Q2F09answers - 1 The excess burden of a sales tax on a good...

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1. The excess burden of a sales tax on a good is another name for the increase in price of the good caused by the tax. False See the definition of excess burden on page 69 of Bergstrom and Miller. “The difference between the loss in total profits of market participants and the amount of tax revenue is called the excess burden or deadweight loss of a tax.” 2. The number of units of a good that would be sold in competitive equilibrium if a \$10 per unit sales tax is collected from sellers is the same as it would be if a \$10 per unit subsidy were paid to buyers of this good. False Take a look at this supply and demand diagram. demand supply demand with \$10 subsidy equilibrium quantity with \$10 subsidy equilibrium quantity with \$10 tax price quantity supply with \$10 tax

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3. Suppose that the supply curve for a good is perfectly elastic, that a sales tax of \$20 per unit is collected from buyers of this good, and that the competitive equilibrium price sellers receive is \$30. If the sales tax is removed, the competitive equilibrium price sellers receive will fall by \$20. False Here’s the diagram. \$30 demand with the tax supply demand without the tax price quantity 4. If the suppliers of a good are paid a subsidy of \$20 for each unit of the good they sell, the supply curve for the good is shifted downward by \$20. True Without the subsidy, suppose a price of p would have been necessary for sellers to supply q units. With a subsidy of \$20, the price necessary to yield a quantity of q is p-\$20 because the net price received by sellers (price + subsidy) would be p. The supply curve shifts down by the amount of the subsidy.
5. Assume the supply curve for a good shifts in (less supplied at every price) and the demand curve for the good does not change. If the total revenue of suppliers increases as a result of this shift, the demand for the good is inelastic. Answer: True Remember this approximation: p p q q R R Δ + = , where p is price, q is quantity and R is revenue (R=pq). The deltas mean change in price, quantity or revenue. If supply shifts in, q q is negative, and p p is positive as the equilibrium point moves up the demand . If total revenue increases, the percentage change in price, p p , must be greater in absolute value than the percentage change in quantity, q q . The elasticity of demand is p p q q E d = . Because the percentage change in price is greater in absolute value than the percentage change in quanity, the elasticity must lie between -1 and 0, which means demand is inelastic.

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Multiple Choice Questions 6. There are 50 vacant lots in Paradise, Idaho. The owner of each lot is willing to sell that lot if he or she receives a price of at least \$10,000. There are 200 retirees from California who would like to buy a lot in Paradise on which they could build their retirement homes. Seventy-five of those retirees are willing to pay \$15,000 for a lot, and 125 of those retirees are willing to pay \$7,500 for a lot. If the town of Paradise imposes a tax of \$1,000 on each person who buys a lot, how will the
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This note was uploaded on 03/20/2010 for the course ECON 1 taught by Professor Bergstrom during the Spring '07 term at UCSB.

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Q2F09answers - 1 The excess burden of a sales tax on a good...

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