chapter 20 review

The graph shown depicts a tax being imposed, causing demand to shift from D1 to D2. What change does this tax cause?

Positive government revenue and decreased consumption

Which of the following is an example of entitlement spending?

Social Security

Deadweight loss is minimized when a tax is levied on a good for which:

a price change is unlikely to cause people to change their behavior.

Which of the following would likely have the smallest deadweight loss? a. a head tax (i.e., a tax everyone must pay regardless of what one does or buys) b. an income tax c. a tax on compact discs d. a tax on caviar

a. a head tax (i.e., a tax everyone must pay regardless of what one does or buys)

The benefit from a tax is measured by the a. benefit received by those people who gain from government's expenditure of the tax revenue. b. cost of collecting (administering) the tax. c. interest saved because the government did not borrow the funds. d. government's surplus, which is tax revenue minus government expenditures.

a. benefit received by those people who gain from government's expenditure of the tax revenue.

When a tax on a good is enacted, a. buyers and sellers share the burden of the tax regardless of who it is levied on. b. buyers always bear the full burden of the tax. c. sellers always bear the full burden of the tax. d. sellers bear the full burden if the tax is levied on them, but buyers bear the full burden if the tax is levied on them.

a. buyers and sellers share the burden of the tax regardless of who it is levied on.

If a tax is imposed on the buyer of a product the demand curve would shift a. downward by the amount of the tax. b. upward by the amount of the tax. c. downward by less than the amount of the tax. d. upward by more than the amount of the tax.

a. downward by the amount of the tax.

The social security tax is primarily a tax on a. earnings from labor. b. interest income. c. real estate holdings. d. consumption spending.

a. earnings from labor.

When evaluating the size of the deadweight loss due to a tax we know that the a. greater the elasticities of supply and demand, the greater the deadweight loss. b. smaller the elasticities of supply and demand, the greater the deadweight loss. c. smaller the decrease in both quantity demanded and quantity supplied, the greater the deadweight loss. d. primary factor that determines the size of the deadweight loss in the percentage the tax is of price.

a. greater the elasticities of supply and demand, the greater the deadweight loss.

Deadweight loss measures the a. loss in a market to buyers and sellers that is not offset by an increase in government revenue. b. loss in revenue to the government when buyers choose to buy less of the product. c. loss of efficiency in a market as a result of government intervention. d. lost revenue to businesses because of higher prices to consumers from the tax.

a. loss in a market to buyers and sellers that is not offset by an increase in government revenue.

The more freedom people are given to choose the date of their retirement a. more elastic the supply of labor. b. less elastic the supply of labor. c. steeper the labor supply curve. d. smaller the reduction in output caused by a tax on labor.

a. more elastic the supply of labor.

Assume that the demand for diamonds is more elastic than the demand for gasoline. Compared to the decline in purchases from a similar percentage tax on gasoline, we would expect that a tax on diamonds will cause the quantity of diamonds purchased to decline a. more. b. less. c. the same. d. neither more or less.

a. more.

The amount of deadweight loss that will result from a tax is determined by the a. price elasticity of demand and supply. b. number of buyers of the product in the market. c. number of suppliers of the product in the market. d. percentage of the purchase price the tax amounts to.

a. price elasticity of demand and supply.

Deadweight loss is the a. reduction in total surplus that results from a tax. b. loss of profit to businesses when a tax is imposed. c. reduction in consumer surplus when a tax is placed on buyers. d. decline in government revenue when taxes are reduced in a market.

a. reduction in total surplus that results from a tax.

The Laffer curve a. relates income tax rates to total income taxes collected. b. was so ridiculous that economists took it as a joke, hence the name, Laffer Curve. c. relates tax rates to deadweight welfare losses. d. relates government welfare payments to the birth rate.

a. relates income tax rates to total income taxes collected.

Assume that the supply of gasoline is relatively inelastic and the supply of wheat is relatively elastic. A tax levied on wheat will cause the loss of producer surplus to be a. relatively large. b. relatively small. c. zero. d. either small or large, depending on the elasticity of demand.

a. relatively large.

A tax levied on the supplier of a product shifts the a. supply curve upward (or to the left). b. supply curve downward (or to the right). c. demand curve upward (or to the right). d. demand curve downward (or to the left).

a. supply curve upward (or to the left).

