Question

Question 7

The incidence of a tax is determined by:

	a) the relative elasticities of supply and demand.
	b) who pays the tax out of pocket.
	c) whether the supply curve or demand curve shifts as a result of the tax.
	d) how much tax revenue it generates.
	e) how much paperwork there is to complete. Question 5 A tax on consumers would cause the __________ curve(s) to shift to the __________. a) demand; right b) supply; left c) supply and demand; left d) supply and demand; right e) demand; left

Answer 1

Question 1:

The incidence of tax is determined by

Options

A. The relative elasticity of demand and supply

B. Who pays the tax out of pocket

C. Whether the supply curve or demand curve shifts as a result of the tax

D. How much tax revenue it generates

E. How much paper work there is to complete.

Answer: Option A) The relativity elasticity of demand and supply

Explanation:

• The response of the consumer in quantity demanded towards change in price is known as price elasticity of demand
• The response of the seller to in quantity supplied towards change in price is known as price elasticity of supply
• Both of these forces determine tax incidence.
• Let’s see how. When there is tax imposed by the government on product, we should see on whom the tax incidence will fall, whether on the seller or consumer.
• Tax incidence falls on the group which shows greater relative inelasticity (who never minds price change)
• Suppose consumer is more elastic towards price, that is, more sensitive towards price change. If price increases, demand will come down. But seller is more inelastic because even the prices are high, they will produce as they were producing.
• The tax incidence will fall on the seller who is inelastic to the price. Because, if tax incidence is shifted to the buyers, they will reduce their demand as they are more elastic (sensitive) towards price increase. So the sellers have to bear the tax.
• If buyers are more inelastic (not sensitive) towards price change, then sellers can shift the burden of tax to the buyers. Because buyers don’t mind price rise and they will buy the same quantity.
• Hence the relative elasticity of demand and supply determines the incidence of tax

Question 2:

A tax on consumers would cause the _________ curve to shift to the ______

Options:

A. Demand curve to the right

B. Supply curve to the left

C. Supply and demand to the left

D. Supply and demand to the right

E. Demand to the left

Answer : option E) Demand , left

A tax on consumers would cause the demand curve to shift to the left.

Explanation:

The tax on consumers shift the demand curve to the left because

1. It reduces the demand for the product
2. Because consumers have to pay higher price.
3. While all other factors of demand determinants are constant, an increase in price will lead consumers to buy less.
4. It will result in lower quantity demanded
5. The extent of the shift in demand curve will be equal to the amount of tax.
6. The change in demand is going to be equal to the change in price that is caused by the tax.