Q: Which formula correctly calculates the tax revenue from an excise tax?

$$\text{Tax Revenue} = \text{Tax Rate} \times \text{Quantity Sold After Tax}$$

Question 1

What does the term 'tax incidence' refer to in microeconomics?

Accepted Answer

A measure of who really pays the tax, regardless of whom it is levied on.

Question 2

Suppose the government imposes an excise tax on hotel rooms. If the price elasticity of demand is low and the price elasticity of supply is high, who bears most of the tax burden?

Accepted Answer

Hotel guests (consumers)

Question 3

If the price elasticity of demand for gasoline is very low and the price elasticity of supply is very high, what does this imply about the tax incidence?

Accepted Answer

Consumers will bear most of the tax burden.

Question 4

Which of the following best explains why consumers bear most of the tax burden when demand is inelastic?

Accepted Answer

Consumers have few alternatives and must continue buying the good.

Question 5

When the price elasticity of supply is low and the price elasticity of demand is high, who bears most of the burden of an excise tax?

Accepted Answer

Producers

Question 6

Which of the following statements is TRUE regarding tax incidence?

Accepted Answer

Tax incidence depends on the relative elasticities of supply and demand.

Question 7

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

Accepted Answer

Low price elasticity of demand or supply

Question 8

Suppose a city imposes a tax on parking spaces. If the supply of parking spaces is perfectly inelastic, what is the effect on deadweight loss?

Accepted Answer

There is no deadweight loss.

Question 9

Which formula correctly calculates the tax revenue from an excise tax?

Accepted Answer

$$	ext{Tax Revenue} = 	ext{Tax Rate} 	imes 	ext{Quantity Sold After Tax}$$

Question 10

A government increases the excise tax on hotel rooms from $$10 to 20 $$per room. However, tax revenue does not double. What is the most likely explanation?

Accepted Answer

The higher tax reduces the quantity of hotel rooms sold.

Question 11

If the government wants to discourage underage drinking using an excise tax, which condition would make the tax most effective?

Accepted Answer

Demand for alcohol is elastic.

Question 12

Which of the following best describes deadweight loss?

Accepted Answer

The reduction in total surplus caused by a tax.

Question 13

If demand is perfectly inelastic, what is the effect of an excise tax on deadweight loss?

Accepted Answer

There is no deadweight loss.

Question 14

Which of the following scenarios would result in the largest deadweight loss from a tax?

Accepted Answer

Both demand and supply are highly elastic.

Question 15

A city government wants to raise revenue without causing much distortion in the market. Which good should it tax?

Accepted Answer

A good with inelastic demand.

Question 16

If the supply curve for a good is perfectly elastic, who bears the entire burden of an excise tax?

Accepted Answer

Consumers

Question 17

Which of the following is NOT a likely effect of an excise tax?

Accepted Answer

An increase in market efficiency.

Question 18

Suppose the government imposes a $$5 excise tax on a good. The price buyers pay increases by 3$$, and the price sellers receive decreases by $2. What does this illustrate?

Accepted Answer

The tax burden is shared between buyers and sellers.

Question 19

Which of the following best describes the relationship between elasticity and tax incidence?

Accepted Answer

The side of the market that is less elastic bears more of the tax burden.

Question 20

If the government wants to use taxes to reduce a harmful activity, such as smoking, which condition would make the tax less effective?

Accepted Answer

Demand for cigarettes is inelastic.

LESSON 6: Economic Efficiency, Government Price Setting, and Taxes: Study Notes

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