Question

d) the total economic well - being of the country will decrease.
after the government places a new $2 tax on a product, the price consumers pay goes up by $1.80. which statement is the best explanation for this?
a) the supply of the product is much more elastic than the demand.
b) the demand for the product is much more elastic than the supply.
c) the demand for the product is very inelastic.
d) the government forced consumers to pay the tax directly.
which government policy would create the largest amount of deadweight loss?
a) a small tax on a good that has perfectly inelastic demand.
b) a binding price ceiling on a good where both supply and demand are very inelastic.
c) a large tax on a good that has very elastic supply and demand.
d) a non - binding price floor where the legal price is set below the equilibrium price.
the government wants to protect its domestic textile industry. which policy would achieve this goal?
a) removing all taxes on imported textiles.
b) providing a subsidy to foreign textile producers.
c) imposing a quota that limits the number of imported textiles.
d) setting a price ceiling on domestically produced textiles.
a new machine is invented that makes it cheaper to produce widgets. at the same time, the price of gadgets, a popular substitute for widgets, goes up. what will happen to the equilibrium price and quantity of widgets?
a) the equilibrium quantity will increase; the effect on price is uncertain.
b) the equilibrium price will increase; the effect on quantity is uncertain.

Explanation:

1. When the government places a tax and the price consumers pay increases by less than the full - amount of the tax, it implies that demand is more inelastic than supply. If supply is more elastic than demand, consumers bear more of the tax burden. So, for the first question, since the price consumers pay goes up by $1.80 out of a $2 tax, demand is inelastic.
2. Deadweight loss is larger when supply and demand are more elastic. A large tax on a good with elastic supply and demand will create a large deadweight loss. A small tax on a good with perfectly inelastic demand has no deadweight loss, a binding price - ceiling on inelastic goods has a small deadweight loss, and a non - binding price floor has no effect on the market equilibrium and thus no deadweight loss.
3. To protect the domestic textile industry, imposing a quota that limits the number of imported textiles restricts foreign competition, allowing domestic producers to sell more and potentially at higher prices. Removing taxes on imported textiles and providing subsidies to foreign producers will harm the domestic industry, and setting a price ceiling on domestic textiles may not protect the industry as it could lead to shortages.
4. A new machine making widget production cheaper increases supply (shifts supply curve to the right). A rise in the price of a substitute (gadgets) increases the demand for widgets (shifts demand curve to the right). When both supply and demand increase, the equilibrium quantity will increase, but the effect on the equilibrium price depends on the magnitudes of the shifts of the supply and demand curves, so the effect on price is uncertain.

Answer:

1. c) The demand for the product is very inelastic.
2. c) A large tax on a good that has very elastic supply and demand.
3. c) Imposing a quota that limits the number of imported textiles.
4. a) The equilibrium quantity will increase; the effect on price is uncertain.