Introduction to Microeconomics. Topic 7: Taxes

The topic of the questions in this test are based on standard introductory level microeconomics textbook. For my class I am using Krugman & Wells' Economics textbook. This test is based on theory provided in Chapter 7: Taxes. There are 30 questions in this test. You have maximum of 5 minutes to answer each question. Good luck!

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Economics, Microeconomics, Introductory Microeconomics, Taxes, Tax incidence, Elasticity and tax incidence, Welfare and taxes

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5 min

Per question

10:13

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3.8

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3 comments

Holy Duck judge Jul 5, 2020

This test may have a higher chance of receiving a reward. Nominated for:

1. Educational explanations. 👍 Explanations cover why the correct answers are correct and why the wrong answers are wrong (when appropriate). E.g.: #q1, #q2, #q3

2. Well-used and self-made media. 👍 E.g.: #q5, #q6, #q7, etc.

Quick Sheep Jun 22, 2020

19. Regulator imposes $5 excise tax on entertainment provider Netflix. Assume that pre-tax price is $7.99 and demand for Netflix is perfectly elastic whereas supply curve is upward sloping. How much Netflix will charge for its service after the tax imposed?

The explanation given is not clear.

Quiz 19 is based on an assumption (Assume that pre-tax price is $7.99 and demand for Netflix is perfectly elastic) because Netflix doesn't raise prices after being taxed. Is this really possible? While Netflix is not a commodity product?
Sorry, if I'm Netflix, I can't follow the mindset of this business.

Lawful Tiger author Jun 25, 2020

Hi. Yes, it is possible. The burden of tax on buyers and sellers is determined by the elasticities of demand (PED) and supply (ES) respectively. The higher the elasticity - the lower is the burden. In our example buyers have infinitely large elasticity (definition of perfect elasticity), while seller has elasticity that is lower than infinity (PED>ES). When buyers have perfectly elastic demand, any increase in the price will lead to zero demand (buyers are super sensitive to changes in the prices). Sellers know that any increase in the price will lead to zero consumption. As a result sellers will be responsible for taxes.

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