? Explain.
c. Draw the production possibilities frontier
for the household (that is, Bill and Hillary together) assuming that each spends the
same number of hours each day as the other producing food and clothing.
d. Hillary suggests, instead, that she specialize
in making clothing. That is, she will do all the clothing production for the family; however, if
all her time is devoted to clothing and they still want more, then Bill can help with clothing production. What does the household production possibilities frontier look like now?
e. Bill suggests that Hillary specialize in producing food. That is, Hillary will do all the food production for the family; however, if all her
time is devoted to food and they still want more, then Bill can help with food production. What does the household production possibilities frontier look like under Bill’s proposal?
f. Comparing your answers to parts c, d, and e, which allocation of time makes the most sense? Relate your answer to the theory of comparative advantage.
1. Explain each of the following statements using supply-and-demand diagrams.
a. “When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout
b. “When the weathe r turns warm in New England every summer, the price of hotel
rooms in Caribbean resorts plummets.”
c. “When a war breaks out in the Middle East,
the price of gasoline rises, and the price of a
used Cadillac falls.”
2. “An increase in the demand for noteboo ks raises
the quantity of notebooks demanded but
not the quantity supplied.” Is this statement
true or false? Explain.
3. Consider the market for minivans. For each
of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram
to show the effect on the price and quantity of minivans.
a. People decide to have more children.
b. A strike by steelworkers raises steel prices.
c. Engineers develop new automated machinery for the production of minivans.
d. The price of sports utility vehicles rises.
e. A stock-market crash lowers people’s wealth.
4. Consider the markets for DVDs, TV screens, and tickets at movie theaters.
a. For each pair, identify whether they are complements
? DVDs and TV screens
? DVDs and movie tickets
? TV screens and movie tickets
b. Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a diagram to show what happens in the market
for TV screens.
c. Draw two more diagrams to show how the change in the market for TV screens affects
the markets for DVDs and movie tickets.
5. Over the past 30 years, technological advances have reduced the cost of computer chips. How do you think this has affected the market
for computers? For computer software? For typewriters?
6. Using supply-and-demand diagrams, show the effect of the following events on the market for sweatshirts.
a. A hurricane in South Carolina damages the cotton crop.
b. The price of leather jackets falls.
c. All colleges require morning exercise in appropriate attire.
d. New knitting machines are invented.
7. A survey shows an increase in drug use by young people. In the ensuing debate, two hypotheses are proposed:
? Reduced police efforts have increased the availability of drugs on the street.
? Cutbacks in education efforts have
decreased awareness of the dangers of drug addiction.
a Use supply-and-demand diagrams to show
how each of these hypotheses could lead to
an increase in quantity of drugs consumed.
b How could information on what has happened
to the price of drugs help us to distinguish between these explanations?
8. Suppose that in the year 2015 the number of births is temporarily high. How does this baby boom affect the price of babysitting services in 2020 and 2030? (Hint: 5-year-olds need babysitters, whereas 15-year-olds can be babysitters.)
9. Ketchup is a complement (as well as a condiment) for hot dogs. If the price of hot dogs rises,
what happens to the market for ketchup? For tomatoes? For tomato juice? For orange juice?
10. The market for pizza has the following demand and supply schedules:
Price Quantity Demanded Quantity Supplied
$4 135 pizzas 26 pizzas
5 104 53
6 81 81
7 68 98
8 53 110
9 39 121
a. Graph the demand and supply curves. What
is the equilibrium price and quantity in this market?
b. If the actual price in this market were above
the equilibrium price, what would drive the
market toward the equilibrium?
c. If the actual price in this market were below
the equilibrium price, what would drive the
market toward the equilibrium?
11. Consider the following events: Scientists reveal that consumption of oranges decreases the risk
of diabetes, and at the same time, farmers use
a new fertilizer that makes orange trees more productive. Illustrate and explain what effect
these changes have on the equilibrium price and quantity of oranges.
12. Because bagels and cream cheese are often eaten together, they are complements.
a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What could be responsible
for this pattern—a fall in the price of flour
or a fall in the price of milk? Illustrate and
explain your answer.
b. Suppose instead that the equilibrium
price of cream cheese has risen but the equilibrium quantity of bagels has fallen.
