Question 1

Since half of the FICA tax is paid by firms and the other half is paid by workers, the burden of the tax must fall equally on firms and workers.

Accepted Answer

Although the FICA tax is split evenly between firms and workers, economists generally agree that the burden of the tax falls mainly on workers, since firms may pass on the cost of the tax to workers in the form of lower wages or reduced benefits.

Question 2

The burden of a luxury tax most likely falls more heavily on sellers because demand is more elastic and supply is more inelastic.

Accepted Answer

Luxury goods are considered to have a high elasticity of demand, meaning that consumers are more likely to reduce their demand for the product if the price increases. Sellers, on the other hand, have a more inelastic supply as they may have limited quantities of the luxury good to offer. As a result, sellers may have to absorb a larger portion of the tax to maintain their profit margins, making the burden of the luxury tax fall more heavily on them.

Question 3

Even though federal law mandates that workers and firms each pay half of the total FICA tax, the tax burden may not fall equally on workers and firms.

Accepted Answer

This is because while the employer pays the same amount of FICA taxes as the employee, they also factor in this cost when deciding on employee compensation and benefits. This means that the burden of the tax may fall more heavily on the worker in the form of lower wages and benefits.

Question 4

Figure 6-36 
-Refer to Figure 6-36. If the government places a $2 tax in the market, the seller bears $1 of the tax burden.

Accepted Answer

In this diagram, the tax burden is split between buyers and sellers based on the elasticity of demand and supply. Since the seller's supply curve is less elastic than the buyer's demand curve, the seller bears a greater share of the tax burden. In this case, the seller bears $1 of the $2 tax, so the statement is true.

Question 5

Who bears the majority of a tax burden depends on the relative elasticity of supply and demand.

Accepted Answer

The more inelastic (less responsive to price changes) the supply and demand for a good or service, the more the burden of a tax will fall on consumers or producers, respectively. However, if supply and demand are more elastic (more responsive to price changes), the burden of the tax will be shared more equally between consumers and producers.

Question 6

Most of the burden of a luxury tax falls on the middle class workers who produce luxury goods rather than on the rich who buy them.

Accepted Answer

This is because the tax increases the cost of production, which leads to a decrease in demand for the luxury goods, causing layoffs and wage cuts for workers in the industry. Meanwhile, the wealthy consumers who can afford luxury goods continue to buy them regardless of the tax, so they are not affected as much.

Question 7

FICA is an example of a payroll tax, which is a tax on the wages that firms pay their workers.

Accepted Answer

FICA stands for Federal Insurance Contributions Act and is a payroll tax that employers withhold from their employees' wages to fund Social Security and Medicare programs.

Question 8

The true burden of a payroll tax has nothing to do with the percentage of the tax that employers are required to pay.

Accepted Answer

The true burden of a payroll tax is shared between employers and employees, as employers often pass on the cost of the tax to their employees through reduced wages or other benefits. Therefore, the percentage that each party pays is not the only factor that determines the true burden of the tax.

Question 9

Rent controls only affect the demand side of the rental market.
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Accepted Answer

Rent controls also affect the supply side of the rental market, as landlords may be less likely to offer properties for rent if they are not able to set prices at market rates, leading to a potential shortage of rental properties.

Question 10

If the demand curve is very inelastic and the supply curve is very elastic in a market, then the sellers will bear a greater burden of a tax imposed on the market, even if the tax is imposed on the buyers.

Accepted Answer

The answer of If the demand curve is very inelastic...

Question 11

The tax burden falls more heavily on the side of the market that is more inelastic.

Accepted Answer

When a tax is imposed, the market will adjust accordingly with changes in quantity demanded and supplied. The more inelastic (less responsive to price changes) side of the market will bear a larger portion of the tax burden as they are less able to adjust their behavior in response to the tax. In contrast, the more elastic side of the market is able to adjust their behavior more easily and will bear a smaller portion of the tax burden.

Question 12

Workers, rather than firms, bear most of the burden of the payroll tax.

Accepted Answer

Payroll tax is a tax paid by employers on the wages and salaries of their employees. However, economists believe that the burden of the tax is ultimately passed on to the workers in the form of lower wages or fewer employment opportunities. Therefore, workers bear most of the burden of the payroll tax.

Question 13

A tax on a market with elastic demand and elastic supply will shrink the market more than a tax on a market with inelastic demand and inelastic supply will shrink the market.

Accepted Answer

When both demand and supply are elastic, a tax will lead to a greater decrease in quantity and a smaller increase in price compared to when both are inelastic. This is because buyers and sellers are both sensitive to price changes and will adjust their behavior more significantly in response to a tax. In contrast, when both are inelastic, a tax will lead to a relatively smaller decrease in quantity and a larger increase in price, as buyers and sellers are less responsive to changes in price.

Question 14

A tax burden falls more heavily on the side of the market that is less elastic.

Accepted Answer

This is because when a good or service is less elastic, it means that consumers are less responsive to changes in price, and therefore less likely to change their behavior (such as buying less of the good) when a tax is imposed. As a result, the burden of the tax is more likely to be passed on to consumers in the form of higher prices, and thus falls more heavily on the less elastic side of the market.

Question 15

Since one effect of rent controls is to reduce the supply of available rental properties,rent controls can contribute to the problems of homelessness in cities with rent controls.
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Accepted Answer

Rent controls limit the incentive for landlords to offer rental housing, which can lead to a decrease in the supply of available rental properties. This can result in higher rental prices for available units and contribute to the problem of homelessness in cities with rent controls.

Question 16

Most labor economists believe that the supply of labor is much more elastic than the demand.

Accepted Answer

Most labor economists believe that the demand for labor is more elastic than the supply of labor, primarily because workers have limited flexibility in adjusting the number of hours they work in response to wage changes, whereas employers can more easily adjust the amount of labor they demand as wages or the economic conditions change.

Question 17

The burden that results from a tax on yachts falls more heavily on the buyers of yachts than on the sellers of yachts.

Accepted Answer

The burden of a tax on yachts, or any luxury good, typically falls more heavily on the sellers because the demand for such goods is often more elastic. This means consumers can more easily forego purchasing these high-priced items, leading sellers to absorb a larger portion of the tax to maintain sales.

Question 18

​Price ceilings are never binding when set above the equilibrium price.

Accepted Answer

This is because when the price ceiling is set above the equilibrium price, it has no effect on the market. The market is already operating efficiently and there is no need for government intervention. The price ceiling only becomes binding when it is set below the equilibrium price, leading to shortages and other market inefficiencies.

Question 19

Long lines and gasoline shortages during the 1970's can be attributed completely to the decision by OPEC to raise crude oil prices.

Accepted Answer

While the decision by OPEC to raise crude oil prices was a significant factor, the long lines and gasoline shortages during the 1970s were also caused by other factors such as U.S. government policies on price controls, panic buying, and reduced refinery output, making the situation not solely attributable to OPEC's actions.

Question 20

If the demand curve is very elastic and the supply curve is very inelastic in a market, then the sellers will bear a greater burden of a tax imposed on the market, even if the tax is imposed on the buyers.

Accepted Answer

When demand is very elastic and supply is very inelastic, a tax imposed on the buyers will significantly reduce the quantity demanded, leading to a larger decrease in the quantity traded than when either curve is relatively more elastic. As a result, sellers will bear a greater burden of the tax because they will have to reduce their prices to sell the reduced quantity demanded. This phenomenon is known as the "tax incidence."

Quiz 6: Supply, Demand, and Government Policies