REGULATION

Ragan Chapter 5

Efficiency

1. [Section 5.3] Demand and supply are given by D = 12 – 2p and S = 2p

a. Explain Consumer Surplus as net benefit = B – E

b. The area under the demand curve measures total benefit B

c. Explain Producer Surplus as profit = R – C

d. The area under supply curve measures economic cost C

Quantity

Price

ECO101H5 Fall 2023 Copyright University of Toronto

Taxes

2. Supply and Demand are given by D = 12 – 2p and S = 2p. Government introduces a t = 2 per-unit tax.

a. Illustrate the initial equilibrium as p0, q0.

b. Compute and tabulate CS, PS and TS.

c. Explain how a t = 2 gap between pD and pS will affect prices and quantities. [Figure 4-8]

d. Discuss and illustrate how the “incidence” of a per unit tax depends on “relative” elasticities. [Figure 4-9]

e. Explain the “you snooze, you lose” rule for tax incidence.

Quantity

Price

ECO101H5 Fall 2023 Copyright University of Toronto

Subsidies

3. Supply and Demand are given by D = 12 – 2p and S = 2p. Government introduces a s = 2 per-unit subsidy.

a. Illustrate the initial equilibrium as p0, q0.

b. Compute CS, PS and TS.

c. Explain how a s = 2 gap between pD and pS will affect prices and quantities.

d. Compute CS, PS, GS and TS.

e. Discuss and illustrate how the “incidence” of a per unit subsidy depends on “relative” elasticities.

f. Does “you snooze, you lose” apply for subsidies?

Quantity

Price

ECO101H5 Fall 2023 Copyright University of Toronto

The COVID Wage Subsidy

4. During the early months of the COVID-19 pandemic governments introduced a lockdown. Businesses that were deemed to

be non-essential were ordered to close their doors. Some employees were able to work at home, but many lost their jobs.

In response, the Government of Canada introduced a wage subsidy plan. Consider a simplified version of this plan.

Suppose that the pre-pandemic demand for labour was D₀ = 1200 – 50w and the supply was S = 50w – 200. Employment

was L₀ workers per hour employed at a wage of w₀ dollars per hour. Suddenly, the demand for labour declined to D₁ = 800

– 50w. Without a subsidy, employment would fall to L₁. The goal of the per-unit wage subsidy is to avoid layoffs, L = L₀

even though D₁ = 800 – 50w.

a. Provide a labelled Supply and Demand Diagram to illustrate and quantify L₀, w₀, L₁ and w₁

b. Calculate the per-unit subsidy necessary to achieve L = L₀ and the cost of this subsidy.

ECO101H5 Fall 2023 Copyright University of Toronto

Price Ceilings

5. Prices are determined by D = 12 – 2p and S = 2p. The government introduces a Price Ceiling at p̅ = 1.

a. Provide a diagram and calculates to assess the impact on p, q, CS, PS and TS. [Figure 5-3, 5-7]

p* p̅ = 1 Change

b. Add a perfectly elastic supply curve to your diagram.

c. Discuss SR and LR supply curves for Toronto condo market. [Figure 5-4]

d. Canada has a Price Ceiling for consumer loans at 60%. Is this beneficial?

6. Wages are determined by D = 12 – 2w and S = 2w. Government introduces a minimum wage (Price Floor) at w = 5.

a. Provide a diagram and calculates to assess the impact on p, q, CS, PS and TS. [Figure 5-2, 5-7]

b. Add an inelastic demand curve (not perfectly inelastic) to your diagram. Is the e-loss smaller?

c. Does worker surplus increase when a minimum wage is increased? Explain why some workers win, some workers

lose.

ECO101H5 Fall 2023 Copyright University of Toronto

Quotas

7. Prices are determined by D = 12 – 2p and S = 2p. Government introduces a Production Quota restricting supply to S = 4.

a. Provide a diagram and calculates to assess the impact on p, q, CS, PS and TS. [Figure 5-8]

b. How do these impacts depend on the elasticity of supply and demand?

c. What would happen if the government required S = 8?

