Question 1

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

The burden of FICA tax may not fall equally on workers and firms because employers may pass on some of the cost to workers by reducing wages or employment opportunities.

Question 2

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 3

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 market, the demand is relatively inelastic while the supply is relatively elastic. Therefore, the burden of the tax falls more heavily on the seller than the buyer. In this case, the seller bears $1 of the $2 tax burden.

Question 4

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 the demand curve is very elastic, buyers are very sensitive to changes in price and will shift their consumption away from the taxed good if the price increases. Therefore, if a tax is imposed on the buyers, the sellers will have to lower their prices in order to maintain sales, and will end up bearing a greater burden of the tax since their profits will decrease. On the other hand, if the supply curve is very inelastic, the sellers can't easily adjust their production quantity to respond to the tax, and will also bear a greater burden of the tax.

Question 5

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 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

The luxury tax is typically added to the price of luxury goods, which ultimately increases their cost. This increased cost is transferred onto the consumers, including the rich who purchase the items, but also the middle-class workers who produce these luxury goods. As a result, the burden of the luxury tax falls more heavily on the workers rather than the wealthy buyers.

Question 7

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 willing to invest in and maintain their properties if they are not able to charge market rates for rent. This can lead to a decrease in the quantity and quality of rental properties available.

Question 8

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 9

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 burden of a payroll tax is ultimately borne by employees, regardless of who is technically responsible for paying it to the government. The percentage of the tax paid by employers may have an indirect impact on employees' wages and job opportunities, but it does not change the fact that the tax ultimately affects workers' take-home pay.

Question 10

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 cause a larger percentage decrease in quantity than when both are inelastic. This is because inelastic demand and supply are less responsive to changes in price or cost, thus the market is less affected by changes in the tax.

Question 11

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 can make it less profitable for landlords to rent out their properties, which can lead to a decrease in the supply of available rental units. This can result in higher demand for affordable housing, leading to increased competition and potentially increased homelessness.

Question 12

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

Accepted Answer

When a tax is imposed, the burden is shared between buyers and sellers depending on the price elasticity of demand and supply. If a market is less elastic, it means that buyers and sellers are less responsive to price changes, which means that they will continue to buy or sell even if the price increases. This results in the tax burden falling more heavily on the side of the market with the less elastic demand or supply.

Question 13

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 items are typically considered to have a higher price elasticity of demand, meaning that as the price increases, the quantity demanded decreases at a higher rate. On the other hand, the supply of luxury goods is often more limited and inelastic, meaning that producers are less able to increase the supply to match changes in demand. This means that when a luxury tax is imposed, sellers are likely to bear a greater burden of the tax because they have less flexibility to adjust the quantity supplied in response to changes in price. This can result in higher prices for consumers and decreased profitability for luxury goods producers.

Question 14

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

Accepted Answer

Payroll taxes are split between employers and employees, but research has shown that employees ultimately bear the majority of the burden as it can result in lower wages or reduced hours.

Question 15

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

Accepted Answer

The more inelastic side of the market (the side with less flexibility in responding to changes in price) will bear more of the tax burden, while the more elastic side will bear less. This is a basic principle of tax incidence analysis in economics.

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

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

Accepted Answer

When a price ceiling is set above the equilibrium price, the market forces will naturally drive the price towards the equilibrium level. This means that the price ceiling has no impact on the market and is not binding.

Question 18

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

Accepted Answer

FICA (Federal Insurance Contributions Act) is a payroll tax that employers are required to deduct from their employees’ salaries and pay to the government. It includes social security tax and Medicare tax. Thus, it is an example of a payroll tax on wages paid by the firms to their workers.

Question 19

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

This statement is false. The burden of the FICA tax does not necessarily fall equally on firms and workers. Even though both parties technically pay half of the tax, economists disagree on how the burden is ultimately distributed. Some argue that the tax is ultimately paid by workers in the form of lower wages, while others argue that employers bear more of the burden because they cannot pass on the full cost of the tax to consumers in the form of higher prices.

Question 20

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

Accepted Answer

When a tax is imposed, the burden of the tax is likely to fall more heavily on the side of the market that is less responsive to changes in price. This is because the less elastic side of the market cannot easily switch to substitute goods or services when faced with a higher price due to the tax. Therefore, the more inelastic side of the market ends up bearing a larger share of the tax burden.

Quiz 6: Supply, Demand, and Government Policies