Chapter 8 Microeconomics

T or F: A larger tax always generates more tax revenue.

False

T or F: A tax on cigarettes would likely generate a larger deadweight loss than a tax on luxury boats.

False

T or F: A tax will generate a greater deadweight loss if supply and demand are inelastic.

False

T or F: Deadweight loss is the reduction in consumer surplus that results from a tax.

False

T or F: If John values having his hair cut at €20 and Mary's cost of providing the hair cut is €10, any tax on hair cuts larger than €10 will eliminate the gains from trade and cause a €20 loss of total surplus.

False

T or F: When a tax is placed on a good, the revenue the government collects is exactly equal to the loss of consumer and producer surplus from the tax.

False

Deadweight loss is greatest when

both supply and demand are relatively elastic.

total surplus after a tax = ?

consumer surplus + producer surplus + tax revenue (everything but deadweight loss)

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

increases by a factor of four.

what determines the size of the deadweight loss

the elasticity of the supply/demand -greater the elasticity, larger decline in equilibrium quantity, greater deadweight loss

deadweight loss

the fall in total surplus that results from a market distortion, such as a tax

Taxes cause deadweight losses because

they prevent buyers and sellers from realizing some of the gains from trade

what are the effects of a tax?

-a wedge between the price that buyers pay and what sellers receive is created -quantity sold falls

Which of the following is true with regard to a tax on labour income? Taxes on labour income tend to encourage

-the unscrupulous to enter the underground economy the elderly to retire early. -second earners to stay home. -workers to work fewer hours.

T or F: A tax collected from buyers generates a smaller deadweight loss than a tax collected from sellers.

False

Inelastic supply Elastic supply Inelastic demand Elastic demand

Inelastic supply- deadweight loss of a tax is small Elastic supply- deadweight loss of tax is large Inelastic demand- deadweight loss of tax is small Elastic demand- deadweight loss of tax is large

The graph that shows the relationship between the size of a tax and the tax revenue collected by the government is known as a

Laffer curve

T or F: A deadweight loss results when a tax causes market participants to fail to produce and consume units on which the benefits to the buyers exceeded the costs to the sellers.

True

T or F: A larger tax always generates a larger deadweight loss.

True

T or F: A tax causes a deadweight loss because it eliminates some of the potential gains from trade.

True

T or F: If a tax is doubled, the deadweight loss from the tax more than doubles.

True

T or F: If a tax is placed on a good and it reduces the quantity sold, there must be a deadweight loss from the tax.

True

T or F: If a tax is placed on a good in a market where supply is perfectly inelastic, there is no deadweight loss and the sellers bear the entire burden of the tax.

True

T or F: If an income tax rate is high enough, a reduction in the tax rate could increase tax revenue.

True

T or F: In general, a tax raises the price the buyers pay, lowers the price the sellers receive, and reduces the quantity sold.

True

Since the supply of undeveloped land is relatively inelastic, a tax on undeveloped land would generate

a small deadweight loss and the burden of the tax would fall on the landlord.

A tax on petrol is likely to a.) generate a deadweight loss that is unaffected by the time period over which it is measured. b.) cause a greater deadweight loss in the long run when compared to the short run. c.) none of these answers d.) cause a greater deadweight loss in the short run when compared to the long run.

b.) cause a greater deadweight loss in the long run when compared to the short run.

When a tax distorts incentives to buyers and sellers so that fewer goods are produced and sold than otherwise, the tax has

caused a deadweight loss

The reduction of a tax

could increase tax revenue if the tax had been extremely high.

Which of the following would likely cause the greatest deadweight loss? a.) a tax on salt b.) a tax on cigarettes c.) a tax on petrol d.) a tax on cruise line tickets

d.) a tax on cruise line tickets

The losses to buyers and sellers from a tax

exceed the revenue raised by the government

as tax increases, deadweight loss __________, tax revenue ________

increases, first increases, then decreases (Laffer curve)

tax revenue

size of the tax times quantity sold (area of rectangle between supply and demand curves)

increasing a small tax increasing a large tax

small- increases tax revenue large- decreases tax revenue

small tax medium tax large tax

small- small deadweight loss, small tax revenue medium- larger deadweight loss, larger revenue large- very large deadweight loss, small tax revenue

With each increase in the tax rate

the deadweight loss of the tax rises even more rapidly than the size of the tax

Laffer curve shows the relationship between

the size of the tax and the tax revenue

When a tax on a good starts small and is gradually increased, tax revenue

will first rise and then fall.