OPEC+ Production Quotas

8. The COVID-19 pandemic led to a worldwide reduction in the demand for crude oil in the spring of 2020. After all, no one

was flying, cruising or even driving. Producers, who had for many years restricted supply through a cartel called OPEC+,

were faced with falling prices. Suppose that the pre-pandemic demand for crude oil was D0 = 2400 – 20p, supply was S =

20p and a Production Quota was established at Q0 = 800. Suppose that demand fell to D1 = 1800 – 20p.

a. Use a Supply and Demand Diagram to illustrate the pre-pandemic market showing the price p0 = _____ with a

Production Quota established at Q0 = 800. Calculate producer surplus PS0 = _____

b. Use the same diagram to illustrate the demand shift calculating price p1 = _____ assuming that the Q0 = 800 quota

is maintained. Calculate PS1 = _____.

c. Should they reduce the quota so that price is kept at the non-pandemic level p = p0 even though demand has

declined? Calculate the level for the quota to achieve this goal Q2 = ______. Calculate PS2 = _____

d. Would Quota = 600 maximize PS when D = 1800 – 20p?

ECO101H5 Fall 2023 Copyright University of Toronto

Tutorial Questions

1. Demand is D = 40 – p and supply S = p. Calculate Consumer Surplus when a Price Ceiling is introduced at p = 10. Provide a

Supply and Demand Diagram to illustrate this calculation. Illustrate the Efficiency Loss. Explain how the size of the

Efficiency Loss will depend on the price elasticity of supply.

2. Wages and employment are determined by supply S = 0.5w – 20 and demand D = 280 – 0.5w. Next month the government

will introduce a minimum wage of 400 dollars. Calculate and illustrate the Efficiency Loss. Explain how the size of the

Efficiency Loss will depend on the wage elasticity of labour demand.

ECO101H5 Fall 2023 Copyright University of Toronto

3. Prices are determined by demand D = 140 – 0.5p and supply S = 0.5p – 20. Next month a tax of 20 per-unit will be

introduced. Calculate and illustrate the Efficiency Loss. Explain how the incidence of this tax will depend on the elasticities

of supply and demand.

4. A commodity has a Price Ceiling at 20 dollars. Supply and demand are D = 100 – p and S = p. Calculate and illustrate the

Efficiency Gain that could be realized if this price ceiling was eliminated. Explain how the Efficiency Gain will depend on the

price elasticity of supply.

ECO101H5 Fall 2023 Copyright University of Toronto

Review Questions

1. The incidence of a per-unit subsidy is least favourable for buyers when supply is _____ and demand is _______.

a. Elastic; elastic

b. Elastic; inelastic ✓

c. Inelastic; elastic

d. Inelastic; inelastic

2. The imposition of an excise tax usually causes the price paid by consumers to ________, while the price received by sellers

________.

a. Rise; rises

b. Fall; falls

c. Rise; falls ✓

d. Fall; rises

3. Consumers will bear a larger burden of an excise tax if

a. Both demand and supply are relatively elastic.

b. Demand is relatively inelastic, and supply is relatively elastic. ✓

c. Both demand and supply are relatively inelastic.

d. Demand is relatively elastic, and supply is relatively inelastic.

4. Producers will bear a larger burden of a sales tax if

a. Demand is relatively inelastic, and supply is relatively elastic.

b. Demand is relatively elastic, and supply is relatively inelastic. ✓

c. Both demand and supply are relatively inelastic.

d. Both demand and supply are relatively elastic.

5. The revenues associated with a per-unit tax will be the biggest when

a. Both supply and demand are highly elastic.

b. Supply is highly inelastic, and demand is highly elastic.

c. Supply is highly elastic, and demand is highly inelastic.

d. Both supply and demand are highly inelastic. ✓

6. Suppose the market supply curve for some good is upward sloping. If the imposition of an excise tax causes no change in

the equilibrium quantity sold in the market, the good's demand curve must be ________, meaning that the burden of the

tax has fallen completely on the ________.

a. Vertical; consumers ✓

b. Vertical; firms

c. Horizontal; firms

d. Horizontal; consumers

7. In the short run, the supply of rental accommodations tends to be

a. Infinitely price elastic.

b. Very price elastic.

c. Very or completely price inelastic. ✓

d. Irrelevant to the housing market price.

