1. Suppose that a $3.00 tax per pack is imposed on cigarettes. Which of the foll
ID: 1109724 • Letter: 1
Question
1. Suppose that a $3.00 tax per pack is imposed on cigarettes. Which of the following is consistent with the demand being relatively inelastic and the supply being relatively elastic?
a. The price buyers pay increases by more than $1.50 and the price sellers receive decreases by less than $1.50.
b. The price buyers pay increases by less than $1.50 and the price sellers receive decreases by more than $1.50.
c. The price buyers pay increases by $1.50 and the price sellers receive decreases by $1.50.
d. The price buyers pay increases $3 and the price sellers receive does not change.
2. Canada is an importer of hats, taking the world price of $10 per hat as given. Suppose Canada imposes a $5 tariff on hats. Which of the following outcomes is possible?
a. The price of hats in Canada increases to $5; the quantity of Canadian-produced hats increases; and the quantity of hats imported by Canada decreases.
b. The price of hats in Canada increases to $15; the quantity of Canadian-produced hats increases; and the quantity of hats imported by Canada decreases.
c. The price of hats in Canada remains at $10; the quantity of Canadian-produced hats increases; and the quantity of hats imported by Canada decreases.
d. The price of hats in Chile decreases to $5; the quantity of Canadian-produced hats increases; and the quantity of hats imported by Canada does not change.
3. The decrease in total surplus that results from a market distortion, such as a tax, is called
a. tax revenue.
b. shortage.
c. deadweight loss.
d. disequilibrium.
5. When the government auctions off the right to emit a specific quantity of pollution, a market is created for
a. Coase's theorem.
b. tradable pollution permits.
c. corrective taxes.
d. patents.
6. If Germany threatens to impose a tariff on Danish cookies if Denmark does not remove automotive subsidies, then Germany will be left
a. worse off, whether Denmark complies or not.
b. worse off if Demark refuses to remove the subsidies despite the threat.
c. better off, whether Denmark complies or not.
d. worse off if Denmark removes the subsidies in response to the threat.
Explanation / Answer
Question 1
Respective burden of tax depends on the elasticity of demand and the elasticity of supply.
If demand is relatively inelastic while supply is relatively elastic then buyers will bear more burden of tax relative to sellers.
On the other hand, if demand is relatively elastic while supply is relatively inelastic then buyers will bear less burden of tax relative to sellers.
So, if the demand is relatively inelastic while the supply is relatively elastic then in such case buyers will bear more burden of tax than sellers.
Thus, the assertion that the price buyers pay increases by more than $1.50 and the price sellers pay decreases by less than $1.50 is consistent by given scenario as it indicates that buyers will bear more burden of tax relative to sellers.
Hence, the correct answer is the option (a).
Question 2
The world price of hat is $10 per hat. Now, Canada imposes a tariff of $5 per hat.
This will increase the price of hat in Canada to $15 per hat.
This increase in price will increase the domestic production but will reduce the domestic demand including demand for imports.
So, quantity of hats imported by Canada will also decrease.
Hence, the correct answer is the option (b).
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