Question 1

The burden of a tax on a good falls at least partially on consumers if:

Accepted Answer

When a tax is imposed on a good, the cost of producing the good for producers goes up. To compensate for this, producers may increase the price of the good they are selling. If the price of the good increases, consumers may respond by reducing the quantity of the good they buy, resulting in a decline in demand. As a result, in part, the economic burden of the tax is shifted to consumers.

Question 2

An excise tax is levied on:

Accepted Answer

An excise tax is a tax on a specific good or service, often included in the price of the product. It is usually applied per unit of the product sold. Examples of excise taxes include taxes on cigarettes, gasoline, and alcohol.

Question 3

State governments levy excise taxes on cigarettes because:

Accepted Answer

State governments levy excise taxes on cigarettes because it is an easy way to raise tax revenue while discouraging smoking.

Question 4

Suppose the price elasticity of demand for yachts equals 4.04, while the price elasticity of supply for yachts equals 0.22. If Congress reinstates a luxury tax on yachts, who will pay more of the tax?

Accepted Answer

The answer of Suppose the price elasticity of demand for...

Question 5

Determining who actually pays the cost imposed by a tax is the study of:

Accepted Answer

Tax incidence refers to the analysis of who ultimately bears the burden of a tax. It is important to determine tax incidence as it has implications for public policy and economic outcomes. Public interest theory, rational choice theory, and budget analysis do not specifically address the issue of tax incidence.

Question 6

Tax incidence refers to:

Accepted Answer

Tax incidence refers to who really pays the tax, which may not always be the person or entity who physically writes the check to the government. For example, a corporate tax may be passed on to consumers through higher prices, making consumers the actual payers of the tax.

Question 7

Tax incidence analysis seeks to determine:

Accepted Answer

Tax incidence analysis seeks to determine who actually pays the tax, taking into account how the burden of the tax is distributed among buyers, sellers, and other parties in the market. This analysis can help to inform tax policy decisions by revealing how different groups are affected by changes in tax rates or structures. Choice A is incorrect because the entity that sends the tax payment to the government (e.g. the taxpayer, the employer) may not be the same as the one that actually bears the burden of the tax. Choice C is incorrect because tax revenue ultimately goes to the government, regardless of who pays it. Choice D is not a direct application of tax incidence analysis, but rather a framework for categorizing taxes based on different rationales or principles.

Question 8

Suppose the government imposes a $10 per month tax on cell phone service. If the demand curve for cell phone service is perfectly inelastic and the supply curve is upward-sloping, the monthly price for cell phone service will increase by:

Accepted Answer

Since the demand curve is perfectly inelastic, consumers will continue to purchase cell phone service regardless of the price increase, meaning that the quantity demanded will remain constant. However, the supply curve is upward-sloping, which means that the cost of producing cell phone service will increase with the tax. As a result, the entire amount of the tax will be passed on to consumers in the form of a price increase, resulting in a monthly price increase of $10. Therefore, the correct answer is C.

Question 9

Suppose the government levies a $4 per month excise tax on cable TV. If the demand for cable TV is relatively (but not perfectly) inelastic and the supply curve is relatively (but not perfectly) elastic, then the price of cable TV will:

Accepted Answer

If demand for cable TV is relatively inelastic, consumers will still purchase cable TV even with the tax. If the supply curve is relatively elastic, suppliers can easily shift to producing other goods that are not taxed. As a result, the burden of the tax will fall more on consumers than producers, causing a decrease in quantity demanded and a decrease in price. However, the decrease in price will not be enough to offset the entire $4 tax, so the price of cable TV will increase by less than $4.

Question 10

An excise tax is levied on suppliers. The incidence of the tax:

Accepted Answer

The answer of An excise tax is levied on suppliers....

Question 11

Determining who bears the burden of the tax is a question about:

Accepted Answer

Tax incidence refers to the analysis of who ultimately bears the economic burden of a tax. It is concerned with the distribution of the tax burden between producers, consumers, and other stakeholders in the economy. This is directly related to the question of who bears the burden of the tax. Therefore, option A is the correct choice. The other options are not directly related to the concept of tax incidence.

Question 12

If the demand curve is downward-sloping and supply is perfectly elastic, then the burden of an excise tax is:

Accepted Answer

Since the supply is perfectly elastic, producers can only charge the market equilibrium price. When an excise tax is added on top of this price, the price increases, causing a decrease in quantity demanded. However, since demand is downward-sloping, consumers are willing to pay a higher price for the good. As a result, producers can shift the entire burden of the tax onto consumers by charging the new equilibrium price, since there is no limit to the quantity they can produce and sell at that price. Therefore, the burden of the tax falls entirely on consumers.

