Question

1) True/False and Explain: The government presumably prefers to raise revenues in a way that creates the lowest possible deadweight loss to society. If so, the government should prefer to tax heavily those items with inelastic demands.

2) If you’re taking a test that has several questions, how should you allocate your time among the questions in order to get the highest score? (Note that which you want to maximize is your exam grade and the constraint is the amount of time you have to complete the exam.)

Answer 1

1) FALSE . If items with inelastic demand are taxed heavily then most of the tax burden is borne by consumers . The aim of the government is welfare maximization and not shifting the tax burden on consumers . Inelastic demand also means that those are necessary or very essential commodities like medicines so excess tax will raise the price of such commodities .

2) Time allocation should depend on the importance and difficulty of the question . The questions carrying more marks should get more time and vice versa . Here the concept of marginal utility or marginal benefit comes into play . The marginal benefit from each unit time allocated to each question must be same or the theory of marginal utility equivalence .