4. Problems and Applications Q4 Suppose that the government imposes a tax on heating oil. True or False: The revenue collected from this tax would likely be larger in the first year after it is imposed than in the fifth year. True False True or False: The deadweight loss from this tax would likely be smaller in the fifth year after it is imposed than in the first year as demand for heating oil becomes more elastic. True False

True

False

Explanation:

A tax is a compulsory sum levied on goods and services produced.

Taxes increases the price of goods and services.

Elastic demand means that quantity demanded is sensitive to price changes. A small change in price leads to a greater change in quantity demanded.

Demand is inelastic if a small change in price has little or no effect on quantity demanded.

In the short run, demand is relatively inelastic but in the long run demands becomes elastic.

When tax is levied on heating gas, in the short run demand would be inelastic and as a result the revenue derived from the tax would be higher than in the long run when consumers would have had enough time to search for suitable alternatives to heating gas and demand becomes more elastic.

In the long run, because the fall in demand would be greater than in the short run, the deadweight loss of tax would be higher.

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