The amount of deadweight loss from taxes depends on a. the price elasticity of demand and supply. b. how much of the tax revenue the government plans to spend. c. the product the government is planning to tax. d. All of the above are correct.

a. the price elasticity of demand and supply.

When a tax is levied on the sellers of a good, the supply curve shifts a. up by the amount of the tax. b. down by the amount of the tax. c. up by more than the tax. d. down by less than the tax.

a. up by the amount of the tax.

A tax of $10 per unit is imposed on a certain market. The tax reduces the equilibrium quantity in the market by 200 units. The deadweight loss from the tax is a. $2000. b. $1000. c. $500 d. There is not enough information to answer the question.

b. $1000.

Suppose that the equilibrium quantity in the market for widgets has been 200 per month. Then a tax of $5 per widget is imposed on widgets. As a result, the government is able to raise $750 per month in revenue. We can conclude that the equilibrium quantity of widgets has fallen by a. 25 per month. b. 50 per month. c. 75 per month. d. 100 per month.

b. 50 per month.

Which of the following is the most correct statement about tax burdens? a. A tax burden falls most heavily on the side of the market that is elastic. b. A tax burden falls most heavily on the side of the market that is inelastic. c. A tax burden falls most heavily on the side of the market that is closer to unit elastic. d. A tax burden is distributed independently of relative elasticities of supply and demand.

b. A tax burden falls most heavily on the side of the market that is inelastic.

A tax imposed on a market with an inelastic demand and an elastic supply will cause a. sellers to pay the majority of the tax. b. buyers to pay the majority of the tax. c. the tax burden to be equally divided between buyers and sellers. d. the tax burden to be divided, but it cannot be determined how.

b. buyers to pay the majority of the tax.

Assume that the supply of gasoline is relatively inelastic and the supply of wheat is relatively elastic. Compared to the decline in quantity from a similar percentage tax on wheat, we would expect a tax on gasoline to cause the quantity of gasoline produced to a. change more. b. change less. c. change by the same amount. d. change either more or less, depending on the elasticity of demand.

b. change less.

The benefit received by buyers in the market is measured by a. the demand curve. b. consumer surplus. c. the amount buyers are willing to pay for the good. d. the equilibrium price.

b. consumer surplus.

A tax placed on kite buyers will shift a. demand upward, causing both the price received by sellers and the equilibrium quantity to fall. b. demand downward, causing both the price received by sellers and the equilibrium quantity to fall. c. supply downward, causing the price received by sellers to fall and equilibrium quantity to rise. d. supply upward, causing the price received by sellers to rise and equilibrium quantity to fall.

b. demand downward, causing both the price received by sellers and the equilibrium quantity to fall.

A tax placed on chocolate will a. reduce the equilibrium price of chocolate and increase the equilibrium quantity. b. increase the equilibrium price of chocolate and reduce the equilibrium quantity. c. increase the equilibrium price of chocolate and increase the equilibrium quantity. d. reduce the equilibrium price of chocolate and reduce the equilibrium quantity.

b. increase the equilibrium price of chocolate and reduce the equilibrium quantity.

The deadweight economic loss from taxes a. does not depend on tax rates. b. is higher when tax rates are higher than when tax rates are lower. c. is lower when tax rates are higher than when tax rates are lower. d. does not depend on the slope of the demand curve.

b. is higher when tax rates are higher than when tax rates are lower.

A tax has a deadweight loss because a. it induces the government to spend more. b. it induces buyers to consume less and sellers to produce less. c. it causes a disequilibrium in the market. d. the loss to buyers is greater than the loss to sellers

b. it induces buyers to consume less and sellers to produce less.

The more mothers are pressured by society to be housekeepers and stay out of the labor force the a. more elastic the supply of labor will be. b. less elastic the supply of labor will be. c. flatter the labor supply curve will be. d. greater the reduction in output that will be caused by a tax on labor.

b. less elastic the supply of labor will be.

Assume that the demand for salt is relatively inelastic and that the demand for orange juice is relatively elastic. Compared to the deadweight loss from the same percentage tax on orange juice, the deadweight loss from imposing a tax on salt would be a. greater. b. less. c. neither greater nor less. d. either greater or less.

b. less.

