Suppose the supply of land is perfectly inelastic and landowners are receiving payments equal to $25,000 an acre. If the government taxed the landowners' income with a tax rate of 80 percent, how much tax would the government collect?

Question

A) zero, because the owner would do something else with the tax rather than pay such a high tax
B) less than $20,000 because the owners would change their behavior so as to pay less tax
C) more than $20,000 because the combined effects of all the owners trying to change their behavior actually would generate higher returns
D) $20,000 because the use of the land doesn't depend on the price the landowners receive for the land

Answer 1

Answer: D