Multiple Choice
Suppose a \$6 per-unit tax is imposed on a good. If the supply curve is more elastic than the demand curve, how much of the \$6 tax is paid by the suppliers?
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6. Introduction to Taxes and Subsidies
Introducing Taxes and Tax Incidence
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When a government increases taxes, what is the most likely effect on individuals' disposable income?
A
Disposable income increases because higher taxes lead to higher wages.
B
Disposable income increases because the government redistributes more money.
C
Disposable income decreases because individuals pay more in taxes.
D
Disposable income remains unchanged because taxes do not affect income.
Verified step by step guidance1
Understand the definition of disposable income: it is the amount of money individuals have left after paying taxes, which they can use for consumption or saving.
Recognize that when the government increases taxes, individuals are required to pay a larger portion of their income to the government.
Since disposable income is calculated as total income minus taxes, an increase in taxes reduces the amount of income individuals keep.
Evaluate the options: higher taxes do not directly increase wages, so disposable income does not increase due to higher wages; redistribution may affect income but does not guarantee an increase in disposable income for all individuals.
Conclude that the most likely effect of increased taxes is a decrease in disposable income because individuals pay more in taxes, reducing the money available for spending or saving.
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