Question

18.In which situation would consumers bear the highest incidence of a tax? a) an elastic demand with an elastic supply b) an inelastic demand with an inelastic supply c) an elastic demand with an inelastic supply d) an inelastic demand with an elastic supply

19.Which of these is not a problem caused by an effective price ceiling being placed on the price of electricity? a) a reduced effort to improve quality of service b) a misallocation of resources c) a reduction in deadweight loss d) a shortage of electricity

20.A firm increases its price for a good and total revenues increase. From this, we can conclude that its demand:a) is price elastic. b) is unitary elastic. c) has zero elasticity. d) is price inelastic.

Answer 1

18. C.)) Elastic demand with an inelastic supply.

When supply is more elastic than demand, consumers bear most of the tax burden.

When demand is more elastic than supply, producers bear most of the cost of the tax.

19. C.) A reduction in deadweight loss

Five important effects of Price ceilings

1. Shortages
2. Reductions in product quality
3. Wasteful lines and other search costs
4. A loss of gains from trade
5. Misallocation of resources

20. D.) Is price inelastic.

When demand is inelastic – a rise in price leads to a rise in total revenue

When demand is elastic – a fall in price leads to a rise in total revenue

When demand is perfectly inelastic (i.e. Ped = zero), a given price change will result in the same revenue change