PE Chapter 4+5+6 Review Flashcards
Problem Set 2
The negative relationship between price and quantity demanded
a. Applies to most goods in the economy
b. Is represented by a download-sloping demand curve
c. Is referred to as the law of demand
d. All of the above are correct
d. All of the above are correct
a. This applies to most goods in the economy, which is true because the law of demand states that when the price of a good increases, the quantity demanded decreases, and vice versa
c. The law of demand is the term used to describe this relationship, so this is correct as well
Quantity demanded falls as the price rises and rises as the price falls, so we say that
a. Quantity demanded is determined by quantity supplied
b. Price is determined by quantity demanded
c. Quantity demanded is a function of demand
d. Quantity demanded is negatively related to the price
Quantity demanded falls as the price rises and rises as the price falls, so we can say that
a. Quantity demanded is not determined by quantity supplied; supply and demand are seperate concepts
b. While price and quantity demanded are related, price is typically influenced by both supply and demand, not just quantity demanded
c. Demand refers to the overall relationship between price and quantity, while quantity demanded refers to a specific point on the demand curve.
Which of the following changes would not shift the demand curve for a good or service
a. A change in income
b. A change in the price of the good or service
c. A change in expectations about the future price of the good or service
d. A change in the price of a related good or service
b. A change in the price of the good or service (because it causes movement along the curve, not a shift)
a. Shift the demand curve (for normal goods, higher income increases demand; for inferior goods, higher income decreases demand)
b. Does not shift the demand curve (instead, it causes movement along the curve)
c. Shifts the demand curve (if consumers expect higher prices in the future, they might buy more now)
d. Shifts the demand curve (substitutes and complements affect demand; if the price of coffee increases, demand for tea may increase)
Suppose you like to make, from scratch, pies filled with banana cream and vanilla pudding. You noticed that the price of bananas has increased. How would this price increase affect your demand for vanilla pudding
a. It would decrease
b. It would increase
c. It would be unaffected
d. There is insufficient information given to answer the question
a. It would decrease
This question is about complementary goods_goods are often used together. In this case, bananas and vanilla pudding are complements because they are both ingredients in the pies you make.
- If the price of bananas increase, you may buy fewer bananas
- Since you need bananas to make the pie, you might also buy less vanilla pudding because the demand for pies would decrease
- This means that the demand for vanilla pudding would decrease as well
Currently you purchase 6 packages of hot dogs a month. You will graduate from college in December and you will start a new job in January. You have no plans to purchase hot dogs in January. For you, hot dogs are:
a. A substitute good
b. A normal good
c. An inferior good
d. A law of demand good
c. An inferior good
a. A substitute is a product that can replace another (hotdogs and hamburgers) but that is not relevant here
b. A normal good is one where demand increases as income rises, but your demand for hot dogs decreases after graduation
c. Inferior goods are those whose demand decreases as income increases. Since you plan to stop buying hot dogs when you start earning more, this matches the definition.
d. The law of demand applies to all goods, stating that demand decreases when price increases.
If Francis experience a decrease in his income, we would expect that, as a result, Francis’ demand for
a. Each good he purchases will remain unchanged
b. Normal goods will decrease
c. Luxury goods will increase
d. Inferior goods will decrease
b. Normal goods will increases
a. Changes in income typically affect demand, especially for normal and inferior goods.
b. Normal goods are those for which demand decreases when income falls (dining out, branded clothes)
c. Luxury goods are a type of normal good, meaning their demand will also decrease when income drops
d. Inferior goods (like instant noodles or second hand clothes) increase in demand when income falls, not decrease.
Ford Motor Company announces that it will offer 3,000 rebates on new Mustangs starting next month. As a result of this information, today’s demand curve for Mustangs.
Rebate: an amount of money that is returned to you, especially by the government, for example when you have paid too much tax
a. Shifts to the right
b. Shifts to the left
c. Shifts either to the right or to the left, but we cannot determine the direction of the shift from the given information
d. Will not shift; rather, the demand curve for Mustangs will shift to the right next month
b. Shifts to the left
a. Demand decreases today because buyers will wait for the rebate
b. Consumers delay buying Mustangs now, decreasing current demand
d. The rebate affects expectations now, shifting today’s demand curve to the left.
