Micro2Solutions

Suppose the supply curve of a commodity is given by s

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Unformatted text preview: If an excise tax is imposed at the rate of $15 a unit, which of the following statements is correct? a) Sellers will pay most of the tax b) Sellers and buyers will share the tax burden equally c) Sellers will pay most of the tax if demand curve is given by D2, and buyers will pay most of the tax if the demand curve is given by D1 d) Sellers will pay most of the tax if demand curve is given by D1, and buyers will pay most of the tax if the demand curve is given by D2 e) None of the above Solution: c) Sellers will pay most of the tax if demand curve is given by D2, and buyers will pay most of the tax if the demand curve is given by D1 When the demand curve is relatively inelastic (like D1), most of the tax burden is on the consumers; when the demand curve is relatively elastic (like D2), most of the tax burden is on the sellers. Q45. The ____the demand curve, the ____ the deadweight loss from an excise tax a) b) c) d) e) More inelastic; bigger More elastic; smaller More elastic; bigger Steeper; bigger None of the above Solution: c) More elastic; bigger If the demand curve is given by D1, deadweight loss = (1/2)*(70 – 60)*(40 – 25) = 75 If the demand curve is given by D2, deadweight loss = (1/2)*(70 – 50)*(35 – 20) = 150 D2 is more elastic and deadweight loss is bigger. Page 28 of 33 ©Prep101 www.prep101.com/freest...
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This note was uploaded on 08/26/2010 for the course ECON 208 taught by Professor Dickenson during the Fall '07 term at McGill.

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