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?
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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When the price of a good changes, the amount of that good that buyers wish to buy changes:
A. solely because of the substitution effect. B. only if the substitution effect and the income effect do not cancel out each other. C. because of both the substitution and the income effects. D. solely because of the income effect.
A professor posts his course syllabi and past exams on the Internet. From the economic point of view, the professor's behavior
A) demonstrates the arrogance of the professor. B) better informs prospective students. C) is a costless use of scarce resources, because it avoids paper, ink, and mimeos. D) is irrational.
If a firm buys its labor in a competitive market, then a short-run increase in the price of the firm's output will cause the firm to
A) offer a higher wage. B) hire fewer workers. C) hire more workers. D) offer a lower wage.
If a small change in output results in a large change in marginal cost, the marginal cost curve is ________, which makes accurate forecasts ________ valuable.
A) flat; more B) steep; less C) flat; less D) steep; more