Holding the nonprice determinants of supply constant, a change in price would
a. Result in either a decrease in supply or an increase in supply
b. Result in a movement along a stationary supply curve
c. Result in a shift of demand
d. Have no effect on the quantity supplied
b. Result in a movement along a stationary supply curve
a. This describes a shift in supply, but price changes only cause movement along the curve
b. Price changes cause movement along the supply curve (higher price -> higher quantity supplied)
c. A change in price affects quantity supplied, not demand
d. A higher price typically encourages producers to supply more.
Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the government increases the minimum wage by 1$ an hour it is likely that the
a. Demand for bicycle assembly workers will increase
b. Supply of bicycles will shift to the right
c. Supply of bicycles will shift to the left
d. Firm must increase output to maintain profit levels
c. Supply of bicycles will shift to the left
a. Higher wage do not increase demand for workers; instead, firms may hire fewer workers to reduce costs
b. A wage increase raises production costs, making supply decrease, not increase
c. Higher wages increase costs, leading to a decrease in supply (leftward shift)
d. Higher costs make it harder to increase output; firms may reduce production instead
If car manufacturers begin utilizing new labor saving technology on their assembly lines, we would not expect
a. A smaller quantity of labor to be used
b. The supply of cars to increase
c. Costs to the firm to fall
d. Individual car manufacturers to move up and to the right along their individual supply curves
d. Individual car manufacturers to move up and to the right along their individual supply curves.
Expected outcomes:
* Reduces the need for human labor -> Less labor is used
* Increases productivity -> more cars can be produced
* Lowers production costs -> firms may save money on wages
* Shifts the supply curve to the right -> more cars available at the same price
d. New technology shifts the supply curve to the right but it does not cause movement along the existing curve. Movement along a supply curve is caused by a change in price, not technology.
Suppose there is an earthquake that destroys several corn canneries. Which of the following would not be a direct result of this event?
a. Sellers would decrease their ability to produce and sell as much as before ar each relevant price
b. The supply would decrease
c. Buyers would not be willing to buy as much as before at each relevant price
d. The equilibrium price would rise
c. Buyers would not be willing to buy as much as before at each relevant price
Expected effects:
* Reduced production capacity -> sellers cannot produce as much as before
* Decrease in supply -> with fewer canneries, the overall supply of canned corn decreases
* Increase in price -> when supply decreases and demand stays the same, the equilibrium price rises
c. the earthquake affects supply, not demand
How to find the Equilibrium price and quantity
The equilibrium price and quantity occur where quantity demand = quantity supplied
How to find a Surplus
Surplus = Quantity Supplied - Quantity Demanded
If there is a surplus, the price would tend to fall
How to find a Shortage
Shortage = Quantity Demanded - Quantity Supplied
If there is a shortage, price would tend to rise
How to find the Equilibrium Price and Quantity in a figure
The equilibrium point occurs where the supply (S) and demand (D) curves intersect
The demand for Werthers candy is likely
a. Elastic because candy is expensive relative to other snacks
b. Elastic because there are many close subsitutes for Werthers
c. Elastic because Werthers are regarded as a necessity by many people
d. Inelastic because it is usually eaten quickly, making the relevant time horizon short
b. Elastic because there are many close subsitutes for Werthers
- Elastic demand means that a small change in price leads to a significant change in quantity demanded. Factors that make demand more elastic include
- Availability of close substitutes
- Being a luxury good rather than a necessity
- A longer time horizon for consumers to adjust purchasing habits
