Chapter 08

The supply curve for whiskey is the typical upward-sloping straight line, and the demand curve for whiskey is the typical downward-sloping straight line. When whiskey is taxed, the area on the relevant supply-and-demand graph that represents Answers:A. government's tax revenue is a rectangle. B. the deadweight loss of the tax is a triangle. C. the loss of consumer surplus caused by the tax is neither a rectangle nor a triangle. D. All of the above are correct.

D. All of the above are correct.

Refer to Figure 8-14. Which of the following statements is not correct? Answers:A. Supply 2 is more elastic than supply 1. B. Demand 2 is more elastic than demand 1. C. Supply 1 is more inelastic than supply 2. D. Demand 2 is more inelastic than supply 2.

D. Demand 2 is more inelastic than supply 2.

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. total surplus before the tax is measured by the area I+Y. B. J+K+L+M. C. L+M+Y. D. I+J+K+L+M+Y.

D. I+J+K+L+M+Y.

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The producer surplus after the tax is measured by the area Answers:A. M. B. L+M+N+Y+B. C. L+M+Y. D. J.

A. M.

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The tax revenue is measured by the area Answers:A. K+L. B. I+Y. C. J+K+L+M. D. I+J+K+L+M+Y.

A. K+L.

When a good is taxed, Answers:A. both buyers and sellers of the good are made worse off. B. only buyers are made worse off, because they ultimately bear the burden of the tax. C. only sellers are made worse off, because they ultimately bear the burden of the tax. D. neither buyers nor sellers are made worse off, since tax revenue is used to provide goods and services that would otherwise not be provided in a market economy.

A. both buyers and sellers of the good are made worse off.

When a tax is imposed on a good for which the supply is relatively elastic and the demand is relatively inelastic, Answers:A. buyers of the good will bear most of the burden of the tax. B. sellers of the good will bear most of the burden of the tax. C. buyers and sellers will each bear 50 percent of the burden of the tax. D. both equilibrium price and quantity will increase.

A. buyers of the good will bear most of the burden of the tax.

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by I+Y represents the Answers:A. deadweight loss due to the tax. B. loss in consumer surplus due to the tax. C. loss in producer surplus due to the tax. D. total surplus before the tax.

A. deadweight loss due to the tax.

The size of the deadweight loss generated from a tax is affected by the Answers:A. elasticities of both supply and demand. B. elasticity of demand only. C. elasticity of supply only. D. total revenue collected by the government.

A. elasticities of both supply and demand.

Refer to Figure 8-14. Which of the following combinations will minimize the deadweight loss from a tax? A. supply 1 and demand 1 B. supply 2 and demand 2 C. supply 1 and demand 2 D. supply 2 and demand 1

A. supply 1 and demand 1

The Laffer curve relates Answers: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.

A. the tax rate to tax revenue raised by the tax.

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by J+K+L+M represents Answers:A. total surplus after the tax. B. total surplus before the tax. C. deadweight loss from the tax. D. tax revenue.

A. total surplus after the tax.

Refer to Figure 8-14. Which of the following statements is correct? Answers:A. Supply 1 is more elastic than supply 2. B. Demand 2 is more elastic than demand 1. C. Demand 1 is more elastic than supply 1. D. All of the above are correct.

B. Demand 2 is more elastic than demand 1.

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The consumer surplus after the tax is measured by the area Answers:A. J+K+I. B. J. C. M. D. L+M+Y.

B. J.

According to Arthur Laffer, the graph that represents the amount of tax revenue (measured on the vertical axis) as a function of the size of the tax (measured on the horizontal axis) looks like Answers:A. a U. B. an upside-down U. C. a horizontal straight line. D. an upward-sloping line or curve.

B. an upside-down U. C.

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by J+K+I represents Answers:A. consumer surplus after the tax. B. consumer surplus before the tax. C. producer surplus after the tax. D. producer surplus before the tax.

B. consumer surplus before the tax.

Suppose the government increases the size of a tax by 20 percent. The deadweight loss from that tax Answers:A. increases by 20 percent. B. increases by more than 20 percent. C. increases but by less than 20 percent. D. decreases by 20 percent.

B. increases by more than 20 percent.

A deadweight loss is a consequence of a tax on a good because the tax Answers:A. induces the government to increase its expenditures. B. induces buyers to consume less, and sellers to produce less. C. increases the equilibrium price in the market. D. imposes a loss on buyers that is greater than the loss to sellers.

B. induces buyers to consume less, and sellers to produce less.

For a good that is taxed, the area on the relevant supply-and-demand graph that represents government’s tax revenue is a Answers:A. triangle. B. rectangle. C. trapezoid. D. None of the above is correct; government's tax revenue is the area between the supply and demand curves, above the horizontal axis, and below the effective price to buyers.

B. rectangle.

Refer to Figure 8-14. Which of the following combinations will maximize the deadweight loss from a tax? Answers:A. supply 1 and demand 1 B. supply 2 and demand 2 C. supply 1 and demand 2 D. supply 2 and demand 1

B. supply 2 and demand 2

The decrease in total surplus that results from a market distortion, such as a tax, is called a Answers:A. wedge loss. B. revenue loss. C. deadweight loss. D. consumer surplus loss.

C. deadweight loss.

The government's benefit from a tax can be measured by Answers:A. consumer surplus. B. producer surplus. C. tax revenue. D. All of the above are correct.

C. tax revenue.

Suppose a tax is imposed on the sellers of fast-food French fries. The burden of the tax will Answers:A. fall entirely on the buyers of fast-food French fries. B. fall entirely on the sellers of fast-food French fries. C. be shared equally by the buyers and sellers of fast-food French fries. D. be shared by the buyers and sellers of fast-food French fries but not necessarily equally.

D. be shared by the buyers and sellers of fast-food French fries but not necessarily equally.

Total surplus with a tax is equal to Answers:A. consumer surplus plus producer surplus. B. consumer surplus minus producer surplus. C. consumer surplus plus producer surplus minus tax revenue. D. consumer surplus plus producer surplus plus tax revenue.

D. consumer surplus plus producer surplus plus tax revenue.

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by L+M+Y represents Answers:A. consumer surplus after the tax. B. consumer surplus before the tax. C. producer surplus after the tax. D. producer surplus before the tax.

D. producer surplus before the tax.