What could be responsible for this pattern—
a rise in the price of flour or a rise in the
price of milk? Illustrate and explain your answer.
13. Suppose that the price of basketball tickets at your college is determined by market forces. Currently, the demand and supply schedules
are as follows:
Price Quantity Demanded Quantity Supplied $ 4 10,000 tickets 8,000 tickets
8 8,000 8,000
12 6,000 8,000
16 4,000 8,000
20 2,000 8,000
a. Draw the demand and supply curves. What
is unusual about this supply curve? Why
might this be true?
b. What are the equilibrium price and quantity
c. Your college plans to increase total enrollment next year by 5,000 students. The
additional students will have the following demand schedule:
Price Quantity Demanded
$ 4 4,000 tickets
Now add the old demand schedule and the
demand schedule for the new students to
calculate the new demand schedule for the
entire college. What will be the new equilibrium price and quantity?
14. Market research has revealed the following information about the market for chocolate bars: The demand schedule can be represented by
the equation Q D = 1,600 – 300P, where Q D is the quantity demanded and P is the price. The supply schedule can be represented by the equation
Q S = 1,400 + 700P, where Q S is the quantity supplied. Calculate the equilibrium price and quantity
in the market for chocolate bars.
1. For each of the following pairs of goods, which good would you expect to have more elastic demand and why?
a. required textbooks or mystery novels
b. Beethoven recordings or classical music recordings in general
c. subway rides during the next six months or subway rides during the next five years
d. root beer or water
2. Suppose that business travelers and vacationers have the following demand for airline tickets
from New York to Boston:
Quantity Demanded Quantity Demanded
Price (business travelers) (vacationers)
$150 2,100 tickets 1,000 tickets
200 2,000 800
250 1,900 600
300 1,800 400
a. As the price of tickets rises from $200 to $250, what is the price elasticity of demand
for (i) business travelers and (ii) vacationers? (Use the midpoint method in your calculations.)
b. Why might vacationers have a different elasticity from business travelers?
3. Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the
a. if the price of heating oil rises from $1.80
to $2.20 per gallon, what happens to the
quantity of heating oil demanded in the short
run? In the long run? (Use the midpoint
method in your calculations.)
b. Why might this elasticity depend on the time horizon?
4. A price change causes the quantity demanded
of a good to decrease by 30 percent, while
the total revenue of that good increases by
15 percent. Is the demand curve elastic or inelastic? Explain.
5. The equilibrium price of coffee mugs rose sharply last month, but the equilibrium quantity was
the same as ever. Three people tried to explain
the situation. Which explanations could be
right? Explain your logic.
Billy: Demand increased, but supply was
Marian: Supply increased, but so did
Valerie: Supply decreased, but demand was
6. Suppose that your demand schedule for DVDs
is as follows:
Quantity Demanded Quantity Demanded
Price (income = $10,000) (income = $12,000) $ 8 40 DVDs 50 DVDs
10 32 45
12 24 30
14 16 20
16 8 12
a. Use the midpoint method to calculate your
price elasticity of demand as the price of
DVDs increases from $8 to $10 if (i) your
income is $10,000 and (ii) your income is
b. Calculate your income elasticity of demand
as your income increases from $10,000 to
$12,000 if (i) the price is $12 and (ii) the price
7. You have the following information about good X and good Y:
? Income elasticity of demand for good X: –3
? Cross-price elasticity of demand for good X
with respect to the price of good Y: 2
Would an increase in income and a decrease in
the price of good Y unambiguously decrease
the demand for good X? Why or why not?
8. Maria has decided always to spend one-third of her income on clothing.
a. What is her income elasticity of clothing demand?
b. What is her price elasticity of clothing demand?
c. If Maria’s tastes change and s he decides
to spend only one-fourth of her income
on clothing, how does her demand curve change? What is her income elasticity and
price elasticity now?
9. The New York Times reported (Feb. 17, 1996) that subway ridership declined after a fare increase:
“T here were nearly four million fewer riders
in December 1995, the first full month after the price of a token increased 25 cents to $1.50, than
in the previous December, a 4.3 percent decline.”a. Use these data to estimate the price elasticity
of demand for subway rides.
b. According to your estimate, what happens
to the Transit Authority’s revenue when the
c. Why might your estimate of the elasticity be unreliable?
