Question 1

In which situation would consumers bear the highest incidence of a tax?
A) inelastic demand with elastic supply
B) inelastic demand with inelastic supply
C) elastic demand with inelastic supply
D) elastic demand with elastic supply

Accepted Answer

When demand is inelastic and supply is elastic, consumers are less sensitive to price changes and will continue to purchase the product despite the tax, leading to a higher incidence of the tax on consumers. Suppliers, on the other hand, can more easily adjust their quantity supplied due to the elasticity of supply, shifting the tax burden to consumers.

Question 2

In the graph, which shows the market for perfume, if a $10 excise tax is placed on each bottle of perfume, consumers would pay about _____ after the tax and producers would receive about _____ after the tax.

A) $50; $40
B) $45; $35
C) $40; $30
D) $35; $25

Accepted Answer

The answer of In the graph, which shows the market...

Question 3

The price elasticity of demand for lychee fruit is 1.3, while the price elasticity of supply is 0.7. The incidence of a $0.25 excise tax placed on lychee fruit will be
A) higher for producers.
B) higher for consumers.
C) equal for producers and consumers.
D) nonexistent for both producers and consumers.

Accepted Answer

The incidence of the tax will be higher for producers because the price elasticity of demand is greater than the price elasticity of supply. This means that consumers will reduce their consumption of lychee fruit by a greater percentage than producers will reduce their supply in response to the tax. As a result, producers will bear a larger share of the tax burden.

Question 4

In which case would producers bear 100% of the tax incidence?
A) inelastic demand curve and unitary elastic supply curve
B) perfectly inelastic demand curve with elastic supply curve
C) perfectly elastic demand curve with inelastic supply curve
D) inelastic demand curve and perfectly elastic supply curve

Accepted Answer

When the demand curve is perfectly elastic, consumers will not bear any of the tax burden because they will only pay the original price. Therefore, producers will bear 100% of the tax incidence if the supply curve is inelastic.

Question 5

If the demand curve for pet prescription medicine is vertical, the economic burden of an excise tax on pet medicines would be borne
A) evenly by consumers and producers
B) mostly by producers
C) entirely by consumers
D) entirely by producers

Accepted Answer

When the demand curve is vertical, it indicates that the quantity demanded does not change regardless of the price. This means consumers are perfectly inelastic to price changes. Therefore, in the case of an excise tax on pet medicines, the economic burden would be entirely borne by consumers, as they would still purchase the same quantity despite any price increase.

Question 6

In the following graph, if a $15 excise tax is placed on the sale of every bungee jump, the new price that consumers will pay is _____, and the incidence of the tax falls more heavily on _____.

A) $75; buyers
B) $75; sellers
C) $60; buyers
D) $60; sellers

Accepted Answer

The answer of In the following graph, if a $15...

Question 7

Suppose the market for premium music streaming exhibits the typical downward-sloping demand curve and upward-sloping supply curve. A new excise tax placed on music streaming services would lead to _____ consumer surplus, _____ producer surplus, and _____ deadweight loss.
A) higher; lower; higher
B) lower; higher; lower
C) lower; lower; lower
D) lower; lower; higher

Accepted Answer

An excise tax on music streaming services would lead to a higher price for consumers and a lower effective price received by producers, reducing both consumer and producer surplus. The tax also creates a deadweight loss by reducing the quantity of transactions below the level that would occur in a free market, as some consumers and producers are priced out of the market.

Quiz 5: Elasticity

In which situation would consumers bear the highest incidence of a tax?

In the graph, which shows the market for perfume, if a $10 excise tax is placed on each bottle of perfume, consumers would pay about _ after the tax and producers would receive about _ after the tax.

The price elasticity of demand for lychee fruit is 1.3, while the price elasticity of supply is 0.7. The incidence of a $0.25 excise tax placed on lychee fruit will be

In which case would producers bear 100% of the tax incidence?

If the demand curve for pet prescription medicine is vertical, the economic burden of an excise tax on pet medicines would be borne

In the following graph, if a $15 excise tax is placed on the sale of every bungee jump, the new price that consumers will pay is _, and the incidence of the tax falls more heavily on _.

Suppose the market for premium music streaming exhibits the typical downward-sloping demand curve and upward-sloping supply curve. A new excise tax placed on music streaming services would lead to ___ consumer surplus, _ producer surplus, and ___ deadweight loss.