The benefit received by sellers in a market is measured by a. the supply curve. b. producer surplus. c. the amount sellers receive for their product. d. the sellers' cost.

b. producer surplus.

Assume that the demand for diamonds is more elastic than the demand for gasoline. The tax levied on diamonds will cause the loss of consumer surplus to be a. zero. b. relatively large. c. relatively small. d. either small or large (depending on the elasticity of supply).

b. relatively large.

Studies indicate that if income tax rates in Sweden had been reduced, income tax collections would have a. fallen. b. risen. c. remained constant. d. risen, fallen, or remained constant (the studies were inconclusive).

b. risen.

If a tax is imposed on a market with elastic demand and inelastic supply, a. buyers will bear most of the burden of the tax. b. sellers will bear most of the burden of the tax. c. the burden of the tax will be shared equally between buyers and sellers. d. it is impossible to determine how the burden of the tax will be shared.

b. sellers will bear most of the burden of the tax.

Economists generally agree that the most important tax in the U.S. economy is a. the income tax. b. the tax on labor. c. the inheritance or death tax. d. corporate profit taxes.

b. the tax on labor

Assume that the demand for pretzels is relatively inelastic and that the demand for potato chips is relatively elastic. If the same percentage tax were placed on both goods, the tax on which product would create a larger deadweight loss? a. the tax on pretzels b. the tax on potato chips c. The taxes would create the same amount of deadweight loss. d. This question is impossible to answer without knowing the price of both pretzels and potato chips.

b. the tax on potato chips

Total tax revenue received by government can be expressed as a. T/Q. b. T + Q. c. T(Q). d. T - Q.

c

Which of the following statements is true for most markets? a. As the tax rate increases, tax revenue continually rises and deadweight loss continually falls. b. As the tax rate rises, tax revenue rises for a while, but eventually begins to fall; deadweight loss rises but also begins to fall as tax revenue falls. c. As the tax rate rises, tax revenue rises for a while, but eventually begins to fall; deadweight loss continually rises. d. As the tax rate rises, tax revenue rises for a while, but eventually begins to fall; deadweight loss falls for a while, but begins to rise as tax revenue falls.

c. As the tax rate rises, tax revenue rises for a while, but eventually begins to fall; deadweight loss continually rises.

What is true about the burden of a tax imposed on gasoline? a. Buyers bear the entire burden of the tax. b. Sellers bear the entire burden of the tax. c. Buyers and sellers share the burden of the tax. d. The government bears the entire burden of the tax.

c. Buyers and sellers share the burden of the tax.

If the supply of a good is relatively elastic, changing the price causes a. a relatively small change in the amounts that buyers are willing to buy. b. a relatively small change in the amounts sellers are willing to sell. c. a relatively large change in the amounts sellers are willing to sell. d. no change in the amounts sellers are willing to sell.

c. a relatively large change in the amounts sellers are willing to sell.

When a tax is levied on a good a. the market price falls because demand declines. b. the market price falls because supply falls. c. a wedge is placed between the price buyers pay and the price sellers receive. d. the market price rises because demand falls.

c. a wedge is placed between the price buyers pay and the price sellers receive.

Whether a tax is levied on the buyer or seller of the good does not matter because a. sellers always bear the full burden of the tax. b. buyers always bear the full burden of the tax. c. buyers and sellers will share the burden of the tax. d. sellers bear the full burden if the tax is levied on them, and buyers bear the full burden if the tax is levied on them.

c. buyers and sellers will share the burden of the tax.

The loss in total surplus resulting from a tax is called a. a deficit. b. economic loss. c. deadweight loss. d. inefficiency.

c. deadweight loss.

A tax levied on the buyers of a product shifts the a. supply curve upward (or to the left). b. supply curve downward (or to the right). c. demand curve downward (or to the left). d. demand curve upward (or to the right).

c. demand curve downward (or to the left).

When a tax is imposed on a good we know that the losses to buyers and sellers a. are equal to the revenue raised by the government. b. are less than the revenue raised by the government. c. exceed the revenue raised by the government. d. cannot be compared to the tax revenue raised by the government since the amount of the tax will vary from good to good.

c. exceed the revenue raised by the government.

