1) Give an example of a price ceiling and an example of a price floor.

Price ceiling: a legal maximum on the price at which a good can be sold

Price floor: a legal minimum on the price at which a good can be sold

Example of price ceiling and price floor:

For example the equilibrium price of ice cream is $3 per cone. Not everyone may be happy with
the outcomes of market process. American Association of Ice Cream Eaters complains that the
$3 price is too high for everyone to enjoy a cone a day.
Meanwhile, the National Organization of Ice Cream Makers complains that the $3 price the
result of cutthroat competition is too low and depressing the incomes of its members. Because
buyers of any good always want a lower while the sellers want a higher price, the interest of two
groups conflict.
If the ice-cream Eaters are successful in their lobbying, the government imposes a legal
maximum on the price at which ice-cream cones can be sold. Because the price is not allowed to
rise above this level, the legislated maximum is called a price ceiling.
By contrast if the ice-cream maker is successful the government imposes a legal minimum on the
price. Because the price cannot fall below this level, the legislated minimum is called a price
floor.







3) Suppose the government remove a tax on buyer of goods and levies a tax on the
same size on seller of the good. How does this change in the policy affect the price
that buyer pay seller for this good, the amount buyer are out of pocket including
tax, the amount seller received net of the tax, and quantity of goods sold.
Tax:
Tax is piece of money that is collected from people and also spent for the welfare of people.
How tax effect seller:
If the local government passes a law, requiring sellers tax, the effect of tax on sellers can be
determine by follow;
i. Whether the law effects the supply curve or demand curve
ii. Which way the curve shift
iii. The shift effect the equilibrium price and quantity
Step one:
The immediate impact of the tax on the sellers:
We take the example of ice-cream. Because the tax is not levied on buyer, the quantity of ice-
cream demand at any given price is same the demand curve does not change. On the other hand
the tax on seller makes the ice-cream businesses less profitable at any given price so it shifts the
supply curve.
Step two:
Because the tax on the seller is the cost of producing and selling ice-cream, it reduces the
quantity supplied at every price, the supply curve shifts to left.
Step three:
Because seller sells less and buyer buys less in the new equilibrium, the tax reduces the size of
ice cream market.
Implementation:
For example: in the below graph, when the tax of 0.30 is levied on seller, the supply curve shifts
up by 0.30 from S1 to S2, the market price rise from 3 to 3.30. When the tax introduced buyer
pay 0.30 more from each ice-cream cone than they did without tax. Thus the tax makes buyer
worse off. Seller get a high price 0.30 from buyer than they did previously, but effective price
after paying tax falls 3.00 before tax to 2.80 with the tax(3.30-0.50).

Figure 1 impact of the tax on seller














S2
S1
D1
0
90 100
Price
Equilibrium tax
Price buyer pay 3.30
Quantity of ice- cream
Price without tax 3.00
Price seller recieve 2.80
5) What is the difference between a tax paid by buyers and a tax paid by sellers?
Tax levied on sellers and tax levied on buyers is equivalent. Examine bellow graphs, in both
cases, the tax places a wedge between the price that buyers pay and the price that seller receives.
The wedge between the buyers price and the seller price is the same, whether the tax is levied
on buyers or sellers. In both the cases, the wedge shifts the relative position of the supply and
demand curves.
In the new equilibrium, buyers and sellers share the burden of the tax. The only difference
between taxes on sellers and taxes on buyer is who sends the money to the government.
Suppose the government collects the 0.50 ice-cream taxes in a bowl on the counter of each ice
cream store. When the government levies the tax on sellers, the seller is required to place 0.50 in
the bowl after the scale of each cone.

Figure 2 tax on sellers

When the government levies the tax on buyers, the buyer is required to palace 0.50 in the bowl
every time a cone is bought. Whether the 0.50 goes directly from the buyers pocket into the
bowl, or indirectly from the buyers pocket into the sellers hand and then into the bowl, once the
market reaches its new equilibrium point, buyers and sellers share the burden, regardless of how
the tax is levied.


S2
S1
D1
0
90 100
Price
Equilibrium with tax
Price buyer pay 3.30
Quantity of ice- cream
Price without tax 3.00
Price seller recieve 2.80
a tax on seller shift
the supply curve upword
by the size of the tax(0.50)

Figure 3 tax on buyers














S2
S1
D1
0
100 90
Price
Equilibrium without tax
Price buyer pay 3.30
Quantity of ice- cream
Price without tax 3.00
Price seller recieve 2.80
D2
a tax on buyer shift
the demand curve downside
by the size of the tax(0.50)
7) What determines how the burden of a tax is divided between buyers and sellers?
Why?
Tax incidence:
The manner in which the burden of tax is shared among the participants in a market is called
tax incidence.
The tax burden is divided in the following way.
a. Elasticity supply, inelastic demand:
The supply curve is elastic and the demand curve is inelastic. In this case the price received
by seller falls only slightly, while the price paid by buyer rise substantially. Thus buyer bears
most of the burden of tax.

Figure 4 -Elasticity supply, inelastic demand


b. The demand curve is inelastic:
The demand curve is elastic. In this case the price received by seller falls substantially; whole the
price paid by buyer rises only slightly. Thus the seller bears the most of burden of tax.

Demand on product
Supply
when supply i s more elastic
Quantity
Price
Price without tax
Price buyer pay
Price seller recieve
the incidence of the
tax falls more heavily
on consumer


Figure 5- The demand curve is inelastic

supply
Demand
when demand is more
elastic then supply
price buyre pay
price with tax
price seller recieve
Tax
the incidence of tax
falls heavily on producer
on consumer