1. Assume the demand for gasoline is perfectly inelastic—i.e., the demand curve is vertical. If a tax is levied on the producers of gasoline, what percentage of the tax collection would be paid by the consumers of gasoline 0% or 100%? Explain.
2. Within the framework of taxes and subsidies, define the concepts of income effect, substitution effect, compensated demand, equivalent variation, and excess burden.
3. Does an excess burden arise from taxation on corporate income? Explain.
4. How does a tax affect an individual’s decision? Consider the case of an individual who consumes two goods: bread and tortillas, both of which are initially free. Also, assume that the price of each good and the individual’s income are given. How would the individual’s consumption decision—i.e., how much bread and tortillas she consumes— change when a tax is levied on tortillas while bread remains tax-free? Your explanation shall refer to budget constraint, indifference curves, income effect, and substitution effect.

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A tax burden is usually shared by both consumers and producers in a given market When gasolines dema... View the full answer