2019-04-25T10:14:58+00:00 sample questions

In consumer theory in Economics, what is the difference between a necessity and a luxury good?

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Questions 1 to 2 are based on the following:
Adam Smith proposed taxing ‘sugar, rum and tobacco’ because they are:
I.    ‘nowhere necessaries of life’
II.    ‘objects of almost universal consumption’

1)    In consumer theory in Economics, what is the difference between a necessity and a luxury good? [4 marks] What is the likely difference in the tax revenue obtained from a tax imposed on a necessity versus a luxury good? Illustrate with the use of appropriate figures. [7 marks]
2)    Why do you think Adam Smith preferred to impose a tax on luxury goods? Why do you think Adam Smith preferred a tax on ‘objects of almost universal consumption’?  [4 marks]

Please turn over
3)    Why would a tax on sugary drinks ‘lead to people eating fewer fruit and vegetables and more salt’? Illustrate with the use of appropriate figures. [4 marks]
4)    The article does not mention the costs involved with the imposition of a sugary tax. Illustrate with the use of an appropriate figure what the deadweight loss from the imposition of a tax would look like. In the case of sugary drinks, who would likely suffer a greater deadweight loss – the consumer or producer? [8 marks]
5)    Should there be a subsidy imposed on the consumption of salads? How would a subsidy affect the market for salads? Illustrate with the use of an appropriate figure.  [4 marks]
6)    Imagine that sugary drinks are sold in a perfectly competitive market. The government then introduces tax. What happens to the market and individual firms in the short-run and the long run? Illustrate with the use of appropriate figures.  [9 marks]


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