As the Tax Wedge Associated with a Given Economic Activity

question 159

Multiple Choice

As the tax wedge associated with a given economic activity gets smaller, we would expect

• A)more of that economic activity to occur.
• B)the distortions caused by taxes on that activity to be greater.
• C)people to engage in less of that particular activity.
• D)no change in the practice of that activity until the tax wedge ultimately disappears.
• E)people will spend more on that economic activity.

---

Definitions:

Perfect Complements

Goods that are consumed together in fixed proportions, where the value or utility of one good increases with the consumption of the other.

Income Effect

The change in an individual's or economy's income and how that change will impact the quantity demanded of a good or service.

Substitution Effect

The alteration in purchasing habits stemming from a shift in the relative cost of products, causing individuals to replace one item with another.

Price Change

A variation in the cost of a good or service over time or in response to supply and demand dynamics.