Question

A tax imposed on the sellers of a good will

a. raise both the price buyers pay and the effective price sellers receive.

b. raise the price buyers pay and lower the effective price sellers receive.

c. lower the price buyers pay and raise the effective price sellers receive.

d. lower both the price buyers pay and the effective price sellers receive.

Part B.

When studying how some event or policy affects a market, elasticity provides information on the

a. change in the costs of production.

b. tradeoff between equality and efficiency.

c. effect on the budget deficit or surplus.

d. direction and magnitude of the effect.

Answer 1

1. Answer - b. raise the price buyers pay and lower the effective price sellers receive.

When a tax is imposed on a seller, the cost of production increases. Due to increase in the cost of production, the supply decreases. The supply curve shifts to left hand side. As a result, price that the buyers will pay increases and the effective price the seller receives will decrease.

2. Answer - d. direction and magnitude of the effect.

Elasticity measures the degree of responsiveness of the quantity demanded to a change in the price. It provides both the direction of change and also how much it changes. Therefore, it tells about the direction and magnitude of the effect.