Chapter 6
Pays the Tax?
The placement of a tax is not the same as its payment, and placement does not guarantee payment
Quantity Refer to Exhibit 19-1. Suppose that the price of a cup of coffee is originally $4 and then the coffee shop raises the price to $6. The (absolute value of) price elasticity of demand between these two prices is ——————and demand is —————-between these two prices.
1.25, elastic
If price rises from $12 to $14 and the quantity demanded falls from 100 units to 90 units, then what is the price elasticity of demand equal to?
1.46
If price elasticity of demand is 0.5, it follows that a ——————percent increase in price must cause a ————————percent decrease in quantity demanded.
2.00, 1.00
Elasticity and the Tax
A change in price causes no change in quantity supplied; if sellers try to charge a higher price (trying to get buyers to pay some of the tax), a surplus will result, driving the price back down, and sellers pay the full tax
Suppose the current price of gasoline at the pump is $4 per gallon that 1 million gallons are sold per day. A politician proposes to add a $1 tax to the price of a gallon of gasoline. She says the tax will generate $1 million in tax revenues per day (1 million gallons x $1 per gallon - $1 million). In this situation, the politician is assuming that the demand for gasoline is:
Perfectly inelastic
Popcorn lower Orville Redenbacher's popcorn
Popcorn lower Orville Redenbacher's popcorn
Assuming that the quantity supplied of a good can change over time, the——————— the period of adjustment to a price change the —————-the price elasticity of supply will be.
E. a and b. a longer, higher. b. shorter, lower
Demand is elastic and price rises.
Effect on Total Revenue Falls
Demand is inelastic and price falls.
Effect on Total Revenue Falls
Demand is unit elastic and price rises.
Effect on Total Revenue Remains Constant
Elasticity Is Not Slope
Elasticity Is Not Slope
Price Elasticity of Supply and Time
For goods whose quantity supplied can increase with time (most goods) the longer the period of adjustment ista change in price, the higher the price elasticity of supply will be
Who Pays the Tax?
Government can place a tax on whomever it wants, but the laws of supply and demand determine who actually ends up paying it
The coefficient of price elasticity of demand (E) is:
Percentage change in quantity demand %AQ divided by Percentage change in price %AP
E<1 Demand is inelastic
Percentage change in quantity demanded < Percentage change in price →
Demand is elastic
Percentage change in quantity demanded > Percentage change in price -→
E> → Demand is elastic
Percentage change in quantity demanded > Percentage change in price -→
Demand is unit elastic
Percentage change in quantity demanded Percentage change in price → Ed=1
Cross Elasticity of Demand:
Percentage change in quantity demanded of one good divided by the Percentage change in price of another good
Perfectly Elastic Demand:
The demand that occurs when a small percentage change in price causes an extremely large percentage change in quantity demanded (from buying all to buying nothing)
Perfectly Inelastic Demand:
The demand that occurs when quantity demanded does not change as price changes
Unit Elastic Demand:
The demand that occurs when the percentage change in quantity demanded is equal to the percentage change in price. Quantity demanded changes proportionately to price changes
Elastic Demand:
The demand that occurs when the percentage change in quantity demanded is greater than the percentage change in price. Quantity demanded changes proportionately more than price changes
Inelastic Demand:
The demand that occurs when the percentage change in quantity demanded is less than the percentage change in price. Quantity demanded changes proportionately less than price changes
Complete the following sentence to describe which types of goods the government should tax in order to maximize tax revenue.
The government can maximize tax revenue by placing a tax on goods with inelastic V demand since consumers are less V likely to stop buying such goods at higher (after-tax) prices.
Elasticity and the Tax: Supply is perfectly elastic;
buyers pay the full tax
The demand curve for good X is a straight line that slopes downward. It follows that price elasticity of demand is ——————at ———————prices than at —————-prices.
c and d or higher, high, low or lower, low, high
Suppose that the price of good X rises from $2.00 to $2.50, and as a result the quantity demanded of good Y rises from 370 units to 390 units. The cross elasticity of demand for good Y with respect to the price change in good X is ——————-indicating that goods X and Y are———————
c. 0.24, substitutes
If the supply curve of a good is perfectly elastic, and a per-unit tax is placed on the production of the good, it follows that
consumers will end up paying the entire tax.