- Inelastic demand means that a price change has little effect on quantity demanded. This happens when
- The good is necessity
- There are few substitutes
- The time horizon is short
a. Candy is not typically considered “expensive” enough to make demand elastic
b. There are many close substitutes for Werther’s candy, making it demand elastic
c. Werther’s is not a necessity for most people
d. The fact that it’s eaten quickly does not determine elasticity_substitutes matter more
It is likely that
a. The demand for flat-screen computer monitors is more elastic than the demand for monitors in general
b. The demand for grandfather clocks is more elastic than the demand for wristwatches
c. The demand for cardboard is more elastic over a long period of time than over a short period of time
d. All of the above are correct
d. All of the above are correct
a. A specific product (flat-screen monitors) has more substitutes than the broad category (all monitors). The more specific the product, the more elastic the demand
b. Grandfather clocks are a luxury item with many alternatives (digital clocks, wristwatches, phone clocks). This makes their demand more elastic than for wristwatches, which havae fewer direct substitutes
c. In the short run, businesses may have no choice but to buy cardboard at any price. But in the long run, they can find substitutes or adjust production, making demand more elastic
A person who takes a prescription drug to control high cholesterol most likely has a demand for that drug that is
a. Inelastic
b. Unit elastic
c. Elastic
d. Highly responsive to changes in income
a. Inelastic
a. Presciption drugs for high cholesterol are essential for health and often have no close substitutes. Even if the price rises, people must continue buying them, making demand inelastic
b. Unit elasticity means a proportional change in demand when price changes, which is unlikely for essential medications
c. Elastic demand occurs when people easily switch to substitutes or avoid buying when prices rise. Since cholesterol drugs are medically necessary, demand is not highly sensitive to price changes
d. This describes income elasticity, not price elasticity. Life-saving medications are necessities, so demand doesn’t change much with income.
Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten-year period because:
a. Buyers tend to be much less sensitive to a change in price qhen given more time to react
b. Buyers tend to be much more sensitive to a change in price when given more time to react
c. Buyers will have substantially more income over a ten-year period
d. The quantity supplied of gasoline increases very little in response to an increase in the price of gasoline
b. Buyers tend to be much more sensitive to a change in price when given more time to react.
a. In the short run, buyers may be less sensitive (inelastic), but over time, they find alternatives like fuel-efficient cars or public transport
b. Over a long period, demand become more elastic as people can adjust their lifestyle, switch to electric cars, capool, or use public transport. This long term price elasticity explains why gasoline demand falls substantially over time.
c. Income may increase, but that doesn’t directly explain why demand falls - it’s about how people adjust to price changes
d. This relates to supply elasticity, not demand elasticity, so it’s irrelevant to the question.
The local pizza restaurant makes such great bread sticks that consumers do not respond much at all to a change in the price. If the owner is only interested in increasing revenue, he should
a. Lower the price of the bread sticks
b. Leave the price of the bread sticks alone
c. Raise the price of the bread sticks
d. Reduce costs
c. Raise the price of the bread sticks
Consumers do not respond much at all to a change in price, meaning demand is inelastic. When demand is inelastic, an increase in price leads to a higher total revenue because the percentage decrease in quantity demanded is smaller than the percentage increase in price.
a. Lowering the price when demand is inelastic would decrease total revenue
d. While reducing costs might help profits, it does not directly affect revenue, which is the focus of the question.
