Which of the Following Quantities Decrease in Response to a Tax

question 96

Multiple Choice

Which of the following quantities decrease in response to a tax on a good?

• A)the equilibrium quantity in the market for the good,the effective price of the good paid by buyers,and consumer surplus
• B)the equilibrium quantity in the market for the good,producer surplus,and the well-being of buyers of the good
• C)the effective price received by sellers of the good,the wedge between the effective price paid by buyers and the effective price received by sellers,and consumer surplus
• D)None of the above is necessarily correct unless we know whether the tax is levied on buyers or on sellers.

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Definitions:

Arbitrage Opportunity

A situation where a trader can profit from price differences of the same asset in different markets, buying low in one and selling high in another.

Exchange Rates

The worth of a single currency when converted into another, indicating the comparative value between two currencies.

Profit

The financial gain realized when the revenue generated from a business activity exceeds the expenses, costs, and taxes associated with the activity.

Covered Interest Arbitrage

A strategy that involves converting currency through the spot exchange market, investing in foreign interest bearing securities, and hedging exchange risk through the forward market to earn riskless profit.