Econ chapter 8 practice questions

  1. Explain why the combination of consumer and producer surplus is not maximized if there is either excess demand of supply
    with either excess supply or excess demand, the number of trades will be lower than if price were allowed to move its equilibrium price. That means there is a loss of surplus.
  2. How is elasticity related to the revenue from a sales tax?
    if demand is inelastic, raising a tax increases revenue paid by consumers; similary with supply. If demand is elastic, however, raising a tax decreases revenue paid by consuers. Thus what happens to total tax revenue depends on the elasticity of both supply and demand
  3. If the federal government wanted to tax a good and suppliers were strong lobbyists, but consumers were not, would government perfer supply or demand to be more inelastic? why?
    If suppliers were strong lobbyists, the government would perfer demand to be more inelastic because then consumers will bear the largest portion of the tax. If the suppliers had to bear the greatest burden, they would have an incentive to lobby against the tax.
  4. What types of goods would you recommend that the government tax if it wants the tax to result in no welfare loss? name a few examples.
    I'd recommend inelastic goods with a price elasticity of demand and supply as close to zero as possible. Examples would be cigarettes, salt, required medications, a per capita tax and a land tax
  5. Suppose demand for cigarettes is inelastic and the supply of cigarettes is elastic. who would bear the larger share of the burden of tax placed on cigarettes?
    the demander. The more inelastic the demand curve, the larger the percentage of the burden is borne by the demander
  6. If the demand for a good is perfectly elastic and the supply is elastic, who will bear the larger share of the burden of a tax on the good where the tax is paid by consumers?
    with a perfectly elastic demand, suppiers will pay the entiere cost of the tax regardless of how elastic supply is- unless supply is also perfectly elastic, in which case no goods will be bought or sold after the tax, so no one will bear the burden
  7. what perecent of a tax willl the demander pay if price elasticity of supply is .3 and price elasticity of demand is 0.7/ what percent will the supplier pay?
    the demander will pay 30 percent of teh tax (.3/(.7+.3) X 100) and the supplier will pay the remaning 70 percent
  8. Which good would an economist normall recommend taxing if government wanted to minimize welfare loss and maximize revenue; a good with an elastic or inelastic supply? why?
    If the economist wanted to get as much revenue as possible from as little output reduction (welfare loss) as possible, he would suggest taxing goods with inelastic supplies
  9. Calculate the percent of tax borne by the demander and supplier in each of the following cases
    A ED= .3, Es=1.2
    B ED = 3, ES = 2
    C ED = .5, ES = 1
    D ED = .5, ES = .5
    E summarize your findings regarding relative elasticity and tax burden.
    • a. Percent borne by demander = 80; percent borne by supplier = 20.
    • b. Percent borne by demander = 40; percent borne by supplier = 60.
    • c. Percent borne by demander = 67; percent borne by supplier = 33.
    • d. Percent borne by demander = 50; percent borne by supplier = 50.
    • e. Consumers with relatively more elastic
    • demand curves bear a smaller percent of the tax. The same is true for producers
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Econ chapter 8 practice questions
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