AREC 202 FINAL EXAM QUESTIONS WITH
100% CORRECT ANSWERS [ GRADED A+]
Excise Tax - ✔✔Tax on sales of a good or service: "per-unit" tax
Effects:
1. It raises price paid by buyer
2. Reduces price received by sellers
3. Drives a wedge between the two
** If the producer is taxed, the supply curve will shift upwards by the
amount of the tax.
** If the consumer is taxed, the demand curve will shift downwards by
the amount of the tax.
©morren2024/2025.Year published 2024.
,**It does not matter who is actually paying the tax, the burden is
shared between producers and buyers.
How do you calculate the amount of the per-unit tax that is imposed on
sellers? - ✔✔Subtract S2 and S1 curves
How do you calculate the amount of the per-unit tax that is imposed on
buyers? - ✔✔Subtract D2 and D1 curves
Tax incidence - ✔✔A measure of who is really paying the tax (buyers or
sellers). Remember, whoever bares the burden of the tax does not
depend on who pays it.
Tax Incidence depends on the elasticity's of supply and demand.
©morren2024/2025.Year published 2024.
,Tax Incidence and Elasticity - ✔✔In general, whoever is the least
flexible (inelastic) is the party that will pay the tax.
If price elasticity of demand is low (inelastic) and price elasticity of
supply is high (elastic): Excise tax falls on consumers.
If price elasticity of demand is high (elastic) and price elasticity of
supply is low (inelastic): Excise tax falls on producers.
How do you figure this out graphically?
1. Plot Equilibrium price (point where demand and supply curve
intersect)
2. Look at the quantity that is being sold and mark the price on the
demand curve and on the supply curve that is associated with that
quantity.
3. Whoever has the largest gap from the equilibrium price is who the
tax incidence falls on.
©morren2024/2025.Year published 2024.
, Who pays the FICA? - ✔✔FICA: Federal Insurance Contributions Act
Workers pay 7.65% of their earnings in FICA
Each employer: matching amount
Is FICA really shared equally by workers and employers?
NO- price elasticity of demand is high (around 3) and price elasticity of
supply is very low
FICA falls mainly on the suppliers of labor (lower wages) rather on
employers (in form of lower profits)
Revenue from an Excise Tax - ✔✔Revenue of an excise tax is equal to
the area of the rectangle (height of the tax wedge between the supply
and the demand curve, and the width is the new equilibrium quantity
transacted under the tax.
Revenue= Tax incidence * equilibrium quantity
©morren2024/2025.Year published 2024.
100% CORRECT ANSWERS [ GRADED A+]
Excise Tax - ✔✔Tax on sales of a good or service: "per-unit" tax
Effects:
1. It raises price paid by buyer
2. Reduces price received by sellers
3. Drives a wedge between the two
** If the producer is taxed, the supply curve will shift upwards by the
amount of the tax.
** If the consumer is taxed, the demand curve will shift downwards by
the amount of the tax.
©morren2024/2025.Year published 2024.
,**It does not matter who is actually paying the tax, the burden is
shared between producers and buyers.
How do you calculate the amount of the per-unit tax that is imposed on
sellers? - ✔✔Subtract S2 and S1 curves
How do you calculate the amount of the per-unit tax that is imposed on
buyers? - ✔✔Subtract D2 and D1 curves
Tax incidence - ✔✔A measure of who is really paying the tax (buyers or
sellers). Remember, whoever bares the burden of the tax does not
depend on who pays it.
Tax Incidence depends on the elasticity's of supply and demand.
©morren2024/2025.Year published 2024.
,Tax Incidence and Elasticity - ✔✔In general, whoever is the least
flexible (inelastic) is the party that will pay the tax.
If price elasticity of demand is low (inelastic) and price elasticity of
supply is high (elastic): Excise tax falls on consumers.
If price elasticity of demand is high (elastic) and price elasticity of
supply is low (inelastic): Excise tax falls on producers.
How do you figure this out graphically?
1. Plot Equilibrium price (point where demand and supply curve
intersect)
2. Look at the quantity that is being sold and mark the price on the
demand curve and on the supply curve that is associated with that
quantity.
3. Whoever has the largest gap from the equilibrium price is who the
tax incidence falls on.
©morren2024/2025.Year published 2024.
, Who pays the FICA? - ✔✔FICA: Federal Insurance Contributions Act
Workers pay 7.65% of their earnings in FICA
Each employer: matching amount
Is FICA really shared equally by workers and employers?
NO- price elasticity of demand is high (around 3) and price elasticity of
supply is very low
FICA falls mainly on the suppliers of labor (lower wages) rather on
employers (in form of lower profits)
Revenue from an Excise Tax - ✔✔Revenue of an excise tax is equal to
the area of the rectangle (height of the tax wedge between the supply
and the demand curve, and the width is the new equilibrium quantity
transacted under the tax.
Revenue= Tax incidence * equilibrium quantity
©morren2024/2025.Year published 2024.
