Question

5. In the gizmo market, the supply curve is the typical upward-sloping straight line, and the demand curve is the
typical downward-sloping straight line. The equilibrium quantity in the gizmo market is 50,000 gizmos per month when there is no tax. Then a tax of $5 per gizmo is imposed. As a result, the government is able to raise $231,200 per month in tax revenue. We can conclude that the equilibrium quantity of gizmos has decreased by _______ gizmos per month.
A. more than 3,975
B. more than 3,750, but less than 3,975
C. more than 3,525, but less than 3,750
D. more than 3,300, but less than 3,525
E. more than 3,075, but less than 3,300

6. Which of the following variables decrease in response to a tax on a good?
A the effective price received by sellers of the good, the wedge between the effective price paid by buyers and the effective price received by sellers, and consumer surplus
B. the effective price paid by buyers of the good, the wedge between the effective price paid by buyers and the effective price received by sellers, producer surplus and consumer surplus
C. the equilibrium quantity in the market for the good, the effective price of the good paid by buyers, and consumer surplus
D. the equilibrium quantity in the market for the good, producer surplus, and the well-being of buyers of the good
E. None of the above is necessarily correct unless we know whether the tax is levied on buyers or on sellers.

7. In which of the following cases is it most likely that an increase in the size of a tax will increase tax revenue?
A. The price elasticity of demand and the price elasticity of supply are both large.
B. The price elasticity of demand and the price elasticity of supply are both small.
C. The price elasticity of demand is small, and the price elasticity of supply is large.
D. The price elasticity of demand is large, and the price elasticity of supply is small.
E. None of the above answers is plausible because an increase in the size of the tax will always increase tax revenue.

Answer 1

(5) (B)

After-tax quantity = Tax revenue / Unit tax = $231,200 / $5 = 46,240

Decrease in quantity = 50,000 - 46,240 = 3,760

(6) (D)

A tax will decrease effective price received by sellers, producer surplus and consumer surplus (well-being of consumers).

(7) (B)

The lower the elasticity of demand and elasticity of supply, the more inelastic the demand and supply, and the higher the tax revenue with increase in tax.