If the demand for donuts is elastic, then a decrease in the price of donuts will:
a. Increase total revenue of donut sellers
b. Decrease total revenue of donut sellers
c. Not change total revenue of donut sellers
d. There is not enough information
a. Increase total revenue of donut sellers
- Elastic demand means that a percentage decrease in price leads to a larger percentage increase in quantity demanded
- SInce total revenue = price x quantity, when price drops and quantity demanded increase significantly, total revenue rises
- This means a price decrease increases total revenue
(b) would only happen if demand were inelastic
For a horizontal demand curve
a. A slope is undefined and price elasticity of demand is equal to 0
b. A slope is equal to 0 and price elasticity of demand is undefined
c. A slope and price elasticity of demand both are undefined
d. Slope and price elasticity of demand both are equal to 0
b. A slope is equal to 0 and price elasticity of demand is undefined
A horizontal demand curve means that any change in price causes quantity demanded to drop to zero (perfectly elastic demand)
* The slope of a demand curve is calculated as deltaP/deltaQ
* Since the curve is perfectly flat, the change in price (deltaP) is zero, while the quantity (deltaQ) can be any value
* Mathematically, this means slope = 0
Price Elasticity of Demand (PED) measures how much quantity demanded responds to price changes:
PED = %change in quantity demanded / % change in price
- For a horizontal demand curve, even a tiny increase in price drops quantity demanded to zero
- This mean PED = infinity (perfectly elastic demand)
Last year, Joan bought 50 pounds of hamburger when her household’s income was $40,000. This year, the household’s income was only $30,000 and Joan bought 60 pounds of hamburger. All else constant, Joan’s income elasticity of demand for hamburger is
a. Positive, so Joan considers hamburger to be an inferior good
b. Positive, so Joan considers hamburger to be a normal good and a necessity
c. Negative, so Joan considers hamburger to be an inferior good
d. Negative, so Joan considers hamburger to be a normal good, but not a necessity
c. Negative, so Joan considers hamburger to be an inferior good
- Joan’s quantity demanded increased from 50 pounds to 60 pounds
% change in quantity = (60-50) / 50 = 20%
- Her income decreased from $40,000 to $30,000
% change in income = (30,000-40,000) / 40,000 = -25%
- YED = 20% / -25% = -0.8
Since YED is negative, hamburgers are an inferior good for Joan (meaning she buys more when her income decreases)
Suppose the cross price elasticity of demand between hot dogs and mustard is -2.00. This implies that a 20 percent increase in the price of hot dogs will cause the quantity of mustard purchase to
a. Fall by 200 percent
b. Fall by 40 percent
c. Rise by 200 percent
d. Rise by 40 percent
b. Fall by 40 percent
To determine how the quantity of mustard changes when the price of hot dogs increase, we use the cross-price elasticity of demand (XED):
XED = %change in quantity demanded of mustard / %change in price of hot dogs
- Cross-price elasticity (XED) = -2.00
% change in price of hot dogs = +20%
We need to find %change in quantity of mustard - Using the formula:
% change in quantity of mustard = XED x %change in price of hot dogs = (-2,00) x 20% = -40% - A negative value means the quantity of mustard decreases (since mustard and hot dogs are complements - people use them together)
Cross-price elasticity of demand measures how
a. The price of one good changes in response to a change in the price of another good
b. The quantity demanded of one good changes in respose to a change in the quantity demanded of another good
c. The quantity demanded of one good changes in response to a change in the price of another good
d. Strongly normal or inferior a good is
c. The quantity demanded of one good changes in response to a change in the price of another good
Cross-price elasticity of demand (XED) measures how the quantity demanded of one good responds to a change in the price of another good.
XED = %change in quantity demanded of Good A / %change in price of Good B
- If XED > 0, the goods are substitutes (CocaCola & Pepsi)
- If XED < 0, the goods are complements (hot dogs and mustard)
Which of the following expressions represents a cross-price elasticity of demand?
a. Percentage change in quantity demanded of apples divided by percentage change in quantity supplied of apples
b. Percentage change in quantity demanded of apples divided by percentage change in price of pears
c. Percentage change in price of apples divided by percentage change in quantity demanded of apples
d. Percentage change in quantity demanded of apples divided by percentage change in income
b. Percentage change in quantity demanded of apples divided by percentage change in price of pears
Cross-price elasticity of demand (XED) measures how the quantity demanded of one good responds to a change in the price of another good.
