Question

Suppose demand for pianos is very elastic. Suppose that supply of pianos is also quite elastic, but not as elastic as demand. If government imposes a tax on pianos, and the tax is payable by producers, what will be the outcome?

Select one:

Consumers will bear the entire burden of the tax

Producers will bear the entire burden of the tax

Consumers will bear more of the tax burden than producers

Producers will bear more of the tax burden than consumers

There isn't enough information to tell

Consider a simple income tax equal to 25% of a person's annual income. This tax is best considered _______ because ________.

Select one:

Regressive; the rich don't pay proportionately more tax than the poor

Proportional; everyone in society is taxed equally

Progressive; people who have higher incomes will pay more total tax (in $) than people with lower incomes

It's impossible to make any judgement

Consider an ad valorem tax on a luxury good such as cigars. Suppose the current tax rate is 75%. If the tax rate is increased to 100%, what will happen to government tax revenue?

Select one:

Government tax revenue will fall to zero

Government tax revenue will definitely decrease

Government tax revenue will likely decrease

Government tax revenue will likely increase

Government tax revenue will definitely increase

There is not enough information to tell

Answer 1

Answer-1. Correct option is 'B'

If government imposes a tax on pianos, and the tax is payable by producers, producers will bear the entire burden of the tax. The tax incidence depends on the relative price elasticity of supply and demand. When demand is more elastic thean supply, producers bear most of the cost of the tax.

Answer-2. Correct option is 'C'

Consider a simple income tax equal to 25% of a person's annual income. This tax is best considered progressive because people who have higher incomes will pay more total tax (in $) than people with lower incomes . A progressive tax is a tax that imposes a lower tax rate on low-income earners compared to those with a higher income, making it based on the taxpayer's ability to pay. That means it takes a larger percentage from high-income earners than it does from low-income individuals.

Answer-2. Correct option is 'A'

Suppose the current tax rate is 75%. If the tax rate is increased to 100%, government tax revenue will fall to zero. Laffer curve represents a theoretical relationship between rates of taxation and the resulting level of the government's tax revenue. The Laffer curve assumes that no tax revenue is raised at the extreme tax rates of 0% and 100%, and that there is a tax rate between 0% and 100% that maximizes government tax revenue. The Laffer curve is typically represented as a graph that starts at 0% tax with zero revenue, rises to a maximum rate of revenue at an intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate.