Question

# 3) Suppose a \$4/unit tax is placed on a good. If the original equilibrium is (P...

3) Suppose a \$4/unit tax is placed on a good. If the original equilibrium is (P = \$20, Q = 1000) and the new equilibrium is (P = \$21, Q = 800), what is the consumer tax burden?

a \$2400

b \$1000

c \$3200

d \$800

4)

Suppose the demand curve for cigarettes is extremely inelastic (relatively steep). If the government decides to increase its revenue by taxing cigarette sales, will consumers or producers pay a larger proportion of the tax? Will an inelastic demand curve create more or less deadweight loss than an elastic one, all else equal?

a Consumers bear larger tax burden, inelastic demand curve will have more deadweight loss

b Producers bear larger tax burden, inelastic demand curve will have more deadweight loss

c Producers bear larger tax burden, inelastic demand curve will have less deadweight loss

d Consumers bear larger tax burden, inelastic demand curve will have less deadweight loss

3. Before tax price paid by buyers = \$ 20 per unit

After tax price paid = \$ 21 per unit

Tax incidence on buyer = \$ 21 - 20 = \$ 1 per unit

Tax burden on buyers = \$ 1 × 800 = \$ 800

4. As it isme too ed that demand curve is inelastic therefore, buyers will bear a larger burden of tax in comparison to sellers.

The deadweight loss in this case would be smaller. As the demand curve is inelastic. In case of inelastic demand due to tax imposed by government the impact on quantity demanded would be small.

d.  Consumers bear larger tax burden, inelastic demand curve will have less deadweight loss.

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