ECO101H5 Fall 2023 Copyright University of Toronto

8. The shortage of housing that exists in the presence of binding rent controls is smaller

a. The lower is the elasticity of supply of housing. ✓

b. The more elastic is the long-run supply of housing.

c. The higher is the elasticity of demand for housing.

d. The lower is the elasticity of demand for housing.

9. When the long-run supply of housing is highly elastic, the imposition of rent controls will lead to

a. No significant change in the housing shortage over time.

b. A reduction in the housing shortage over time.

c. A worsening of the housing shortage over time. ✓

d. Only a temporary housing shortage.

10. Who are likely to be the biggest beneficiaries of rent controls?

a. Landlords

b. Construction companies

c. Prospective tenants

d. Current tenants ✓

11. A binding price floor is a

a. Maximum price, above equilibrium, which price is not allowed to exceed.

b. Maximum price, below equilibrium, which price is not allowed to exceed.

c. Minimum price, below equilibrium, which price is not allowed to fall below.

d. Minimum price, above equilibrium, which price is not allowed to fall below. ✓

12. Suppose the government decides to eliminate a binding price ceiling that it had previously imposed on a particular good. It

can be expected that

a. Price falls, quantity demanded increases and quantity supplied decreases.

b. Price falls, quantity demanded decreases and quantity supplied increases.

c. Price rises, quantity demanded decreases and quantity supplied increases. ✓

d. Price rises, quantity demanded increases and quantity supplied decreases.

13. Suppose the government decides to eliminate a binding price floor that it had previously imposed on a particular good. It

can be expected that

a. Price falls, quantity demanded increases and quantity supplied decreases. ✓

b. Price falls, quantity demanded decreases and quantity supplied increases.

c. Price rises, quantity demanded decreases and quantity supplied increases.

d. Price rises, quantity demanded increases and quantity supplied decreases.

14. In a competitive market, a legal price ceiling set above the free-market equilibrium price will result in

a. Quantity supplied exceeding quantity demanded and thus a surplus in the market.

b. Quantity demanded exceeding quantity supplied and thus a shortage in the market.

c. Increased profits to the firms in the industry.

d. A continuation of the free-market equilibrium price and quantity. ✓

15. Suppose that the free-market equilibrium price of natural gas would be $2.00 per unit, but to protect consumers the

government has fixed the price at $1.50. At this ceiling price the quantity ________ will be greater than the quantity

________, resulting in a ________ of natural gas.

a. Demanded; Supplied; shortage ✓

b. Supplied; Demanded; surplus

c. Demanded; Supplied; surplus

ECO101H5 Fall 2023 Copyright University of Toronto

d. Supplied; Demanded; shortage

16. The shortages associated with a binding price ceiling will be the smallest when

a. Supply is highly inelastic, and demand is highly elastic.

b. Both supply and demand are highly elastic. ✓

c. Supply is highly elastic, and demand is highly inelastic.

d. Both supply and demand are highly inelastic.

17. If the equilibrium price for some product is $1000, a price ceiling of $800 will result in

a. Surpluses of the good.

b. Shortages of the good. ✓

c. The same effects as a price floor of $1200.

d. No effects because the price ceiling is not binding at that price.

18. Concert promoters often set ticket prices below what they expect the market-clearing price to be. They are effectively

imposing a ________ and the result is often ________ at a considerably higher price.

a. Price ceiling; ticket scalping ✓

b. Price floor; ticket scalping

c. Price floor; a shortage

d. Price ceiling; a surplus

19. Suppose a binding output quota is imposed in a previously competitive market with free-market equilibrium price and

quantity. The result is

a. Higher price and higher quantity exchanged.

b. Higher price and lower quantity exchanged. ✓

c. Lower price and higher quantity exchanged.

d. Lower price and lower quantity exchanged.

