Application: The Costs of Taxation: Algorithmic End of Chapter Graded Assignment

Question

Application: The Costs of Taxation: Algorithmic End of Chapter Graded Assignment Due Sunday 07.22.18 at 11:45 P Attempts: Keep the Highest: 12 4. Problems and Applications Q4 Suppose that the government imposes a tax on heating oil. True or False: The deadweight loss rom this tax ht loss from this tax would likely be larger in the fifth year after it is imposed than in the first year as demand for heating oil become more elastic. O True O False smaller larger The tax revenue collected from a tax on heating oil is likely to be larger in the first year after it is imposed than in the fith year.

Explanation / Answer

Answer:

TRUE. More the elasticity of the demand curve more is the deadweight loss. This is due to the fact, the quantity is highly responsive to changes in prices. In this example, in the first year, the elasticity of demand is relatively less since people do not have alternatives to switch to other sources of energy. But over the time period, when other forms of energy are available they may shift to other products and consequently, their elasticity will go high.

LARGER. Clearly, when demand is inelastic during the first year, tax revenue will be higher. There is an inverse relationship between elasticity and tax revenue. People hardly change their quantity levels when price changes (demand is highly inelastic) and so the tax revenue increases. As time goes by, elasticity increases and tax revenue decreases (fifth year)

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