A positive cross elasticity of demand
is a characteristic of goods that are substitutes: E. >0 Goods are substitutes
total revenue
is at its highest when price elasticity of demand equals 1
Cross Elasticity of Demand:
is often used to determine whether two goods are substitutes for or complements to each other, and the degree to which one good is a substitute for or a complement to the other
If the demand for good Z is inelastic and the price of good Z falls, the percentage increase in the quantity demanded of good Z will be —————the percentage change in its price, and total revenue from the sale of this good will———————-
less than, fall
If the price of good X rises and the demand for good X is inelastic, then the percentage fall in quantity demanded is —————-the percentage change in price, and total revenue——————
less than, rises
Assuming that the quantity supplied of a good can change over time, the ——————the period of adjustment to a price change the ——————-the price elasticity of supply will be.
longer, higher and shorter, lower
Assuming that the quantity supplied of a good can change over time, the————— the period of adjustment to a price change the ———————-the price elasticity of supply will be.
longer, higher and shorter, lower
The shorter the period of time consumers have to adjust to a price change, the ———————-will be the price elasticity of———————-
lower, demand
If the price of good X falls and the demand for good X is elastic, the percentage ———————-in quantity demanded is ———————the percentage change in price, and total revenue——————-
rise, greater than, rises
If the demand for a good is inelastic, and price rises, total revenue———————-; if the demand for a good is elastic, and price falls, total revenue will———————- ; if the demand for a good is unit elastic, and price rises, total revenue will———————-
rise, rise, remain unchanged
Elasticity and the Tax: Demand is perfectly elastic
sellers must pay the full tax
The law of demand
states that price and quantity demanded are inversely related, ceteris paribus,
The more broadly defined the good,
the fewer the number of substitutes it will have
Necessities Versus Luxuries - Generally, the more a good is considered a luxury (a good we can do without) rather than a necessity (a good we cannot do without),
the higher the price elasticity of demand will be
The more substitutes a good has,
the higher the price elasticity of demand will be
The fewer substitutes a good has,
the lower the price elasticity of demand will be
The more narrowly defined the good,
the more the number of substitutes it will have
The demand curve for good X is a straight line that slopes downward. It follows that price elasticity of demand is —————-at ——————-prices than at ——————prices.
higher, high, low and lower, low, high
The price elasticity of demand for a straight-line downward-sloping demand curve varies from
highly elastic to highly inelastic
Suppose that a buyer's income rises by some percentage, and as a result her quantity demanded of good X rises by a smaller percentage. An economist would describe good X as being
income inelastic.
Cross Elasticity of Demand
(A measure of the responsiveness in quantity demanded of one good to changes in the price of another good.)
Income Elasticity of Demand
(A measure of the responsiveness of quantity demanded to changes in income.)
Price Elasticity of Demand
(A measure of the responsiveness of quantity demanded to changes in price.)
Price Elasticity of Supply
(A measure of the responsiveness of quantity supplied to changes in price.)
Total Revenue (TR)
(Price times quantity sold.)
Income Unit Elastic
(The condition that exists when the percentage change in quantity demanded of a good is equal to the percentage change in income.)
Income Elastic
(The condition that exists when the percentage change in quantity demanded of a good is greater than the percentage change in income.)
Income Inelastic
(The condition that exists when the percentage change in quantity demanded of a good is less than the percentage change in income.)
Perfectly Inelastic Demand
(The demand that occurs when quantity demanded does not change as price changes
Perfectly Elastic Demand
(The demand that occurs when small percentage change in price causes an extremely large percentage change in quantity demanded (from buying all to buying nothing).)
Unit Elastic Demand
(The demand that occurs when the percentage change in quantity demanded is equal to the percentage change in price. Quantity demanded changes proportionately to price changes.)
Elastic Demand
(The demand that occurs when the percentage change in quantity demanded is greater than the percentage change in price. Quantity demanded changes proportionately more than price changes.)
Inelastic Demand
(The demand that occurs when the percentage change in quantity demanded is less than the percentage change in price. Quantity demanded changes proportionately less than price changes.)
