Question

1. Who ultimately pays the commodity tax depends on:

A. who writes the check to the government

B. the relative elasticities of demand and supply

2. When the government imposes a commodity tax,

A. buyers will pay a higher price inclusive of the tax and sellers will receive a lower price exclusive of the tax

B. buyers will pay a lower price inclusive of the tax and sellers will receive a higher price exclusive of the tax

3. Here are two statements, either of which may be true or false.

I         The higher is the price elasticity of demand compared with the price elasticity of supply, the more the burden of a commodity tax falls on buyers compared with sellers.

II          The higher is the price elasticity of supply compared with the price elasticity of demand, the more the burden of a commodity tax falls on sellers compared with buyers.

Choose the correct option.

A. Neither statement is true.

B. Only I is true.

C. Only II is true.

D. Both statements are true.

4. The deadweight loss of a commodity tax represents

A. the administrative costs of the tax like the salaries paid to tax inspectors

B. the fees that taxpayers pay to tax accountants and tax preparers

C. the tax receipts foregone when taxpayers (legally) avoid and (illegally) evade tax

D. the gains to trade that are foregone because the tax drives a wedge between the price that buyers pay and the price that sellers receive

5. Ceteris paribus, the higher is the price elasticity of demand,

1. the greater must be the deadweight loss of a commodity tax

2. the less must be the deadweight loss of a commodity tax

6. Ceteris paribus, the higher is the price elasticity of supply,  

A. the greater must be the deadweight loss of a commodity tax

B. the less must be the deadweight loss of a commodity tax

7. Ceteris paribus, the larger is a commodity tax,

A. the greater must be the deadweight loss

B. the higher must be the tax revenue

8. When the government imposes a commodity tax, government revenue increases by   

A. less than producer and consumer surplus fall

B. more than producer and consumer surplus fall

Answer 1

1. B. the relative elasticities of demand and supply
(Burden of tax depends on elasticities.)

2. A. buyers will pay a higher price inclusive of the tax and sellers will receive a lower price exclusive of the tax
(Price paid by buyers exceed price received by sellers.)

3. A. Neither statement is true
(They are inversely related.)

4. D. the gains to trade that are foregone because the tax drives a wedge between the price that buyers pay and the price that sellers receive
(DWL is the loss of welfare due to tax.)

5. 1. the greater must be the deadweight loss of a commodity tax
(Higher is the elasticity, higher is the DWL.)

6. A. the greater must be the deadweight loss of a commodity tax
(Higher is the elasticity, higher is the DWL.)

7. A. less than producer and consumer surplus fall
(This creates DWL.)