20. Eliminating a Price Ceiling might make Consumer Surplus increase, but only if ______.

a. Demand is very elastic.

b. Demand is very inelastic.

c. Supply is very inelastic.

d. Supply is very elastic. ✓

21. The introduction of a Quota on a non-imported good will always,

a. Decrease producer surplus.

b. Decrease consumer surplus. ✓

c. Increase consumer surplus.

d. Increase producer surplus.

22. Decreases in the minimum wage might increase employee surplus if

a. Demand is elastic. ✓

b. Demand is inelastic.

c. Supply is elastic.

d. Supply is inelastic.

ECO101H5 Fall 2023 Copyright University of Toronto

24. Grape pickers have labour supply given by S = 20w – 80. Vineyards who employ these workers have labour demand given

by D = 240 – 20w. The demand for wine is given by D = 4800 – 200p. The supply of wine depends on the wage paid to

grape pickers S = 200p – 400w.

a. Provide diagrams showing labour supply and demand for grape pickers (left diagram) and the supply and demand

for wine (right diagram) that illustrate and quantify equilibrium wages, employment, the price and quantity of

wine.

b. Next month the government plans to introduce a payroll tax of 4 dollars per hour. Use your diagrams from Part a.

to illustrate and quantify how this change will affect wages, employment, the price and quantity of wine.

c. The government will collect a total of __________ dollars from this tax.

ECO101H5 Fall 2023 Copyright University of Toronto

25. Equilibrium prices for wheat are determined by demand DA = 200 – 2pA and supply SA = 2pA – 40. Prices for corn are

determined by DB = 240 – 2pB and supply SB = 2pB – pA – 20.

a. Provide labelled diagrams and supporting calculations to illustrate equilibrium prices and quantities in both

markets.

b. Use the same diagrams to illustrate how prices and quantities would be affected by the introduction of a tax $40

per unit of wheat. Show your work.

Good 1 Good 2

a. Changes to the price for corn will be largest when the supply curve for wheat is elastic/inelastic (circle one), the

demand curve for wheat is elastic/inelastic (circle one) and the demand curve for corn is elastic/inelastic (circle

one).

b. Tax revenues are equal to ______________ dollars.

26. With a $3 per-unit subsidy on Grape Jam:

Price of Grape Jam Demand Supply

a. Consumers would pay a price of __________ dollars.

! ! = 1

b. Producers of Grape Jam would receive a price of _______ dollars.

! " = 4

c. The cost to government is ___________ dollars.

3 × 1100

27. Consider a market where Demand is D = 450 – 10p and Supply is S = 10p – 50.

a. A 20 dollar per-unit tax will yield government tax revenues equal to __________

b. A quota restricting quantity supplied to 100 units will create an efficiency loss equal to _______

c. A price ceiling at 15 dollars will yield consumer surplus equal to __________

d. A price ceiling at 15 dollars will yield producer surplus equal to __________

4500 50 100 150 200 250 300 350 400

28. Supply and demand for economics textbooks at UTM are given by D = 2500

− 10P and S = 10P

− 500. A wealthy old man

from Oakville once took economics at UTM. He would like to help the students who are currently in ECO100 and offers to

provide a per-unit subsidy to the bookstore. His goal is to reduce the price paid by students to $100.

a. Provide a Supply and Demand diagram that illustrates and quantifies how the equilibrium price would be affected

by this subsidy.

b. He’s ready to pay. How big a cheque will he need to write? ___________

29. Demand and supply for labour in the Mississauga market are given by D = 160

− 4w and S = 4w. There is currently a tax of

20 dollars per hour is used to finance an employment training plan called the ETP. A persistent shortfall of tax revenues

for funding the ETP, has prompted a government analyst to propose that this payroll tax should be increased to 30 dollars

per hour.

a. Provide a labelled diagram, and supplementary calculations to assess the impact of this tax increase on workers,

employers and government revenue.

b. Before the tax increase governments earned revenues of ____________. With a tax of 30 dollars per hour

government tax revenue is equal to ______________.