Suppose that the price of good X rises from $12.00 to $12.90, and as a result the quantity demanded of good X falls from 5,000 units to 4,600 units. The (absolute value of) price elasticity of demand for good X is ———————indicating that good X Is ————————-price This increase in price caused total revenue to———————-
1.15, elastic, fall
Suppose that the price of good X rises from $2.00 to $2.50, and as a result the quantity demanded of good Y rises from 370 units to 390 units. The cross elasticity of demand for good Y with respect to the price change in good X is —————-indicating that goods X and Y are—————
0.24, substitutes
The price of a given good rises by 12 percent and the quantity demanded of that good then falls by 5 percent. The coefficient of price elasticity of demand (E) is ———————-indicating that the demand for this good in Its current price range is
0.4, inelastic
If the price of good X falls by 8 percent and as a result the quantity demanded of good X rises by 4 percent, the absolute value of the coefficient of price elasticity of demand for good X is ——————and good X is price————-in demand in the current price range
0.50, inelastic
Suppose the price of a cup of coffee is $5, and at this price, the quantity supplied is 300 cups of coffee. Now suppose the price of coffee is raised to $7, where at this price, the quantity supplied is 400 cups of coffee. The price elasticity of supply is ————-and the supply is price—————-
0.83, inelastic
Airline travel in the long run higher Airline travel in the short run
Airline travel in the long run higher Airline travel in the short run
Cross Elasticity of Demand:
A measure of the responsiveness in quantity demanded of one good to changes in the price of another good
Income Elasticity of Demand:
A measure of the responsiveness of quantity demanded to changes in income
Price Elasticity of Demand:
A measure of the responsiveness of quantity demanded to changes in price
AT&T cell phone service higher v Cell phone service in general
AT&T cell phone service higher v Cell phone service in general
The coefficient of price elasticity of demand (E) is:
AVariable on vertical axis AVariable on horizontal axis
If the demand for a good is perfectly inelastic, then a $1 per unit tax placed on the sellers of the good will
C. end up raising the price of the good by $1 and the entire tax will be paid for by the consumers of the good.
Cars in general lower Cars produced by Ford
Cars in general lower Cars produced by Ford
If the demand for the good is perfectly Inelastic, buyers will absorb 100 percent of the tax. Perfectly inelastic demand Indicates that buyers will not alter their quantity demanded as the price of the good rises, thus the entire burden of the tax will be placed upon them.
If the demand for the good is perfectly Inelastic, buyers will absorb 100 percent of the tax. Perfectly inelastic demand Indicates that buyers will not alter their quantity demanded as the price of the good rises, thus the entire burden of the tax will be placed upon them.
If the supply of good A decreases, the price of good A increases. As a result, the total expenditures on good A will increase and crimes committed by the buyers of good A will increase
If the supply of good A decreases, the price of good A increases. As a result, the total expenditures on good A will increase and crimes committed by the buyers of good A will increase
If good ABC has an income elasticity of 1.0, then the demand for good Z is —————and the good is ——————-good.
Income unit elastic, a normal
Suppose a tax is placed on the sellers of a good. What happens to the percentage of this tax that buyers pay as the price elasticity of demand decreases?
O As the price elasticity of demand decreases, the percentage of this tax the buyers pay increases.
The price elasticity of demand for a good is 1.7. This implles that if price
O a. rises by 1 percent, quantity demanded falls by 1.7 percent. o b. rises by 10 percent, quantity demanded falls by 17 percent. o d. falls by 15 percent, quantity demanded rises by 25.5 percent.
Total Revenue (TR):
Price times quantity sold
Inelastic
Quantity demanded changes proportionately less than price changes: %AQ, < %AP.
Elastic
Quantity demanded changes proportionately more than price changes: %AQ, >%AP.
Unit elastic
Quantity demanded changes proportionately to price change: %AQ, = %AP.
Perfectly inelastic
Quantity demanded does not change as price changes.
Perfectly elastic
Quantity demanded is extremely responsive to even very small changes in price.
Demand is elastic and price falls.
Rises
Demand is inelastic and price rises.
Rises
Television sets lower Sony television sets
Television sets lower Sony television sets
Suppose the demand for good Y is perfectly inelastic and the government decides to impose a tax on the production of good Y. Who will pay the greater share of such a tax, the buyers or sellers of good Y?