XED = %change in quantity demanded of Good A / %change in price of Good B
- If XED > 0, the goods are substitutes (CocaCola & Pepsi)
- If XED < 0, the goods are complements (hot dogs and mustard)
Generally, a firm is more willing and able to increase quantity supplied in response to a price change when:
a. The relevant time period is short rather than long
b. The relevant time period is long rather than short
c. Supply is inelastic
d. The firm is experiencing capacity problems
b. The relevant time period is long rather than short
A firm’s ability to increase quantity supplied when price changes depends on several factors, particularly time and production capacity
a. In the short run, firms cannot easily adjust production due to fixed resources (limited labour, machines)
b. Over the long run, firms can expand capacity, hire more workers and invest in technology, making supply more elastic and allowing a greater response to price changes
c. If supply is inelastic, the firm cannot increase quantity supplied significantly, even if the prices rise
d. Capacity problems limit supply increases, making the firm less willing/able to respond to price changes
The discovery of a new hybrid wheat would increase the suppply of wheat. As a result, wheat farmers would realize an increase in total revenue if
a. The supply of wheat is elastic
b. The supply of wheat is inelastic
c. The demand for wheat is inelastic
d. The demand for wheat is elastic
c. The demand for wheat is inelastic
The discovery of a new hybrid wheat increases supply, which shifts the supply curve rightward, leading to a lower equilibrium price and a higher quantity sold
For total revenue (TR = Price x Quantity) to increase, we need to analyze the price elasticity of demand of wheat
a. Supply elasticity affects how much quantity increases, but it does not directly determine whether total revenue rises or falls
b. Inelastic supply means less ability to expand production, but TR depends more on demand elasticity when supply shifts
c. If demand is inelastic, a price drop leads to a smaller percentage increase in quantity demanded, so TR increases (because consumers don’t reduce spending much even with a price change)
d. If demand were elastic, the price drop would cause a larger percentage increase in quantity demanded, but TR would decrease because price falls more than the increase in quantity sold.
Price controls are usually enacted
a. As a means of raising revenue for public purposes
b. When policymakers believe that the market price of a good or service is unfair to buyers or sellers
c. When policymakers detect inefficiencies in a market
d. All of the above are correct
b. When policymakers believe that the market price of a good or service is unfair to buyers or sellers
Price controls are government-imposed limits in prices in a market, such as price ceilings (maximum prices) and price floors (minimum prices). These controls are typically used to address** market fairness or inefficiencies** rather than to raise government revenue
a. Price controls do not generate revenue for the government like** taxes **do. Instead, they regulate market prices
b. Price controls are often implemented to protect consumers or produces when policymakers think prices are too high (price ceilings, rent control,…) or too low (price floors, minimum wage)
c. If a market is not functioning efficiently (monopolies, externalities), policymakers may introduce price controls to correct distortions
A price ceiling will be binding only if it is set
Binding: cannot be legally avoided or stopped
a. Equal to equilibrium price
b. Above euilibrium price
c. Below equilibrium price
d. None of the above; a price ceiling is never binding
c. Below equilibrium price
A price ceiling is a government-imposed maximum price that can be charged for a good or service. It is considered binding if it prevents the market from reaching its natural equilibrium price, creating a shortage (demand exceeds supply)
a. If the price ceiling is set at the equilibrium price, it has no effect because the market is already clearing at that price
b. A price ceiling above equilibrium is not binding because the market price is already lower. It won’t impact supply or demand
c. A price ceiling is only binding when it is set below the equilibrium price, because it forces prices lower than what the market naturally dictates, leading to excess demand (shortages)
d. Price ceilings can be binding if set below equilibrium. A common example is rent control, when landlords are forced to charge lower rents, leading to housing shortages
When, in a particular market, the law of demand and the law of supply both apply, the imposition of a binding price ceiling in that market causes quantity demanded to be
a. Greater than quantity supplied
b. Less than quantity supplied
c. Equal to quantity supplied
d. Any of the above is possible
a. Greater than quantity supplied
A binding price ceiling is set** below equilibrium price**, forcing the market price lower than it would naturally be. According to the law of demand, when prices decrease, quantity demanded increases. However, the law of supply stataes that lower price discourage production, reducing quantity supplied
a. Because the price ceiling is below equilibrium, the lower price increases demand while discouraging supply, leading to a shortage where quantity demanded exceeds quantity supplied
b. This would only happen if price floors were in effect (minimum price above equilibrium), leading to a surplus
c. If quantity demanded and supplied were equal, there would be no shortage, meaning the ceiling is not binding
d. In a binding price ceiling scenario, demand always exceeds supply, making only (a) correct
Suppose the equilibrium price of a physical examination (“physical”) by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling
a. The demand curve for physicals shifts to the right
b. The supply curve for physicals shifts to the left
c. The quantity demanded of physicals increases and the quantity supplied of physicals decreases
d. The number of physicals performed will increase
c. The quantity demanded of physicals increases and the quantity supplied of physicals decreases
A price ceiling of $150 is set below the equilibrium price of $200, meaning it is binding. This forces the price lower than the natural market equilibrium, causing higher demand and lower supply, leading to a shortage
a. The demand curve itself does not shift; instead, quantity demanded increases because of the lower price. A demand curve shift occurs due to external factors like income changes, not price ceilings.