Question 13

If demand is perfectly inelastic and the supply curve is upward-sloping, then the burden of an excise tax is:

Accepted Answer

When demand is perfectly inelastic, consumers are willing to pay any price for a product, meaning they will bear the entire burden of an excise tax, regardless of the supply curve's slope.

Question 14

Which of the following is an excise tax?

Accepted Answer

An excise tax is a tax on specific goods or services, such as gasoline or tobacco. Option A is an excise tax on gasoline, which is a specific good, making it the correct answer. Option B is a payroll tax, while option C is a property tax, and option D is a per capita tax.

Question 15

As part of an antiobesity program, the government levies an excise tax on high-fat foods. We expect consumers to pay almost all of this tax if demand is _____ and supply is _____.

Accepted Answer

When demand is inelastic, consumers are less sensitive to price changes and will continue to buy the product despite price increases, such as those caused by a tax. When supply is elastic, producers can more easily change their production levels and are less likely to absorb the cost of the tax, passing it on to consumers instead.

Question 16

Suppose the government imposes a $4 per month excise tax on cable TV. If the demand for cable TV is perfectly inelastic and the supply curve is elastic (but not perfectly elastic), then the price of cable TV will:

Accepted Answer

When demand is perfectly inelastic, consumers will buy the same quantity regardless of price changes. Therefore, the entire tax burden falls on consumers, leading to a price increase of exactly $4.

Question 17

State governments levy excise taxes on alcohol because:

Accepted Answer

Excise taxes on alcohol discourage excessive drinking by making it more expensive, while also generating revenue for the state government. This revenue can then be used to fund public services and programs. It is not intended to subsidize alcohol production or encourage individuals to produce their own alcohol, and it may not be popular with religious groups who oppose any form of drinking.

Question 18

Use the following to answer question 
Figure: Market for Hotel Rooms 
-(Figure: The Market for Hotel Rooms) Look at the figure The Market for Hotel Rooms. Suppose with no tax the equilibrium price is $110 and the equilibrium quantity is 250. If the local government levies a tax of $30 per night on each hotel room rented, the new equilibrium price will equal _____ and the new equilibrium quantity will equal _____.

Accepted Answer

The answer of Use the following to answer question 
Figure:...

Question 19

Taxes on the purchase of specific items such as gasoline, cigarettes, or alcoholic beverages are called:

Accepted Answer

Excise taxes are specifically applied to certain goods such as gasoline, cigarettes, or alcoholic beverages, based on either their volume or value. Personal income taxes are levied on individuals and their earnings, property taxes are based on the value of real estate, and sales taxes are applied to all goods and services sold.

Question 20

Prior to any taxes, the equilibrium price of gasoline is $3 per gallon. Then a $1-per-gallon tax is levied. As a result, the price of gasoline rises to $3.75 per gallon. The incidence of the $1 tax is _____ paid by consumers and _____ paid by producers.

Accepted Answer

When a tax of $1 per gallon is levied, the supply curve shifts upward by the amount of the tax, from S0 to S1, as shown below:

```
Price
     ^
$4  |	            E (post-tax)
    |              /
    |             / 
$3.75|	        /
    |          / 
    |         /   
$3  |	    S0 /           
    |        /     
    |       /    
$0  |------/---------> Quantity
          Q0    Q1
```

As a result of the tax, the equilibrium price rises from $3 to $3.75 per gallon, and the quantity demanded and supplied decreases from Q0 to Q1.

The incidence of the tax depends on the relative price elasticities of demand and supply. If demand is more elastic than supply, then consumers will bear a larger portion of the tax burden, while if supply is more elastic than demand, then producers will bear a larger portion of the tax burden.

In this case, the increase in price from $3 to $3.75 implies a price elasticity of demand of:

% change in quantity demanded / % change in price

($3 - $3.75) / $3 x 100% = -25%

While the increase in price from $2 to $3 implies a price elasticity of supply of:

% change in quantity supplied / % change in price

($3.75 - $3) / $3.75 x 100% = 13.33%

Since demand is more price elastic (-25%) than supply (13.33%), consumers will bear a larger portion of the tax burden than producers.

To determine the actual incidence of the tax, we can use the following formula:

Incidence on consumers = (Ed / (Ed + Es)) x tax 
Incidence on producers = (Es / (Ed + Es)) x tax

Where Ed = price elasticity of demand, Es = price elasticity of supply, and tax = amount of tax per unit.

Plugging in the values:

Incidence on consumers = (-0.25 / (-0.25 + 0.1333)) x $1 = $0.75
Incidence on producers = (0.1333 / (-0.25 + 0.1333)) x $1 = $0.25

Therefore, the incidence of the $1 tax is $0.75 paid by consumers and $0.25 paid by producers. The correct answer is D.

Quiz 7: Taxes