Question 1

If the government imposes a $3 tax in a market, the equilibrium price will rise by $3.

Accepted Answer

A) True 
 B)False

Question 2

Figure 8-7
The vertical distance between points A and B represents a tax in the market. 
-Refer to Figure 8-7. As a result of the tax, buyers effectively pay

Accepted Answer

A)  $32 for each unit of the good, and sellers effectively receive $24 for each unit of the good.
B)  $32 for each unit of the good, and sellers effectively receive $16 for each unit of the good.
C)  $24 for each unit of the good, and sellers effectively receive $16 for each unit of the good.
D)  $28 for each unit of the good, and sellers effectively receive $20 for each unit of the good.E) B) and D)
F) C) and D)

Question 3

A tax placed on a good

Accepted Answer

A)  causes the effective price to sellers to increase.
B)  affects the welfare of buyers of the good but not the welfare of sellers.
C)  causes the equilibrium quantity of the good to decrease.
D)  creates a burden that is usually borne entirely by the sellers of the good.E) A) and B)
F) None of the above

Question 4

Figure 8-3
The vertical distance between points A and C represents a tax in the market. 
-Refer to Figure 8-3. The amount of the tax on each unit of the good is

Accepted Answer

A)  P3 - P1.
B)  P3 - P2.
C)  P2 - P1.
D)  P4 - P3.E) All of the above
F) A) and B)

Question 5

For the purpose of analyzing the gains and losses from a tax on a good, we use tax revenue as a direct measure of the

Accepted Answer

A)  government's benefit from the tax.
B)  government's loss from the tax.
C)  deadweight loss of the tax.
D)  overall net gain to society of the tax.E) A) and C)
F) None of the above

Question 6

Figure 8-11 
-Refer to Figure 8-11. The tax revenue that the government collects equals

Accepted Answer

A)   ) 
B)   ) 
C)   ) 
D)   ) E) B) and D)
F) A) and B)

Question 7

Figure 8-15  
-Refer to Figure 8-15. Panel (a)  and Panel (b)  each illustrate a $4 tax placed on a market. In comparison to Panel (a) , Panel (b)  illustrates which of the following statements?

Accepted Answer

A)  When demand is relatively inelastic, the deadweight loss of a tax is smaller than when demand is relatively elastic.
B)  When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is relatively inelastic.
C)  When supply is relatively inelastic, the deadweight loss of a tax is smaller than when supply is relatively elastic.
D)  When supply is relatively elastic, the deadweight loss of a tax is larger than when supply is relatively inelastic.E) All of the above
F) B) and C)

Question 8

Figure 8-27 
-Refer to Figure 8-27. Suppose that Market A is characterized by Demand 1 and Supply 1, and Market B is characterized by Demand 2 and Supply 1. If an identical tax is imposed on each market, the tax will create a larger deadweight loss in which market? Explain.

Accepted Answer

The deadweight loss will be larger in Ma...

Question 9

If a tax shifts the demand curve downward (or to the left) , we can infer that the tax was levied on

Accepted Answer

A)  buyers of the good.
B)  sellers of the good.
C)  both buyers and sellers of the good.
D)  We cannot infer anything because the shift described is not consistent with a tax.E) A) and D)
F) A) and C)

Question 10

If the tax on a good is doubled, the deadweight loss of the tax

Accepted Answer

A)  increases by 50 percent.
B)  doubles.
C)  triples.
D)  quadruples.E) A) and B)
F) C) and D)

Question 11

Figure 8-10 
-Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market after the tax to Q2. With the tax, the producer surplus is

Accepted Answer

A)  (P5-0)  x Q5.
B)  1/2 x (P5-0)  x Q5.
C)  (P8-0)  x Q2.
D)  1/2 x (P8-0)  x Q2.E) All of the above
F) B) and C)

Question 12

When a tax is imposed on sellers, consumer surplus and producer surplus both decrease.

Accepted Answer

A) True 
 B)False

Question 13

Who once said that taxes are the price we pay for a civilized society?

Accepted Answer

A)  Milton Friedman
B)  Theodore Roosevelt
C)  Arthur Laffer
D)  Oliver Wendell Holmes, Jr.E) A) and B)
F) A) and C)

Question 14

In which of the following cases is it most likely that an increase in the size of a tax will decrease tax revenue?

Accepted Answer

A)  The price elasticity of demand is small, and the price elasticity of supply is large.
B)  The price elasticity of demand is large, and the price elasticity of supply is small.
C)  The price elasticity of demand and the price elasticity of supply are both small.
D)  The price elasticity of demand and the price elasticity of supply are both large.E) C) and D)
F) A) and D)

Question 15

The Laffer curve relates

Accepted Answer

A)  the tax rate to tax revenue raised by the tax.
B)  the tax rate to the deadweight loss of the tax.
C)  the price elasticity of supply to the deadweight loss of the tax.
D)  government welfare payments to the birth rate.E) B) and D)
F) None of the above

Question 16

Suppose the price of milk is $2.39 per gallon, and the equilibrium quantity of milk is 100 thousand gallons per day with no tax on milk. Starting from this initial situation, which of the following scenarios would result in the smallest deadweight loss?

