Question from Past Microeconomics Qualifying ExamEdit
Spring 2005 - Section I, Question two, George Mason University
T,F,U. State first whether the following statements are true, false or uncertain. Then briefly explain your resaoning in four or five sentences. You may sue a graph if it helps clairify your answer.
If all firms in an industry are identical (having the same cost curves), then the burden of a tax on that industry's product will be borne equally between consumers and producers.
Uncertain. How much of a tax burden is born by consumers or producers depends on elasticity of demand. Given a demand schedule the cost of production will determine how much output a firm will produce. With all firms having the same cost curve they will all prodcue the same amount of output and will all be facing the same elasticity of demand. Therefore the producers will all be baring the same tax burden. However, since we don't know where on the demand curve they are producing we can't tell whether the burden of the tax will be borne equally between consumers and producers.