Taxes

1.The diagram shows the demand curve and supply curve for a good on which the

government imposes a specific tax.

What will be the result of this tax?

A Most of the incidence of the tax will fall on the producer.

B There will be a new demand curve parallel to DD.

C The price will rise by the full amount of the tax.

D The quantity bought will fall proportionately to the tax rate.

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2. The production of a product generates a negative externality that increases as output

rises.

Which form of government intervention in the market is most suitable to tackle this

externality?

A a direct income tax

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B a specific indirect tax
C a subsidy

D an ad valorem indirect tax

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7. A government wishes to impose a tax on a good so that the consumer and not the

producer pays most of the tax increase.

Which type of elasticity would best achieve this aim?

A high price elasticity of supply B

low price elasticity of supply

C unitary price elasticity of supply

D perfectly inelastic price elasticity of supply

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