The greater the elasticities of demand and supply the a. smaller the deadweight loss from a tax. b. less intrusive a tax will be on a market. c. greater the deadweight loss from a tax. d. more equitable the distribution of a tax between buyers and sellers.

c. greater the deadweight loss from a tax.

If the labor supply curve is nearly vertical, a tax on labor a. has a large deadweight loss. b. will raise small amounts of tax revenue. c. has little impact on the amount of work workers are willing to do. d. Both b and c are correct.

c. has little impact on the amount of work workers are willing to do.

As more people become self-employed and so can determine how many hours they work per week, we would expect that the deadweight loss from the Social Security Tax would a. increase and the revenue generated from it would rise. b. decrease and the revenue generated from it would rise. c. increase and the revenue generated from it would fall. d. decrease and the revenue generated from it would fall.

c. increase and the revenue generated from it would fall.

When a country is on the downward-sloping side of the Laffer curves, cutting tax rates will a. lower tax revenues and increase deadweight loss. b. lower both tax revenues and deadweight loss. c. increase tax revenues and decrease deadweight loss. d. increase both tax revenues and deadweight loss.

c. increase tax revenues and decrease deadweight loss.

As the size of a tax increases the deadweight loss from the tax a. declines. b. remains constant. c. increases. d. No one knows how the deadweight loss changes because no tax has ever been reduced.

c. increases.

A $2.00 tax placed on the sellers of potting soil will shift the supply curve a. right (downward) by exactly $2.00. b. left (upward) by less than $2.00. c. left (upward) by exactly $2.00. d. right (downward) by less than $2.00.

c. left (upward) by exactly $2.00.

Assume that the demand for diamonds is more elastic than the demand for gasoline. A tax levied on gasoline will cause the loss of consumer surplus to be a. zero (because raising the price of gasoline has no effect on the amount purchased). b. relatively large. c. relatively small. d. either small or large--depending on the elasticity of supply

c. relatively small.

Buyers of a product will pay the majority of a tax placed on a product when a. the tax is placed on the seller of the product. b. the demand is more elastic than supply. c. supply is more elastic than demand. d. the tax is placed on the buyer of the product

c. supply is more elastic than demand.

When the government places a tax on a product a. the cost of the tax to buyers and sellers will be less than the revenue raised from the tax by the government. b. the cost of the tax to buyers and sellers will equal the revenue raised from the tax by the government. c. the cost of the tax to buyers and sellers exceeds the revenue raised from the tax by the government. d. without additional information, such as the elasticity of demand for this product, it is impossible to compare tax cost with tax revenue.

c. the cost of the tax to buyers and sellers exceeds the revenue raised from the tax by the government.

Taxes cause deadweight losses because a. they transfer purchasing power to the government which always wastes money. b. they prevent buyers and sellers from realizing some of the gains from trade. c. marginal buyers and sellers leave the market causing the quantity sold to fall. d. Both b and c are correct.

d. Both b and c are correct.

Assume that a tax is levied on a good and the government uses the funds to build statues of the Governors of each of the 50 states. In this case which of the following would NOT occur? a. a decrease in consumer surplus to consumers of the taxed good b. a decrease in producer surplus to producers of the taxed good c. a probable decrease in the welfare of society that exceeds the deadweight loss from the tax d. a deadweight loss larger than the loss in both consumer and producer surplus

d. a deadweight loss larger than the loss in both consumer and producer surplus

Assume that a tax is levied on a good and that the government uses the revenue to clean up lethal toxic waste that would cause irreparable harm to a large number of people. In this case which of the following would NOT occur? a. a decrease in consumer surplus to consumers of the taxed good b. a decrease in producer surplus to producers of the taxed good c. a probable increase in the total economic welfare of society d. a decrease in the total economic welfare of society

d. a decrease in the total economic welfare of society

When a tax is imposed on a product quantity demanded a. will increase and quantity supplied will decrease. b. will decrease and quantity supplied will increase. c. and quantity supplied will both increase. d. and quantity supplied will both decrease.

d. and quantity supplied will both decrease.

