Macroeconomics Chapter 8
Welfare economics is the study of how taxes affect welfare recipients.
False
A tax on cigarettes would likely generate a larger deadweight loss than a tax on luxury boats.
False. Luxury boats have more elastic demand than cigarettes, therefore deadweight loss from a tax would be greater.
If a tax is doubled, the deadweight loss from the tax doubles too.
False. The deadweight loss more than doubles.
If Jack values a haircut at $20 and Mary's cost of providing a haircut is $10, any tax on haircuts larger than $10 will cause a $20 loss of total surplus.
False. The loss of total surplus is $10 (difference between buyer's valuation and seller's cost).
A larger tax always generates a larger deadweight loss.
True
Deadweight loss is the reduction in total surplus that results from a tax.
True
If Jack values a haircut at $20 and Mary's cost of providing a haircut is $10, any tax on haircuts larger than $10 will eliminate the gains from trade.
True
In general, a tax raises the price buyers pay, reduces the price sellers receive, and reduces quantity sold.
True
Suppose the supply of diamonds is relatively inelastic. A tax on diamonds would fall on the seller.
True
The more elastic the demand curve, the greater the deadweight loss.
True
The more elastic the supply curve, the greater the deadweight loss.
True
Suppose the supply of diamonds is relatively inelastic. A tax on diamonds would generate a small deadweight loss, not a large deadweight loss.
True. Remember, more elastic = greater deadweight loss.
If a tax is placed on a good in a market where demand is perfectly inelastic, there is no deadweight loss and the buyers bear the entire burden of the tax.
True. Think of the graph. Demand is a straight line going across. There is no place for the deadweight loss triangle. The new demand line is straight across too, but at a higher price.
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. Think of the graph. Supply is a straight line up and down. There is no place for the deadweight loss triangle.
A larger tax always generates more tax revenue.
False
A tax collected from buyers generates a smaller deadweight loss than a tax collected from sellers.
False
Deadweight loss is greater in the short run.
False