b. The supply curve does not shift either. Rather, quantity supplied decreases due to the lower price, but the supply curve remains in place.
c. Since the price is artificially kept below equilibrium, more people want physicals (higher quantity demanded), but doctors are less willing to provide them at the lower price (lower quantity supplied). This creates a shortage.
d. The lower price reduces the quantity supplied, which means fewer physicals are performd, not more.
Which of the following statements about the effects of rent control is correct
a. The short-run effect of rent control is a surplus of apartments, and the long-run effect of rent control is a shortage of apartments
b. The short-run effect of rent control is a relatively small shortage of apartments, and the long-run effect of rent control is a larger shortage of apartments.
c. In the long run, rent control leads to a shortage of apartments, and the quality of available apartments is improved by rent control
d. The effects of rent control are very noticeable to the public in the short run, because the primary effects of rent control occur very quickly
b. The short-run effect of rent control is a relatively small shortage of apartments, and the long-run effect of rent control is a larger shortage of apartments.
Rent control is the type of price ceilings imposed by the government to keep rental prices low. However, while it may make housing more affordable in the short run, it often leads to negative long-term effects such as housing shortages and lower quality apartments due to reduced incentives for landlords to maintain properties.
a. Rent control leads to shortages, not surpluses, because landlords are less willing to rent out properties at lower prices
b. In the short run, landlords might still rent out apartments, but as time goes on, they reduce investment in rental properties, leading to larger shortages in the long run
c. The quality of apartments declines because landlords have less incentive to maintain or improve properties if they can’t charge higher rent
d. The largest effects of rent control (severe shortages and lower quality housing) occur over time, making the long-run impact more significant than the short-run effects.
How to determine the effective price that buyers pay after the tax is imposed in a figure
- Identify the equilibrium price before the tax
- Check the price buyers pay after the tax
Buyers now have to pay $X, which is the price at the new equilibrium after the tax is imposed
- Effective price that the buyers pay after the tax is imposed is $X
What is the tax size
The tax size is the vertical distance between the original supply curve (S) and the “After Tax” supply curve at the quantity sold after the tax is imposed.
- Find the price buyers pay after tax
- Find the price sellers receive after tax
- Calculate the tax size = price buyers pay - price sellers receive
How to determine the tax burden on buyers
- Find the price buyers pay after tax
- Find the initial equilibrium price (before tax)
- Calculate the buyers’ tax burden = new price paid - original equilibrium price
How to determine the tax burden on sellers
- Find the price sellers receive after tax
- Find the initial equilibrium price (before tax)
- Calculate the sellers’ tax burden = original equilibirum price - price sellers receive after tax
How to determine which market will have the majority of the tax burden fall on buyers
We need to analyze price elasticity of supply and demand in each graph.
