Answer Key to Study Questions for Test #2

Here is the answer key to the sample multiple choice problems. Please keep in mind that these problems come from previous tests. There may be a few that cover some items not discussed in class, but they should be items covered in the readings.

1-A, 2-C, 3-B, 4-C,
5-D, 6-D, 7-B, 8-D, 9-B, 10-C, 11-A,
12-A, 13-B, 14-B,
15-B, 16-A, 17-D, 18-C, 19-B, 20-C,
21-C, 22-D, 23-C, 24-D, 25-A, 26-C, 27-D, 28-C,
29-A, 30-D, 31-B, 32-A, 33-B, 34-B,
35-B, 36-B, 37-B, 38-A,
39-D, 40-D*
41-B, 42-B, 43-C, 44-C, 45-A, 46-D, 47-C,
48-B, 49-D, 50-D, 51-A, 52-B, 53-C, 54-B,
55-C

comments:

40: This is a tricky one and I regret its trickiness. By looking at the diagram in Panel A, the supply is relatively elastic, compared to the demand. So the consumers pick up the larger share of the tax burden. However, (A, buyers) is not an option. But panel D shows supply being relatively more elastic than demand, which would satisfy the conditions of the set up of the problem, along with the buyers incurring a larger share of the tax burden.

A terminology note: item 20 refers to the "incidence" of the tax as in reality, who has to pay. This is the same as the burden of the tax. One thing that is important to keep in mind is that all taxes are shiftable. So when an excise tax is levied on the seller of a good, some of it (depending on the elasticity) gets passed on to the consumer. But the seller still bears some of the burden. That burden is usually in the form of lost sales due to the higher prices people have to pay.

So it may seem that when firms are taxed they just "pass it on to the consumer". This is only the case when demand is quite inelastic. So indeed, it may seem that taxes are passed to the consumer but also be aware, they can only really tax goods where that demand is not very elastic. Otherwise taxing the good will not only dramatically decrease sales but also not generate much tax revenue. So maybe we do get taxes passed on to us. But certainly our behavior limits those things that can actually be taxed.

Let me know (jjulian@iup.edu or CinciDood on AIM) if there are any errors on this key. And check back in case any corrections are made.

JJ