Q: Which formula correctly represents the wedge created by a unit tax in a competitive market?

$$P_{buyers} - P_{sellers} = \text{tax}$$

Question 1

Suppose the government imposes a unit tax of $10 per unit on a competitive market. Which of the following best describes the effect of this tax on the market equilibrium?

Accepted Answer

The price paid by buyers increases by less than $$10, and the price received by sellers decreases by less than 10$$, with the difference between the two prices equal to $10.

Question 2

Which of the following statements about the economic incidence of a unit tax is correct?

Accepted Answer

It is determined by the relative elasticities of supply and demand, not by who is legally responsible for paying the tax.

Question 3

If the demand for a good is perfectly inelastic, what is the effect of a unit tax on the division of the tax burden?

Accepted Answer

Buyers bear the entire tax burden.

Question 4

A $5 per unit subsidy is introduced in the market for corn. Which of the following is a likely outcome?

Accepted Answer

The price paid by buyers decreases and the price received by sellers increases.

Question 5

Which formula correctly represents the wedge created by a unit tax in a competitive market?

Accepted Answer

$$P_{buyers} - P_{sellers} = 	ext{tax}$$

Question 6

In the case of a perfectly elastic supply curve, who bears the entire burden of a unit tax?

Accepted Answer

Buyers

Question 7

Which principle states that people should pay taxes according to how easily they can bear the burden?

Accepted Answer

Ability-to-Pay Principle

Question 8

A government subsidy on a good will generally result in which of the following effects on consumer and producer surplus?

Accepted Answer

Both consumer and producer surplus increase, but the increase is less than the total cost of the subsidy, resulting in deadweight loss.

Question 9

Suppose the supply of a good is perfectly inelastic. What happens when a unit tax is imposed?

Accepted Answer

The entire tax is paid by sellers, and the equilibrium quantity does not change.

Question 10

Which of the following best describes deadweight loss resulting from a unit tax in a competitive market?

Accepted Answer

It is the reduction in total surplus that results because the tax discourages mutually beneficial trades.

Question 11

If a $20 per unit tax is imposed on sellers, how is the supply curve affected?

Accepted Answer

It shifts upward by $20 at every quantity.

Question 12

Which of the following equations represents the perceived demand curve when a unit tax $$t is $$imposed on buyers?

Accepted Answer

$$P^P = P^D - t$$

Question 13

A $0.10 per unit tax is imposed on marker pens. If the supply is perfectly elastic, what is the effect on the price paid by buyers?

Accepted Answer

The price paid by buyers increases by $0.10.

Question 14

Which of the following is true regarding the statutory and economic incidence of a tax?

Accepted Answer

Economic incidence is independent of statutory incidence and depends on elasticities.

Question 15

If the government wants to minimize deadweight loss from a tax, it should tax goods with which characteristics?

Accepted Answer

Inelastic supply and inelastic demand

Question 16

Which of the following best describes the effect of a subsidy on market efficiency?

Accepted Answer

A subsidy increases the quantity traded beyond the efficient level, creating deadweight loss.

Question 17

Suppose the demand for a product is highly elastic and the supply is inelastic. Who will bear most of the burden of a unit tax imposed on this product?

Accepted Answer

Sellers

Question 18

Which of the following is the correct formula for total surplus in a market before a tax is imposed?

Accepted Answer

$$	ext{Total Surplus} = 	ext{Consumer Surplus} + 	ext{Producer Surplus}$$

Question 19

Which of the following best describes the benefits principle of taxation?

Accepted Answer

People should pay taxes equal to the benefits they receive from government services.

Microeconomics Study Notes: Taxes and Subsidies in Competitive Markets

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