Question 1

The price elasticity of demand for a particular life-saving drug is zero, and the price elasticity of supply is 0.50. If a $10 tax is levied on producers, how much of this tax will eventually be paid by consumers?

Accepted Answer

When the price elasticity of demand is zero, it means demand is perfectly inelastic, and consumers will bear the entire burden of the tax. Therefore, consumers will pay the full $10 tax.

Question 2

When a tax is imposed on consumers, the demand curve shifts downward, so that the vertical distance between the original demand curve and the new demand curve that incorporates the tax equals the:

Accepted Answer

The vertical distance between the original demand curve and the new demand curve equals the amount of the tax per unit, as it represents the additional cost to consumers.

Question 3

(Figure and Table: The Market for Lyft Rides) Use Figure and Table: The Market for Lyft Rides. If the government imposes an excise tax of $1 per ride on producers, then people who ride Lyft will pay _____ of each $1 tax.

Accepted Answer

When an excise tax is imposed, the supply curve shifts upward by the amount of the tax. This means that the price paid by consumers also increases. In this case, if the excise tax is $1 per ride, the supply curve will shift from S1 to S2, and the equilibrium price will rise from $8 to $9. The amount of the tax is shared between producers and consumers, but the incidence (or burden) of the tax depends on the price elasticities of supply and demand. In this case, because demand for Lyft rides is relatively elastic (as shown by the flat demand curve), consumers will bear most of the burden of the tax. The new price of $9 represents a 12.5% increase over the old price of $8, so consumers will pay about $0.50 of the $1 tax, while producers will only receive $8 instead of $9, so they will bear the remaining $0.50 of the tax. Therefore, the answer is B.

Question 4

(Figure and Table: The Market for Lyft Rides) Use Figure and Table: The Market for Lyft Rides. If the government imposes an excise tax of $1 per ride on producers, then people who drive Lyft will pay _____ of each $1 tax.

Accepted Answer

The answer of (Figure and Table: The Market for Lyft...

Question 5

(Figure and Table: The Market for Lyft Rides) Use Figure and Table: The Market for Lyft Rides. If the government imposes an excise tax of $2 per ride on producers, then people who ride Lyft will pay _____ of each $2 tax.

Accepted Answer

The answer of (Figure and Table: The Market for Lyft...

Question 6

(Figure and Table: The Market for Lyft Rides) Use Figure and Table: The Market for Lyft Rides. If the government imposes an excise tax of $2 per ride on producers, then people who drive Lyft will pay _____ of each $2 tax.

Accepted Answer

When an excise tax is imposed, the supply curve shifts upward by the amount of the tax. In this case, the supply curve shifts from S1 to S2, resulting in a new equilibrium quantity of 800 rides and a higher price of $12 per ride. The $2 tax is ultimately paid by either the buyers or the sellers, or a combination of both. In this case, because the supply curve shifts upward by the full amount of the tax, the entire $2 tax will be paid by the sellers (i.e. Lyft drivers). Therefore, the drivers will pay the full $2 tax and receive $10 per ride, resulting in a decrease in producer surplus.

Question 7

(Figure: The Market for Beyond Meat Burgers) Use Figure: The Market for Beyond Meat Burgers. If the market is originally in equilibrium, and the government imposes a tax of $0.80 per unit of the good sold, the amount of the tax paid by consumers is:

Accepted Answer

The answer of (Figure: The Market for Beyond Meat Burgers)...

Question 8

(Figure: The Market for Beyond Meat Burgers) Use Figure: The Market for Beyond Meat Burgers. If the market is originally in equilibrium, and the government imposes a tax of $0.80 per unit of the good sold, the amount of the tax paid by producers is:

Accepted Answer

The answer of (Figure: The Market for Beyond Meat Burgers)...

Question 9

(Figure: The Incidence of Tax and Elasticities) Use Figure: The Incidence of Tax and Elasticities. Each panel below shows the application of a tax that raises the price from P1 to P2. When a good or service is characterized by a relatively elastic supply, as shown in panel _____, a greater share of the burden of a tax is borne by _____.

Accepted Answer

When a good or service is characterized by a relatively elastic supply, a greater share of the burden of a tax is borne by buyers. This is depicted in panel A of the figure, where the demand curve is relatively steep compared to the supply curve. As a result, when the price of the good increases due to the tax, buyers are more likely to reduce their quantity demanded, causing the overall quantity of the good sold to decrease. Sellers may respond to this by lowering their prices to attract buyers, but the burden of the tax ultimately falls on buyers because they are the ones who ultimately bear the costs of the reduction in quantity.

Question 10

(Figure: The Incidence of Tax and Elasticities) Use Figure: The Incidence of Tax and Elasticities. Each panel below shows the application of a tax that raises the price from P1 to P2. When a good or service is characterized by a relatively inelastic supply, as shown in panel _____, a greater share of the burden of a tax is borne by _____.

Accepted Answer