When a tax is levied on a good a. neither buyers nor sellers are worse off. b. sellers are worse off but not buyers. c. buyers are worse off but not sellers. d. both buyers and sellers are worse off.

d. both buyers and sellers are worse off.

Total surplus with a tax is equal to a. consumer surplus and producer surplus. b. consumer surplus minus producer surplus. c. consumer surplus, producer surplus, and total surplus. d. consumer surplus, producer surplus, and tax revenue.

d. consumer surplus, producer surplus, and tax revenue.

If the size of a tax is tripled, then the deadweight loss from the tax would a. double. b. triple. c. increase a factor of six. d. increase by a factor of nine.

d. increase by a factor of nine.

If the size of a tax increases, tax revenue will a. increase. b. decrease. c. remain the same. d. increase, then decrease.

d. increase, then decrease.

When the size of a tax is doubled, the deadweight loss from the tax a. increases by the size of the tax. b. doubles. c. remains constant. d. increases by a factor of four.

d. increases by a factor of four.

The argument that cutting income tax rates will increase tax revenues a. clearly has merit for the United States but not for most other countries. b. clearly has merit for all countries that have income taxes. c. may not have merit for the United States but has merit for most other countries. d. is most likely to have merit for any country that has very high marginal tax rates.

d. is most likely to have merit for any country that has very high marginal tax rates.

The larger the deadweight loss of taxation the a. more people will choose to not buy the product. b. more the burden of the tax will fall on the buyer and not the seller. c. more the burden of the tax will fall on the seller and not the buyer. d. larger the cost of any government program.

d. larger the cost of any government program.

Suppose a tax is imposed on the buyers of a product. The burden of the tax will fall a. entirely on the buyers. b. entirely on the sellers. c. entirely on the government. d. on both the buyers and the sellers.

d. on both the buyers and the sellers.

The higher a country's tax rates the more likely that country will be a. on the top of the Laffer curve. b. on the positively sloped part of the Laffer curve. c. above the Laffer curve. d. on the negatively sloped part of the Laffer curve.

d. on the negatively sloped part of the Laffer curve.

Tax cuts and deregulation may cause output in an economy to increase because of all of the following EXCEPT a. increasing the value of output by reducing deadweight tax burdens. b. luring the underground economy to the surface. c. increasing incentives to produce. d. reducing competition.

d. reducing competition.

The Laffer curve indicates each of the following EXCEPT income tax collections will be a. very low if income tax rates are very low. b. very low if income tax rates are very high. c. at a maximum if income tax rates are at some intermediate level between very low and very high. d. very high if income tax rates are very high.

d. very high if income tax rates are very high.

In general, raising taxes has:

diminishing returns to revenue.

Concerning the labor market and taxes on labor, economists disagree a. about the size of the deadweight loss. b. that the marginal tax rate on labor is almost 50 percent. c. about the elasticity of the labor supply curve. d. All of the above. e. Only a and c are correct.

e. Only a and c are correct.

The federal income tax _______ than a state sales tax.

has a higher administrative burden

The statutory incidence of a tax _______ the economic incidence of the tax.

has no effect on

When a tax is present in a market, the price paid by consumers:

is greater than that received by suppliers.

Federal government spending in the United States:

is mostly not discretionary.

The burden a tax places on buyers and sellers is:

not the answer: always split in half between each party.

We can describe who bears the burden of a tax by using the concept of:

not the answer: marginal tax rate.

If the _______ effect is greater than the _______ effect, a tax cut will increase revenue.

not the answer: price; quantity

The primary intent of a tax on tobacco is to:

reduce its consumption.

A tax that is levied in such a way that low-income taxpayers pay a greater proportion of their income than high-income taxpayers is called a:

regressive tax.

A tax on the value of a good or service being purchased is called a(n):

sales tax

Lump-sum taxes reduce the total amount of revenue that can be raised because:

the size of the tax is limited by the poorest citizen's ability to pay.

When a tax is levied on the sellers of a good, the supply curve a. shifts left (up) by less than the tax. b. shifts left (up) by more than the tax. c. shifts left (up) by an amount equal to the tax. d. does not shift when a tax is levied on sellers.

v\c. shifts left (up) by an amount equal to the tax.