Problem Set 7

Consider the tax burden on consumers and producers of a $1 per-unit tax to be paid by producers when demand is perfectly elastic and supply is perfectly inelastic. 1) The burden of the tax on producers is ___ percent 2) The incidence of the tax falls ____ because ____

-100 -entirely on producers -consumers are infinitely price sensitive

Tax incidence is the

division of the burden of a tax between the buyer and the seller

Economic analysis tells us when government policy requires raising revenue, it should tax activities where market supply is:

inelastic, because the weak response minimizes deadweight loss

A black market

is a potential outcome of a price ceiling

When a tax is imposed on a good, at the after tax equilibrium the marginal benefit of the last unit produced ___ the marginal cost

is greater than

If a $10 sales tax is imposed on a good and the equilibrium buyer increases by $10, the tax is

paid fully by buyer

Neither the demand nor the supply of sugar is perfectly elastic or inelastic. If the government imposes a 5% tax on sugar, the

price of sugar buyers pay increases by less than 5%

If the marginal tax rate facing a consumer on the last dollar of earned income is greater than the average tax rate, the tax system is ___

progressive

To reduce inequality and poverty in an economy, the government uses a ___

progressive tax system to fund transfer payments

If a good has a tax levied on it, sellers respond to the prices that excludes the tax and not the price with the tax because

sellers do not get to keep the tax revenue

The government runs a budget surplus when ___

tax revenue exceeds its spending

Consumer sovereignty is the view that consumers have the right to choose ___, and the government should not interfere with these choices

the goods that they will consume