Question

In general, a tax raises the price the buyers pay, lowers the price the sellers receive, and reduces the quantity sold.

Select one:

True

False

Question 23

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Which of the following goods would you expect to have an elastic demand with respect to income?

a.

Restaurant meals

b.

Floor

c.

Gasoline

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Economists assume that economic decisions are made rationally. In the case of consumers, rational decision-making means: that consumers buy the sorts of goods that the average person buys.

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True

False

Question 25

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When a government decides to place a tax on a given product, both the producer and consumer surplus will decrease.

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True

False

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When a tax is placed on a good, the revenue the government collects is exactly equal to the loss of consumer and producer surplus from the tax.

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True

False

The government in the UAE announced that for every 10 per cent rise in the price of cigarettes, the demand was likely to fall by 6 per cent. This means that the price elasticity of demand for cigarettes is

a.

6

b.

-0.06

c.

-0.6

d.

0.6

Answer 1

In general, a tax raises the price the buyers pay, lowers the price the sellers receive, and reduces the quantity sold.

True - Since the burden of a tax is borned partially by sellers and partially by buyers, what it implies is that the price the buyers pay is higher than pre-tax price, what the sellers receive is lower than pre-tax price, and since the price is higher for buyers, the equilibrium quantity is lower than pre-tax quantity

Which of the following goods would you expect to have an elastic demand with respect to income?

Restaurant meals would be expected to have an elastic demand with respect to income, i.e., their quantity demnaded woudl go up more than proportionately with a rise in income. This wouldn't happen with the other two goods since they are more of necessasities than restaurant meals.

Economists assume that economic decisions are made rationally. In the case of consumers, rational decision-making means: that consumers buy the sorts of goods that the average person buys.

True - this is true. Economics studies the behavior of average individual.

When a government decides to place a tax on a given product, both the producer and consumer surplus will decrease.

True - As explained in the first answer above, the quantity goes down, and the price for the consumer goes up and for the seller it goes down hence both producer and consumer surplus decrease.

Producer surplus = Revenue (P*Q) - total willingness to accept and we know that post-tax P is lower for seller and Q is also lower

Consumer surplus = Total willingness to pay - P*Q, and we know that P is higher than pre-tax price for buyer and Q is lower

When a tax is placed on a good, the revenue the government collects is exactly equal to the loss of consumer and producer surplus from the tax.

False - Tax revenue the govt collects is equal to tax rate multiplied by the new equilibrium quantity and is not equal to loss in producer adn consumer surplus

The government in the UAE announced that for every 10 per cent rise in the price of cigarettes, the demand was likely to fall by 6 per cent. This means that the price elasticity of demand for cigarettes is

c. -0.6 is the right answer, since elasticity = % change in quantity / % change in price = -6% / 10% = -0.6