Question from Past Microeconomics Qualifying ExamEdit
Fall 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 reasoning in four or five sentences. You may use a graph if it helps clarify your answer.
Taxing a good always leads to a larger quantity reduction in the long run than in the short run.
True. The elasticity of demand with respect to any kind of price increase is greater in the long than in the short run. However...
Uncertain: Though generally true, as above, if the immediate response to the tax is a reduction in quantity to zero, then no further reduction can occur over time. I know it sounds trivial, but they do grade on these limiting cases as well.
UNCERTAIN: Durable goods are more elastic in the short term than in the long term. A large enough tax on cars will lead some consumers to hold off on buying a car in the short term, but as cars wear down, they will be forced to buy a new car. Non durables are generally more elastic in the short term than the long term. A large tax on gas for example may not be lead consumer to consume less gas in the short term, but as they make purchasing decisions in the future they will choose more fuel efficient alternatives leading to less gas usage in the long