Suppose There Is an Increase in the Excise Tax Imposed

question 260

Multiple Choice

Suppose there is an increase in the excise tax imposed on cigarettes, a good for which the demand is relatively inelastic. The short-run burden of the tax increase will be borne primarily by

• A) consumers, because the increase in market price will be large relative to the increase in the excise tax.
• B) firms, because the increase in market price will be large relative to the increase in the excise tax.
• C) consumers, because the increase in market price will be small relative to the increase in the excise tax.
• D) firms, because the increase in market price will be small relative to the increase in the excise tax.

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Definitions:

Monopoly Markets

Markets dominated by a single seller, where the monopolist has significant control over the price and supply of a product or service.

Deadweight Losses

Economic inefficiencies that arise when market equilibrium is not achieved, often resulting from monopolies, taxes, subsidies, or price controls, leading to lost welfare for consumers or producers.

X-inefficiency

The difference between efficient behavior of businesses under competitive environments versus the inefficiency that arises in the absence of competition.

Competitive Firms

Companies that operate in markets where no single firm has the power to influence the price of goods and services significantly.