- When demand is more inelastic (steeper D curve), buyers bear more of the tax burden
- When supply is more inelastic (steeper S curve), sellers bears more of the tax burden
How to determine which market will have the majority of the tax burden fall on sellers
We need to analyze price elasticity of supply and demand in each graph
- When supply is more inelastic (steeper S curve), sellers bear more of the tax burden
- When demand is more inelastic (steeper D curve), buyers bear more of the tax burden
Suppose the demand curve for a good is very flat and the supply curve for the good is very steep. If the government taxes this good
a. Buyers and sellers will each share 50% of the burden, regardless of the slopes of the demand and supply curves
b. Sellers will bear a larger share of the tax burden and buyers will bear a smaller share of the burden
c. The distribution of the burden will depend upon whether the buyers or the sellers are required to send the tax to the government
d. The amount of tax revenue collected by the government will depend upon whether the buyers or the sellers are required to send the tax to the government
b. Sellers will bear a larger share of the tax burden and buyers will bear a smaller share of the burden
- Tax incidence depends on the relative elasticity of supply and demand
- If demand is very flat (elastic) and supply is very steep (inelastic), sellers bear most of the tax burden because they have fewer alternatives and cannot easily change their quantity supplied
a. Tax burden is not always shared 50-50, it depends on elasticity
Suppose that a tax is placed on books. If the buyers pay the majority of the tax, we know that the
a. Demand is more inelastic than the supply
b. Supply is more inelastic than the demand
c. Government has required that buyers remit the tax payments
d. Government has required that sellers remit the tax payments
a. Demand is more inelastic than the supply
- Tax burden falls more on the less elastic (more inelastic) side of the market
- If buyers are paying most of the tax, this means demand is more inelastic than supply (buyers have fewer alternatives and are less responsive to price changes than sellers)
a. If buyers bear more of the tax burden, demand must be more inelastic than supply
b. This would imply sellers bear more of the tax, but the question states buyers bear most of it
c. Who remits the tax (buyers or sellers) doesn’t determine tax incidence_it depends on elasticity
A $2.00 tax placed on the sellers of mailboxes will shift the supply curve
a. Upward by exactly $2.00
b. Upward by less than $2.00
c. Downward by exactly $2.00
d. Downward by less than $2.00
a. Upward by exactly $2.00
- A tax on sellers increases their cost per unit, causing the** supply curve to shift upward (or leftward)**
- Since the tax is $2.00 per unit, this means the minimum price sellers are willing to accept increases by $2.00
a. The supply curve shifts upward by exactly $2.00 because the tax adds a fixed cost per unit
c. A tax on sellers does not shift the supply curve downward
Suppose sellers of liquor are required to send $1.00 to the government for every bottle of liquor they sell. Further, suppose this tax causes the price paid by buyers of liquor to rise by $0.80 per bottle. Which of the following statements is correct?
a. This tax causes the demand curve for liquor to shift downward by $0.80 at each quantity of liquor
b. The incidence of the tax is summarized by the fact that sellers send the tax payments to the government
c. Eighty percent of the burden of the tax falls on buyers
d. All of the above are correct
c. Eighty percent of the burden of the tax falls on buyers
- A $1.00 tax on sellers increases their cost, shifting the supply curve upward by $1.00
- Buyers end up paying $0.80 more per bottle, meaning they bear 80% of the tax burden
- Sellers only absorb $0.20 per bottle because they cannot pass the full tax onto consumers
a. The tax affects supply, not demand. The demand curve does not shift
b. Tax incidence is about who actually bears the burden, not who send the tax payments
In general, a tax burden falls more heavily on the side of the market that
a. Has a fewer number of participants
b. Is more elastic
c. Is unit elastic
d. Is less elastic
d. Is less elastic
- Tax burden falls more heavily on the side of the market that is less elastic (less responsive to price changes)
- If demand is inelastic, buyers bear more of the tax
- If supply is inelastic, sellers bear more of the tax
b. The more elastic side escapes most of the burden by changing quantity more
c. Unit elasticity means total revenue remains constant, not that one side bears more tax
In which of these cases will the tax burden fall most heavily on buyers of the good?
a. The demanded curve is relatively steep and the supply curve is relatively flat
b. The demand curve is relatively flat and the supply curve is relatively steep
c. The demand curve and supply curve are both relatively flat
d. The demand curve and the supply curve are both relatively steep
a. The demanded curve is relatively steep and the supply curve is relatively flat
- The tax burden falls more heavily on the side of the market that is less elastic (less responsive to price changes)
- A steep (inelastic) demand curve means buyers don’t reduce quantity much when prices rise, so they bear more of the tax burden
- A flat (elastic) supply curve means sellers can easily adjust quantity, shifting most of the tax burden to buyers
b. Flat demand (elastic) + steep supply (inelastic) -> Sellers bear more of the tax burden
c. Both flat (elastic) -> Tax burden is shared more equally
d. Both steep (inelastic) -> Tax burden is shared, but not necessarily heaviest on buyers
Pb, Ps
effective price buyers/ sellers pay with tax
