Question 1

(Figure: The Market for Exercise Apps) Use Figure: The Market for Exercise Apps. If the government imposes a tax of $1 in this market, producers will pay _____ of the tax, while consumers will pay _____ of the tax.

Accepted Answer

The answer of (Figure: The Market for Exercise Apps) Use...

Question 2

Assuming a normal upward-sloping supply curve and downward-sloping demand curve, if the government imposes a $25 tax on expensive handbags and collects the tax from suppliers, the price of expensive handbags will:

Accepted Answer

When a tax is imposed on suppliers, it increases their costs and reduces their profits. Therefore, they will supply less of the product at every given price. This shifts the supply curve to the left, causing the equilibrium price to rise but by a smaller amount than the amount of the tax. Therefore, the price of expensive handbags will increase by less than $25.

Question 3

Assuming a normal upward-sloping supply curve and downward-sloping demand curve, if the government imposes a $25 tax on expensive handbags and collects the tax from the consumers, the price of expensive handbags will:

Accepted Answer

When the tax is imposed on expensive handbags and collected from the consumers, the supply curve shifts upward by the amount of the tax. This means that the price paid by consumers will increase, but not by the full amount of the tax. The price increase will be less than $25 because the demand curve slopes downward, meaning that as the price of the handbags increases, the quantity demanded will decrease. Therefore, the burden of the tax will be shared between the consumers and the producers, where the price will increase by less than the full amount of the tax.

Question 4

If the government imposes a $15 tax on cheap wine, and the price of cheap wine increases by $12:

Accepted Answer

If the price of cheap wine increases by $12 in response to a $15 tax, it is likely that consumers are paying a significant portion of the tax. This means that producers are not bearing the entire burden of the tax, so choice C is not correct. It is possible that the government will receive less tax revenue than anticipated if the increase in price causes a decrease in the quantity of wine sold, but this is not explicitly stated in the question, so choice A cannot be confirmed. The increase in price may also lead to a decrease in quantity demanded (Law of Demand), so it is unlikely that the quantity of cheap wine sold will increase, making choice D incorrect.

Question 5

If the government imposes a $15 tax on new cell phones, and the price of new cell phones does not change:

Accepted Answer

Since the price of new cell phones does not change for consumers, it means that producers are absorbing the cost of the $15 tax entirely. This results in a decrease in the producer's revenue by the amount of the tax, indicating that producers are paying all of the tax.

Question 6

Prior to any taxes, the equilibrium price of bottled water is $5 per gallon. Then a $1-per-gallon tax is levied. As a result, the price of bottled water rises to $5.75 per gallon. The incidence of the $1 tax is _____ paid by consumers and _____ paid by producers.

Accepted Answer

When a tax is levied, the incidence depends on the elasticity of demand and supply. In this case, the price elasticity of demand for bottled water is likely to be low as it is a necessity and there are few substitutes, while the price elasticity of supply is likely to be high as there are many producers who can easily switch to other goods. Therefore, the tax burden falls more heavily on consumers than on producers. Using the formula for tax incidence, we can find that the tax incidence on consumers is ($5.75-$5)/($1)= $0.75 and the tax incidence on producers is ($1-$0.75)= $0.25. Therefore, the answer is (D) $0.75; $0.25.

Question 7

A tax is levied on suppliers. The incidence of the tax:

Accepted Answer

The incidence of a tax, meaning how much of the tax burden falls on consumers versus producers, depends on the relative elasticities of supply and demand. Without information on these elasticities, it's impossible to determine how the tax burden is divided.

Question 8

A tax is levied on consumers. The incidence of the tax:

Accepted Answer

The incidence of a tax, meaning how much of the tax burden is shouldered by consumers versus producers, depends on the relative elasticities of supply and demand. Without information on these elasticities, it's impossible to determine how the tax burden is divided.

Question 9

Suppose the absolute value of the price elasticity of demand for Harley Davidson motorcycles is 4.04, while the price elasticity of supply for Harley Davidson motorcycles is 0.22. If Congress reinstates a luxury tax on high-end motorcycles, who will pay more of the tax?

Accepted Answer

The answer of Suppose the absolute value of the price...

Question 10

The federal government has passed legislation requiring that, starting in February 2021, all airlines pay a security fee of $20 for each passenger. Assuming the demand and supply curves in this market have their usual slopes:

Accepted Answer

The burden of a tax, such as the security fee, is typically shared between the sellers (airlines) and the buyers (customers), depending on the elasticities of demand and supply. Neither side usually bears the entire cost.