10. Two drivers—Tom and Jerry—each drive up to
a gas station. Before looking at the price, each places an order. Tom says, “I’d like 10 gallons
of gas.” Jerry says, “I’d like $10 worth of gas.”What is each driver’s price elasticity of demand?
11. Consider public policy aimed at smoking.
a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack
of cigarettes currently costs $2 and the government
wants to reduce smoking by
20 percent, by how much should it increase
b. If the government permanently increases
the price of cigarettes, will the policy have a
larger effect on smoking one year from now
or five years from now?
c. Studies also find that teenagers have a
price elasticity than do adults. Why
might this be true?
12. You are the curator of a museum. The museum is running short of funds, so you decide to increase revenue. Should you increase or decrease the price of admission? Explain.
13. Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand. Suppose that technological advance doubles the supply of both products (that is,
the quantity supplied at each price is twice
what it was).
a. What happens to the equilibrium price and quantity in each market?
b. Which product experiences a larger change
c. Which product experiences a larger change
d. What happens to total consumer spending
on each product?
14. Several years ago, flooding along the Missouri and the Mississippi rivers destroyed thousands
of acres of wheat.
a. Farmers whose crops were destroyed by the floods were much worse off, but farmers
whose crops were not destroyed benefited
from the floods. Why?
b. What information would you need about the market for wheat to assess whether farmers
as a group were hurt or helped by the
15. Explain why the following might be true:
A drought around the world raises the total revenue that farmers receive from the sale of grain, but a drought only in Kansas reduces the total revenue that Kansas farmers receive.
1. 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?
2. The government has decided that the free-market price of cheese is too low.
a. Suppose the government imposes a binding
price floor in the cheese market. Draw
and-demand diagram to show the
effect of this policy on the price of cheese and
the quantity of cheese sold. Is there a shortage
or surplus of cheese?
b. Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain.
c. In response to farmers’ complaints, the government agrees to purchase all the surplus
cheese at the price floor. Compared to the
basic price floor, who benefits from this new policy? Who loses?
3. A recent study found that the demand and
schedules for Frisbees are as follows:
Price per Quantity Quantity
Frisbee Demanded Supplied
$11 1 million Frisbees 15 million Frisbees
10 2 12
9 4 9
8 6 6
7 8 3
6 10 1
a. What are the equilibrium price and quantity
b. Frisbee manufacturers persuade the government that Frisbee production improves
scientists’ understanding of aerodynamics
and thus is important for national security. A concerned Congress votes to impose a price
floor $2 above the equilibrium price. What is
the new market price? How many Frisbees
c. Irate college students march on Washington
and demand a reduction in the price of
Frisbees. An even more concerned Congress
votes to repeal the price floor and impose a
price ceiling $1 below the former price floor.
What is the new market price? How many Frisbees are sold?
4. Suppose the federal government requires beer drinkers to pay a $2 tax on each case of beer purchased. (In fact, both the federal and state governments impose beer taxes of some sort.) a. Draw a supply-and-demand diagram of the market for beer without the tax. Show the
price paid by consumers, the price received
by producers, and the quantity of beer sold. What is the difference between the price
paid by consumers and the price received by producers?
b. Now draw a supply-and-demand diagram
for the beer market with the tax. Show the
price paid by consumers, the price received
by producers, and the quantity of beer sold. What is the difference between the price
paid by consumers and the price received
by producers? Has the quantity of beer sold increased or decreased?
5. A senator wants to raise tax revenue and make workers better off. A staff member proposes raising the payroll tax paid by firms and using part of the extra revenue to reduce the payroll tax paid by workers. Would this accomplish
the senator’s goal? Explain.
6. If the government places a $500 tax on luxury cars, will the price paid by consumers rise by more than $500, less than $500, or exactly $500? Explain.
7. 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 for each gallon of gasoline sold.
a. Should they impose this tax on producers
or consumers? Explain carefully using a
b. If the demand for gasoline were more elastic, would this tax be more effective or less effective in reducing the quantity of gasoline consumed? Explain with both words and a diagram.
c. Are consumers of gasoline helped or hurt by