Question 1

Suppose the government imposes a $1 per unit tax on sellers in a perfectly competitive market. If the demand is perfectly inelastic and the supply is perfectly elastic, who bears the entire tax burden?

Accepted Answer

Buyers bear the entire tax burden.

Question 2

Given the market demand $$Q_D = 500 - 30P$$ and market supply $$Q_S = 20P$$ for sugar in Hong Kong, what is the equilibrium price?

Accepted Answer

$$P = 10$$

Question 3

If the government imposes a $1 per unit tax on buyers in the sugar market described above, what is the new price that buyers pay?

Accepted Answer

$$P_B = 10.4$$

Question 4

Which of the following statements about tax incidence is correct?

Accepted Answer

Tax incidence depends on the elasticities of demand and supply, not on who legally pays the tax.

Question 5

A luxury tax is imposed on yachts, which have elastic demand and relatively inelastic supply. Who bears most of the tax burden?

Accepted Answer

Sellers (yacht manufacturers) bear most of the tax burden.

Question 6

Which scenario will result in a smaller deadweight loss (DWL) from a tax?

Accepted Answer

When both demand and supply are inelastic.

Question 7

If the government wants to raise tax revenue with minimal efficiency loss, which type of goods should it tax?

Accepted Answer

Goods with inelastic demand and/or inelastic supply.

Question 8

Suppose a $$1 tax is imposed on sellers in the sugar market (Q_D = 500 - 30P$, Q_S = 20P$). What is the new price sellers receive after the tax?

Accepted Answer

$$P_S = 9.4$$

Question 9

Which principle justifies high rates of income tax on high incomes to pay for law and order and other public benefits?

Accepted Answer

The ability-to-pay principle.

Question 10

If the government imposes a tax on a good with perfectly elastic supply, what happens to the price received by sellers?

Accepted Answer

The price received by sellers does not change; sellers bear none of the tax.

Question 11

Which of the following best describes deadweight loss (DWL) from a tax?

Accepted Answer

DWL is the reduction in total surplus that results from a tax, due to the decrease in quantity traded.

Question 12

If the demand for cigarettes is inelastic, what is the effect of a tax on cigarettes?

Accepted Answer

Buyers bear most of the tax burden.

Question 13

Suppose the government imposes a tax on food to raise revenue, arguing that placing the tax on sellers will protect poor buyers. What will actually determine who bears the tax burden?

Accepted Answer

The elasticities of demand and supply for food.

Question 14

Which formula correctly represents the division of a per-unit tax $$t$$ between buyers and sellers?

Accepted Answer

$$P_B - P_S = t$$

Question 15

If a tax is imposed on a good with perfectly inelastic demand, what is the effect on quantity traded and deadweight loss?

Accepted Answer

Quantity traded does not change and deadweight loss is zero.

Question 16

Which of the following is an example of the benefits principle in taxation?

Accepted Answer

High fuel taxes to pay for freeways.

Question 17

If the government imposes a $$1 tax on buyers and the equilibrium price before tax is 10$, what is the effective price buyers pay and sellers receive if the new equilibrium price is 9.4$?

Accepted Answer

Buyers pay $$10.4$$, sellers receive $$9.4$$

Question 18

Which of the following is true regarding the effect of elasticity on tax burden?

Accepted Answer

The more elastic the demand or supply, the less that side bears the tax burden.

Government Actions in Markets: Taxes, Incidence, and Deadweight Loss

Study Guide - Practice Questions

Study Guide - Flashcards