Question 11

Suppose the government levies a $6 per month tax on cell phone usage. If the demand for cell phone service is relatively (but not perfectly) inelastic, and the supply is relatively (but not perfectly) elastic, then the price of cell phone usage will:

Accepted Answer

When demand for a product is relatively inelastic, consumers are not very responsive to changes in price. Therefore, a tax will result in a smaller decrease in the quantity demanded compared to the increase in price. On the other hand, when supply is relatively elastic, producers are more responsive to changes in price. Therefore, the increase in price will result in a larger increase in quantity supplied. As a result, the burden of the tax will be shifted more towards consumers than producers, and the price of cell phone usage will increase by less than $6.

Question 12

For a good with a highly elastic demand, such as black beans, and an upward-sloping supply curve:

Accepted Answer

When demand is highly elastic, consumers are very responsive to price changes and can easily switch to substitutes if the price of black beans increases due to a tax. Therefore, producers will bear a larger portion of the tax burden, leaving consumers with an insignificant part of it.

Question 13

For a medical procedure which has a highly inelastic demand and an upward-sloping supply curve:

Accepted Answer

If the demand is highly inelastic, consumers will be willing to pay a high price for the medical procedure regardless of any added tax. As a result, the burden of the tax will fall on the consumers as they will continue to demand the same number of procedures irrespective of the price. On the other hand, suppliers may not be able to increase the supply of the medical procedure significantly as a response to the higher demand. Therefore, they will not have to bear an insignificant burden of the tax.

Question 14

For Uber rides, which have a highly elastic supply and a downward-sloping demand curve:

Accepted Answer

In a highly elastic supply and downward-sloping demand curve market, such as Uber rides, producers can easily adjust their supply in response to changes in demand. Therefore, if a tax is imposed on the producers, they can simply decrease their supply to avoid paying the tax. This means that consumers will end up paying a higher price for the service, and the burden of the tax will fall on them, not on the producers. Hence, producers will bear only a small proportion of the burden of a tax.

Question 15

For nuclear reactors, which have a highly inelastic supply and a downward-sloping demand curve:

Accepted Answer

When supply is highly inelastic, it means producers cannot easily change the amount of product available in response to price changes. Therefore, if a tax is imposed, producers have limited ability to reduce production or pass the tax onto consumers by raising prices. As a result, producers will bear most of the burden of the tax.

Question 16

Suppose the government imposes a $6 per month tax on cell phone usage. If the demand for cell phone usage is perfectly inelastic, and the supply curve is elastic (but not perfectly elastic), then the price of cell phone usage will:

Accepted Answer

When demand is perfectly inelastic, consumers bear the full burden of the tax, so the price will increase by exactly the amount of the tax, which is $6.

Question 17

If the demand curve is downward-sloping, and supply is relatively elastic, then the burden of a tax is:

Accepted Answer

When the demand curve is downward sloping and supply is relatively elastic, it means that consumers are more responsive to changes in price than producers. Therefore, if a tax is imposed, producers will try to pass on the burden of the tax to consumers in the form of higher prices. However, since consumers are sensitive to price changes, they will reduce their quantity demanded, which will lead to a bigger decrease in the quantity sold than the increase in price. As a result, the burden of the tax falls mainly on consumers.

Question 18

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

Accepted Answer

When demand is relatively inelastic, consumers are less sensitive to price changes, meaning they will continue to buy the product even if the price rises. Therefore, in the case of an excise tax, the burden falls mostly on consumers because they are less likely to reduce their quantity demanded in response to the tax-induced price increase.

Question 19

Suppose the government imposes a $15 per month tax on internet service. If the demand curve for internet service is perfectly inelastic, and the supply curve is upward-sloping, the monthly price for internet service will increase by:

Accepted Answer

When demand is perfectly inelastic, consumers will bear the entire burden of the tax, leading to a full $15 increase in the monthly price for internet service.

Question 20

Suppose the government imposes a $16 per month tax on internet service. If the demand curve for internet service is perfectly elastic, and the supply curve is upward-sloping, the monthly price for internet service will:

Accepted Answer

When demand is perfectly elastic, consumers are very sensitive to price changes, and any increase in price would lead to zero quantity demanded. Therefore, the entire tax burden falls on the suppliers, and the price paid by consumers does not change.

Quiz 6: When Governments Intervene in Markets

(Figure: The Market for Exercise Apps) Use Figure: The Market for Exercise Apps. If the government imposes a tax of $1 in this market, producers will pay _ of the tax, while consumers will pay _ of the tax.