30. The price of wheat pW is determined by supply SW = 2pW – 20 and demand DW = 100 – 2pW. Next month The Wheat

Marketing Board will introduce a price floor at pW = 40 in the wheat market. The price of corn pC is also determined by

supply SC = 2pC – 2pW and demand DC = 240 – 2pC .

a. Provide a Supply and Demand Diagram to illustrate and quantify the market for wheat. Show how the price floor

will affect the prices and quantities in the wheat market.

b. The efficiency loss in the wheat market caused by this floor will be equal to __________.

c. Provide a Supply and Demand Diagram to illustrate and quantify the market for corn. Show how a price floor in the

wheat market will affect prices and quantities in the corn market.

31. Suppose that demand and supply for residence housing are given by D = 240 – 2p and S = 2p where p is the price paid per

day. The University currently maintains a price ceiling for these rents at a price of $50 per day. Recently, Governing Council

has decided to eliminate the price ceiling. To ensure that rents do not rise, they will pay the residence management group

a per-unit subsidy. The amount of the subsidy will be chosen to ensure that daily rents stay at $50.

a. Provide a labelled Supply and Demand diagram to illustrate the impact of this policy change for Consumer Surplus

(Tenants) Producer Surplus (Landlords) and Government Surplus.

b. The amount of the subsidy will be equal to _________ per day.

32. The number of students who attend an orientation event depends on the admission price and is given by the demand

curve D = 300

− 4p. Event organizers behave based on the supply curve S = 60 + 2p While they originally planned to sell as

many tickets as the market would bear, the Fire Codes mean that there is a quota where no more than 100 people can

attend.

a. Provide calculations to assess how this Quota has affected Consumer and Producer Surplus in this market.

b. Will introducing a Quota always increase producer surplus? Illustrate how this depends on elasticities.

33. Demand for grape pickers at Canadian grape farms is given by D = 2500

− 10w. Grape pickers have labour supply given by

S = 10w

− 500. A minimum wage, currently at 170 dollars, will be increased to 200 dollars next month.

a. Provide a labelled Supply and Demand diagram that illustrates and quantifies how this change would affect the

well-being (surplus) of Canadian farmers and grape pickers.

b. Provide a second Supply and Demand diagram that shows the market for Canadian wine. Why might drinkers

oppose this increase in the minimum wage?

34. Quantities supplied, and quantity demanded for frozen turkeys in Brampton are given by D = 120

− 2p and S = 2p

− 40.

The government imposes a price ceiling at $30. This is to ensure that no one living in Brampton has to pay more than $30

for a frozen turkey.

a. Provide calculations to assess how the introduction of this ceiling has affected Consumer, Producer and Total

Surplus in the economy. Provide a fully labeled diagram.

b. Will introducing a price ceiling always increase consumer surplus? Illustrate how this depends on elasticities.

35. Supply and demand curves for limousine rentals in Mississauga are given by D = 200

− 2p and S = 3p + 50 where p is the

price per hour. Beginning in January the Mississauga City Council plans to impose a price floor is established at $80.

a. Provide a labeled diagram showing how the market responds to this floor. Calculate the change producer and

consumer surplus associated with the price floor.

b. Does producer surplus always increase when a price floor is introduced? Illustrate how this depends on elasticities.

36. Equilibrium prices are and quantities are determined by D1 = 1,000 − 100p1 and S1 = 200p1 − 200 in the market for Good 1

and by D2 = 400 + 200p1 – 200p2 and S2 = 200p2 in the market for Good 2.

a. Provide a diagram showing the equilibrium price and quantity in the market for Good 1 and a second diagram

showing the equilibrium price and quantity in the market for Good 2.

b. Next month the government will introduce a t = 3 per unit tax in the market for Good 1 (not Good 2). Update your

diagrams to show and quantify how prices and quantities will be affected in both markets.

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