Response Questions- An Excise Tax

Tell whether each of the following statements is true or false. If a statement is false, explain why.

1. A tax that takes $100 from every household in the country is a proportional tax.

2.A perfectly inelastic demand curve is a vertical line.

3.An increase in the price of Pepsi causes an increase in the demand for Coca-Cola, rather than an increase in the quantity of Coca-Cola demanded.

4.If the quantity demanded equals eight minus the price and the price is 2, the amount of Consumer Surplus is 12.

5.If the cross-price elasticity of demand between two items is positive, the two items are substitutes.

6.If an item is extremely insignificant in your budget, your demand for the item is likely to be very inelastic.

7.If the quantity demanded is 6 units per week at a price of $3 per unit and 10 units per week at a price of $2 per unit, the demand between the two points on the demand curve is elastic.

8.If the makers of Coca-Cola develop a process to bottle more bottles per hour without any increase in labor or in any other input, the demand curve for Coca-Cola shifts to the right.

9.If both Brazil and the United States have straight-line production-possibilities curves, the U.S. can use all its resources to produce either 10 tons of coffee or 10 tons of wheat per year, and Brazil can use all of its resources to produce either 4 tons of coffee or 2 tons of wheat per year, Brazil has a comparative advantage in coffee production.

10.If the quantity demanded equals 10 minus the price and the quantity supplied equals four times the price, there is more Consumer Surplus at the equilibrium price than there would be if the Government set a price ceiling of $1.

11.If the price of an inferior good rises, the income effect and the substitution effect work in opposite directions in affecting the quantity demanded.

Use an appropriate diagram to show that an income tax leaves a consumer better off than does an excise tax that raises the same amount of revenue for the Government. Explain your diagram fully.

At a price of ten dollars a unit, the quantity demanded is four and at a price of four dollars a unit, the quantity demanded is six. Calculate the elasticity of demand along the relevant portion of the demand curve. SHOW YOUR WORK.

Define progressive, proportional, and regressive taxes. Are Federal excise taxes progressive, proportional, or regressive? Why?

The quantity demanded equals 10 minus the price, and the quantity supplied equals the price minus 4. Calculate the Consumer Surplus, Producer Surplus, and deadweight loss if the Government imposes a tax of $4 per unit on the suppliers.