Suppose the market for grass seed is expressed as Demand: QD = 100 - 2p Supply: QS = 3p Price elasticity of supply is constant at 1. If the supply curve is changed to Q = 8p, price elasticity of supply is still constant at 1. Yet, with the new supply curve, consumers pay a larger share of a specific tax. Why?
What will be an ideal response?
Even though the elasticity of supply has not changed, the new supply curve intersects the old demand curve at a lower price where demand is relatively less elastic than at the higher price. Since the incidence of a specific tax on consumers is n/(n - e), where n is the price elasticity of supply and e is the price elasticity of demand, therefore when e increases (less elastic demand), the consumers' tax incidence is higher.
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The production of an industrial good in a plant emits harmful gases that cause breathing difficulty. Which of the following will happen if the government imposes a Pigouvian tax on the plant?
A) Marginal external cost will increase. B) Marginal private cost will fall. C) The quantity supplied of the good will decrease. D) The demand for the good will increase.
If Abercrombie & Fitch borrows $8 million from a bank to finance the construction of a new store, this is an example of
A) indirect finance. B) a bond market transaction. C) direct finance. D) a stock market transaction.
If we observe an increase in the price of a good and an increase in the amount of the good bought and sold, this could be explained by
a. an increase in the supply of the good. b. an increase in the demand for the good. c. a decrease in the demand for the good. d. a decrease in the supply of the good.
Which of the following statements about bid-ask rates is correct?
a. The bid rate and the ask rate are the rates the bank offers you in exchange for another currency. b. The bid rate and the ask rate are the rates the bank asks you for in exchange for another currency. c. The bid rate is the rate the bank offers you and the ask rate is the rate the bank asks you for in exchange for another currency. d. The bid rate is the rate the bank asks you for and the ask rate is the rate the bank offers you in exchange for another currency.