Suppose a Tax Is Imposed on Bananas

question 8

Multiple Choice

Suppose a tax is imposed on bananas. In which of the following cases will the tax cause the equilibrium quantity of bananas to shrink by the largest amount?

• A)The response of buyers to a change in the price of bananas is strong, and the response of sellers to a change in the price of bananas is weak.
• B)The response of sellers to a change in the price of bananas is strong, and the response of buyers to a change in the price of bananas is weak.
• C)The response of buyers and sellers to a change in the price of bananas is strong.
• D)The response of buyers and sellers to a change in the price of bananas is weak.

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Definitions:

Firm's Beta

A measure of a stock's volatility in relation to the overall market, indicating the stock's risk level.

Transaction Costs

Expenses incurred when buying or selling goods and services, which can include fees, taxes, and other charges.

Tax Implications

The effect that various financial decisions have on one's tax liability, including income generation, investments, and deductions.

Flotation Costs

Expenses incurred by a company in issuing new securities, including fees to underwriters, lawyers, and accountants.