Tax Incidence and Elasticity Quiz

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1. The demand and supply functions for henbane in Hempstead are given, respectively, by the equations:

P = 83.6 - 0.037 Q
P = 15.7 + 0.056 Q.
A correct analysis of the economic incidence of a $10 per unit tax levied on buyers could be carried out by:

(a) Solving simultaneously the equations P = 83.6 - 0.037 Q P = 15.7 + 0.056 Q to determine the equilibrium quantity and the sellers' price, then adding $10 to determine the buyers' price.
(b) Solving simultaneously the equations P = 83.6 - 10 - 0.037 Q P = 15.7 + 0.056 Q to determine the equilibrium quantity and the sellers' price, then adding $10 to determine the buyers' price.
(c) Solving simultaneously the equations P = 83.6 - 0.037 Q P = 15.7 + 10 + 0.056 Q to determine the equilibrium quantity and the sellers' price, then adding $10 to determine the buyers' price.
(d) Solving simultaneously the equations P = 83.6 - 10 - 0.037 Q P = 15.7 + 10 + 0.056 Q to determine the equilibrium quantity and the sellers' price, then adding $10 to determine the buyers' price.

2. Let P₀ denote the equilibrium price of frumious bandersnatches when no tax is imposed, P_b the buyers' gross price (inclusive of the tax), P_s the sellers' net price (exclusive of the tax), Q₀ the equilibrium quantity when no tax is imposed, and Q_t the equilibrium quantity when the tax is imposed. Which of the following diagrams shows a correct analysis of the impact of a $t per unit tax collected from sellers in a market whose initial demand and supply conditions are described, respectively, by the functions S and D?

(a)	(b)
(c)	(d)

3. If the demand and supply functions for gnomons in Nome are given by P = 200 - 3 Q and P = 40 + 2 Q, respectively, then imposing a $25 per unit tax on gnomons collected from buyers will:

(a) Decrease equilibrium quantity by 27 and increase the price that buyers pay by $15.
(b) Decrease equilibrium quantity by 27 and leave unchanged the price that buyers pay.
(c) Decrease equilibrium quantity by 5 and increase the price that buyers pay by $25.
(d) Decrease equilibrium quantity by 5 and increase the price that buyers pay by $15.

4. If the (absolute value of the) price elasticity of demand in Oyster Cove for slithy toves is much greater than their price elasticity of supply, we would expect that the economic burden of a tax on slithy toves to:

(a) Be borne mostly by sellers.
(b) Be borne mostly by buyers.
(c) Be borne equally by sellers and buyers.
(d) Depend on whether it is collected from sellers or buyers.

5. If the supply of gunwale brackets is more elastic with respect to price in the long run than in the short run, then all else equal we should expect that a tax on gunwale brackets:

(a) Falls more on buyers in the short run than in the long run.
(b) Falls more on sellers in the short run than in the long run.
(c) Falls to the same degree on buyers in the short run as in the long run.
(d) Falls equally on buyers and sellers in the short run but not the long run.

6. When the Air Hockey Hall of Fame raised its admission price from $12 to $14, annual visits fell from 10 million to 9 million. Suppose you are asked to calculate the price elasticity of demand based on this information; which form of the elasticity formula is the most appropriate one to use?

(a)	(b)
(c)	(d)

7. The demand for synecdoche in Schenectady is given by the equation P = 2.73 - 0.0043 Q. Suppose you are asked to calculate the price elasticity of demand when the price is $1.50; which form of the elasticity formula is the most appropriate one to use?

(a)	(b)
(c)	(d)

8. When the price of muck rakes increases from $4 to $6, the quantity supplied increases from 19,000 to 21,000. The price elasticity of supply is approximately:

(a) 0.25.
(b) 4.
(c) 250.
(d) 0.004.

9. A typhoon ravages the island of Aiaia, where pig farming is an important industry. The storm reduces each pig farmer's herd by ten percent. If the demand for pig products on Aiaia is inelastic, then:

(a) the equilibrium price and quantity of pig products fall.
(b) the equilibrium price falls and the equilibrium quantity rises.
(c) the incomes of pig farmers fall.
(d) the incomes of pig farmers rise.

10. If the demand for recordings of Wagnerian opera is elastic with respect to price, then an increase in the supply of recordings of Wagnerian opera will:

(a) increase the demand for recordings of Wagnerian opera.
(b) increase total spending on recordings of Wagnerian opera.
(c) decrease total spending on recordings of Wagnerian opera.
(d) raise the general level of musical culture everywhere.

11. If the elasticity of demand for anchovies with respect to the price of olives is - 0.88, then: then:

(a) Anchovies and olives are complements in consumption.
(b) Anchovies and olives are substitutes in consumption.
(c) Anchovies are an inferior good.
(d) Anchovies are a normal good.

12. The demand for rump-fed ronyons is given by the equation P = 184 - 0.4 Q and the supply is given by P = 24 + 0.6 Q. The price elasticity of demand for ronyons at the market equilibrium is:

(a) - 15/8.
(b) - 8/15.
(c) - 4/5.
(d) - 5/4.

13. The demand and supply conditions for rump-fed ronyons are as given in question 12. The price elasticity of supply for ronyons at the market equilibrium is:

(a) 15/8.
(b) 8/15.
(c) 5/4.
(d) 4/5.

14. The demand and supply conditions for rump-fed ronyons are as given in question 12. A per-unit tax collected from sellers of rump-fed ronyons will fall relatively more heavily on sellers because:

(a) the legal incidence of a tax tends to follow its economic incidence.
(b) the economic incidence of a tax tends to follow its legal incidence.
(c) the absolute value of the price elasticity of demand exceeds the price elasticity of supply.
(d) the price elasticity of supply exceeds the absolute value of the price elasticity of demand.

15. Which of the following statements about the demand for bald economists, illustrated at right, is correct?

(a) The price elasticity of demand at A is zero.
(b) Demand at D is infinitely elastic with respect to price.
(c) Demand is more elastic with respect to price at B than at C.
(d) Demand is more elastic with respect to price at C than at B.