Question

# 7) Suppose a \$2/unit tax is placed on a good. If the original equilibrium is (P...

7)

Suppose a \$2/unit tax is placed on a good. If the original equilibrium is (P = \$13, Q = 500) and the new equilibrium is (P = \$14.50, Q = 300), what is the producer tax burden?

a \$1000

b \$150

c \$450

d \$600

8)

Which of the following is consistent with a demand curve that shows a larger percent change in price than its percent change in quantity?

a Price Elasticity = 0.8, Inelastic demand

b Price Elasticity = 1.2, Inelastic demand

c Price Elasticity = 1.2, Elastic demand

d Price Elasticity = 0.8, Elastic demand

7) b. \$150
Reason- The new quantity supplied after imposing tax is 300 units. Tax per unit is \$2. Therefore, the supply curve will shift upwards by 2 units.

Here, the shaded portion is the tax burder that falls on the producers.

8) a. Price elasticity= 0.8, Inelastic Demand
Reason- When the the percentage change in price is more than the percentage change in quantity demanded, the demoninator will be more than the numerator, as a result of which the price elasticity will be less than zero, which is inelastic. The demand is inelastic because only a large change in price effects the quantity supplied.

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