Figure 8-21 -Refer to Figure 8-21.Suppose the Market Is Represented by Demand

question 31

Multiple Choice

Figure 8-21
-Refer to Figure 8-21.Suppose the market is represented by Demand 1 and Supply 1.At first the government places a $3 per-unit tax on this good.Then the government decides to raise the tax to $6 per unit.How would you characterize the decision to raise the tax rate from $3 to $6 per unit? The decision is

• A)a good one because it increases tax revenue while decreasing the deadweight loss from the tax.
• B)a bad one because it does not increase tax revenue yet increases the deadweight loss from the tax.
• C)a bad one because it decreases tax revenue while increasing the deadweight loss from the tax.
• D)unclear because it increases tax revenue yet also increases the deadweight loss from the tax.

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Definitions:

Excise Tax

A specific tax levied on certain goods, services, or activities, often included in the price of things like gasoline, alcohol, and tobacco.

Equilibrium Output

The level of output at which the quantity of goods produced equals the quantity of goods demanded, with no excess supply or demand in the market.

Perfectly Inelastic

Describes a situation where the quantity demanded or supplied does not change despite changes in price.

Excise Tax

A tax imposed on the sale of specific goods and services, such as tobacco, alcohol, and gasoline.