February 12, 2010
Quiz 2
True-False Questions
1.
If the supply curve for a good is upward sloping and the demand curve for the good is elastic, a
per-unit tax on the good paid by sellers will decrease the total amount buyers spend on the good.
Answer:
True
Below are the supply and demand curves for a good.
demand curve
price
before tax
price
price
after tax
supply curve
before tax
supply curve
after tax
quantity
A tax on sellers shifts the supply curve up by the amount of the tax.
The supply curve after
the tax is the dashed line in the figure above.
The price that buyers pay increases and the
quantity decreases.
The price increase will have a positive effect on the amount buyers
spend on the good.
The quantity decrease will have a negative effect.
Which effect
dominates?
If demand is elastic, the quantity effect dominates.
The total amount buyers
spend on the good falls.
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2.
If the supply curve for a good is perfectly elastic and buyers pay a tax for each unit of the good
they buy, an increase in that tax will not change the equilibrium price of the good.
Answer:
True
A perfectly elastic supply curve is a horizontal line as depicted below.
supply curve
price
demand curve w/o tax
demand curve with higher tax
quantity
demand curve with tax
The demand curve without a tax is the solid downward sloping line.
A tax on buyers shifts
the demand curve down by the amount of the tax. That curve is the dashed line.
An even
higher tax shifts the curve down even further, the dotted line in the figure.
The equilibrium
price is the same for both tax rates, however.
With a perfectly elastic supply, buyers pay the
full burden of the tax.
The price that sellers receive is not affected the tax.
3.
The deadweight loss of a tax is the reduction in the profits of buyers and sellers because of the
tax minus the revenue raised by the tax.
Answer:
True
See the definition of deadweight loss on page 69 of Bergstrom and Miller.