Suppose That Government Imposes a Specific Excise Tax on Product

question 138

Multiple Choice

Suppose that government imposes a specific excise tax on product X of $2 per unit and that the price elasticity of demand for X is unitary (coefficient = 1) . If the incidence of the tax is such that consumers pay $1.80 of the tax and the producers pay $.20, we can conclude that the

• A) supply of X is highly inelastic.
• B) supply of X is highly elastic.
• C) demand for X is highly inelastic.
• D) demand for X is highly elastic.

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Definitions:

Value of Money

The purchasing power of money, indicating the amount of goods or services that one unit of money can buy, subject to change due to inflation or deflation.

Interest Rate

The percentage of an amount of money which is charged for its use per a certain period, often annually, by a lender to a borrower.

Medium of Exchange

A medium of exchange is anything widely accepted as a form of payment, making trade easier by eliminating the need for a coincidence of wants.

Store of Value

An asset, commodity, or currency that can be saved, retrieved, and exchanged in the future without significantly losing value.