The buyers will pay the entire share of the tax.
Income Unit Elastic:
The condition that exists when the percentage change in quantity demanded of a good is equal to the percentage change in income
Income Inelastic:
The condition that exists when the percentage change in quantity demanded of a good is less than the percentage change in income
Income Elastic:
The condition that exists when the percentage change in quantity-demanded of a good is greater than the percentage change in income
A toothpaste manufacturer sells toothpaste, and a mouthwash manufacturer sells mouthwash. These two firms are likely to be in competition with each other if:
The cross elasticity of demand between mouthwash and toothpaste is greater than zero
differences between the slope of a demand curve and the price elasticity.
The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. The value of price elasticity varies along a linear demand curve. The slope of a demand curve is the absolute change in the variable on the vertical axis (price) divided by the absolute change in the variable on the horizontal axis (quantity). The value of the slope remains constant along a linear demand curve. Therefore, the elasticity of demand and the slope of the demand curve are not the same.
Suppose a tax is imposed on the rental price of land. If the quantity supplied of land is constant regardless of price, who will pay the greater share of such a tax: buyers or sellers?
The sellers will pay the entire share of the tax.
perfectly inelastic supply,
a change in price brings no change in quantity supplied (and thus the supply curve, or a portion of it, is vertical)
If demand is elastic,
a price decline increases total revenue: Demand is elastic: PI → TR ↑
If demand is elastic,
a price rise decreases total revenue: Demand is elastic: P↑ → TR ↑
perfectly elastic supply,
a small change in price changes the quantity supplied by an initely large amount, and thus the supply curve, or a portion of it, is horizontal)
The price elasticity of demand for a good is 1.7. This implies that if price
a. rises by 1 percent, quantity demanded falls by 1.7 percent. b. rises by 10 percent, quantity demanded falls by 17 percent. (d) falls by 15 percent, quantity demanded rises by 25.5 cent.
If price elasticity of demand is 0.5, it follows that a —————percent increase in price must cause a ————-percent decrease in quantity demanded.
b. 2.00, 1.00
Suppose that good X is a normal, income inelastic good. It follows that an 8 percent decrease in income will ——————-quantity demanded by ——————than 8 percent.
decrease, less
Cross elasticity of demand measures the responsiveness of changes in the quantity —————of one good to changes in——————
demanded, the price of another good
Cross elasticity of demand measures the responsiveness of changes in the quantity ——————of one good to changes in———————
demanded, the price of another good
If the demand for a good is perfectly inelastic, then a $1 per unit tax placed on the sellers of the good will
end up raising the price of the good by $1 and the entire tax will be paid for by the consumers of the good.
If the demand for a good is inelastic, and price rises, total revenue—————— if the demand for a good is elastic, and price falls, total revenue will——————- :if the demand for a good is unit elastic, and price rises, total revenue will———————
fall, fall, remain unchanged
Which of the follow would lead to higher price elasticity of demand?
more substitutes for the good
The —————-substitutes for a good, the ——————-the price elasticity of demand; the—————— time that passes since a price change, the —————the price elasticity of demand.
more, higher, more, higher
The ——————substitutes for a good, the——————— the price elasticity of demand; the —————-time that passes since a price change, the——————the price elasticity of demand.
more, higher, more, higher
Price elasticity of demand is equal to the ——————change in the quantity demanded of a good divided by the ——————change In the price of the good and slope and price elasticity of demand—————-
percentage, percentage, are not the same
The sellers of a good will pay the full tax that is placed on the sale of that good if demand is —————or supply is——————
perfectly elastic, perfectly inelastic
The sellers of a good will pay the full tax that is placed on the sale of that good if demand is———— or supply is————
perfectly elastic, perfectly inelastic
If demand is inelastic,
then a price decline decreases total revenue; in sum, price and total revenue are directly related: Demand is inelastic :price goes up TR goes up. Demand is inelastic:price goes down and TR goes down
Cross Elasticity of Demand If the elasticity coefficient is negative,
then the two goods are complements:
Determinants of Price Elasticity of Demand Four factors are relevant:
| - 1. Number of substitutes - 2. Necessities versus luxuries -3. Percentage of one's budget spent on the good - 4. Time