Accepted Answer

A)  The price elasticity of demand for milk is 0.3, the price elasticity of supply for milk is 0.7, and the milk tax amounts to $0.40 per gallon.
B)  The price elasticity of demand for milk is 0.2, the price elasticity of supply for milk is 0.5, and the milk tax amounts to $0.30 per gallon.
C)  The price elasticity of demand for milk is 0.2, the price elasticity of supply for milk is 0.7, and the milk tax amounts to $0.30 per gallon.
D)  The price elasticity of demand for milk is 0.1, the price elasticity of supply for milk is 0.5, and the milk tax amounts to $0.20 per gallon.E) A) and D)
F) A) and C)

Question 17

Figure 8-8
Suppose the government imposes a $10 per unit tax on a good. 
-Refer to Figure 8-8. The government collects tax revenue that is the area

Accepted Answer

A)  L.
B)  B+D.
C)  C+F.
D)  F+G+L.E) None of the above
F) A) and B)

Question 18

The government's benefit from a tax can be measured by

Accepted Answer

A)  consumer surplus.
B)  producer surplus.
C)  tax revenue.
D)  All of the above are correct.E) B) and C)
F) None of the above

Question 19

Figure 8-6
The vertical distance between points A and B represents a tax in the market. 
-Refer to Figure 8-6. When the tax is imposed in this market, producer surplus is

Accepted Answer

A)  $450.
B)  $600.
C)  $900.
D)  $1,500.E) None of the above
F) A) and B)

Question 20

A tax of $0.25 is imposed on each bag of potato chips that is sold. The tax decreases producer surplus by $600 per day, generates tax revenue of $1,220 per day, and decreases the equilibrium quantity of potato chips by 120 bags per day. The tax

Accepted Answer

A)  decreases consumer surplus by $645 per day.
B)  decreases the equilibrium quantity from 6,000 bags per day to 5,880 bags per day.
C)  decreases total surplus from $3,000 to $1,800 per day.
D)  creates a deadweight loss of $15 per day.E) A) and B)
F) C) and D)

Exam 8: Application: The Costs of Taxation

The Laffer curve relates

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If the tax on a good is doubled, the deadweight loss of the tax

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Figure 8-15 -Refer to Figure 8-15. Panel (a) and Panel (b) each illustrate a $4 tax placed on a market. In comparison to Panel (a) , Panel (b) illustrates which of the following statements?

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A tax of $0.25 is imposed on each bag of potato chips that is sold. The tax decreases producer surplus by $600 per day, generates tax revenue of $1,220 per day, and decreases the equilibrium quantity of potato chips by 120 bags per day. The tax

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Figure 8-27 -Refer to Figure 8-27. Suppose that Market A is characterized by Demand 1 and Supply 1, and Market B is characterized by Demand 2 and Supply 1. If an identical tax is imposed on each market, the tax will create a larger deadweight loss in which market? Explain.

Correct AnswerverifiedThe deadweight loss will be larger in Ma...View AnswerShow Answer

When a tax is imposed on sellers, consumer surplus and producer surplus both decrease.

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If the government imposes a $3 tax in a market, the equilibrium price will rise by $3.

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Figure 8-11 -Refer to Figure 8-11. The tax revenue that the government collects equals

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For the purpose of analyzing the gains and losses from a tax on a good, we use tax revenue as a direct measure of the

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Figure 8-6 The vertical distance between points A and B represents a tax in the market. -Refer to Figure 8-6. When the tax is imposed in this market, producer surplus is

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A tax placed on a good

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The government's benefit from a tax can be measured by

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In which of the following cases is it most likely that an increase in the size of a tax will decrease tax revenue?

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Figure 8-7 The vertical distance between points A and B represents a tax in the market. -Refer to Figure 8-7. As a result of the tax, buyers effectively pay

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Who once said that taxes are the price we pay for a civilized society?

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Figure 8-10 -Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market after the tax to Q2. With the tax, the producer surplus is

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Figure 8-8 Suppose the government imposes a $10 per unit tax on a good. -Refer to Figure 8-8. The government collects tax revenue that is the area

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If a tax shifts the demand curve downward (or to the left) , we can infer that the tax was levied on

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Suppose the price of milk is $2.39 per gallon, and the equilibrium quantity of milk is 100 thousand gallons per day with no tax on milk. Starting from this initial situation, which of the following scenarios would result in the smallest deadweight loss?

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Figure 8-3 The vertical distance between points A and C represents a tax in the market. -Refer to Figure 8-3. The amount of the tax on each unit of the good is

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