Micro Chapter 6

Every summer, Matt travels by air to see his grandmother. Matt's maximum willingness to pay for an airline ticket is $260, but the airline only requires a minimum of $100 to fly him. Normally, Matt pays the airline the going market price of $250 per ticket. If the government places a $50 tax on each ticket, raising ticket prices to $270, and causing Matt not to go, what is the deadweight loss created by this tax? A. $160 B. $150 C. $10 D. $260

A. $160

(Figure: Wage Subsidy) Refer to the figure. If a minimum wage of $8 had been implemented instead of a wage subsidy, how many workers would have been unemployed? A. 60 B. 180 C. 120 D. 30

A. 60

Consider the market for gasoline, a good with a relatively low elasticity of demand. Who will bear the majority of a tax imposed on gasoline? A. Buyers will bear the majority of the tax, as long as demand is less elastic than supply. B. Sellers will bear the majority of the tax, as long as supply is more elastic than demand. C. No one will bear the majority of the tax; the tax burden will be borne equally by both buyers and sellers D. It depends on the tax rate at the time the gasoline is sold.

A. Buyers will bear the majority of the tax, as long as demand is less elastic than supply.

In this figure, the benefits of a subsidy will be greater for sellers facing demand curve ______, the ______ demand. A. D2; more elastic B. D2; least elastic C. D1; more elastic D. D1; least elastic

A. D2; more elastic

In Free Market Environmentalism, economists Terry Anderson and Donald Leal write, "Subsidized irrigation . . . encourages farmers to break prairie sod and plant crops in arid regions. Rather than choosing drought-resistant crops that might be more appropriate in an environment undergoing global warming, farmers intensify the use of pesticides and chemical fertilizers to increase their yields. . ." (pp. 163-164). Which of the following explains the deadweight loss from irrigation subsidies? A. Farmers are using methods for which the social cost of growing food exceeds the social benefit. B. Farmers are using methods that do not result in the highest crop yield. C. Farmers are using methods that do not match their incentives. D. Farmers are using methods without considering the methods' opportunity cost.

A. Farmers are using methods for which the social cost of growing food exceeds the social benefit.

Which of the following statements is NOT true for a case in which the demand for labor is more elastic than the supply of labor? A. Firms cannot escape the cost of health insurance for labor by employing fewer workers. B. Firms can move overseas if the tax on labor gets too high. C. Most workers would continue to work even if their wages were lower because of the cost of health insurance. D. Firms can substitute capital for labor if the health insurance on labor gets too costly.

A. Firms cannot escape the cost of health insurance for labor by employing fewer workers.

If there is a tax on both medicine and sugar, ceteris paribus, how will the deadweight losses in each market compare? A. Sugar has a larger deadweight loss. B. Medicine has a larger deadweight loss. C. The deadweight losses are equal. D. Neither has a deadweight loss due to the tax.

A. Sugar has a larger deadweight loss.

The government subsidizes driving by building roadways, but it also taxes driving through gasoline taxes. Which of the following is TRUE? A. These policies at least partially offset each other because a subsidy is a negative tax. B. Road-building expenditures must be less than gasoline tax revenues. C. These policies compound each other because a subsidy is the same thing as a tax. D. Deadweight losses from road subsidies exceed deadweight losses from gasoline taxes.

A. These policies at least partially offset each other because a subsidy is a negative tax.

As demand becomes more elastic, ceteris paribus, the deadweight loss from a tax: A. increases. B. changes unpredictably. C. decreases. D. remains the same.

A. increases.

Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers? A. $0.67 B. $0.40 C. $0.75 D. $0.60

B. $0.40

(Table: Unit Taxes) Because of the $4 tax in the accompanying table, buyers are paying ______ per unit and sellers are receiving _______ per unit. A. $4 less; $4 more B. $2.50 more; $1.50 less C. $4 more; $4 less D. $2 more; $2 less

B. $2.50 more; $1.50 less

(Figure: Imposition of a Tax) Refer to the figure. With a $4 tax, the deadweight loss is: A. $10. B. $20. C. $35. D. $40.

B. $20.

Martin's maximum willingness to pay for an electric boat motor is $250. Because of a tax, the price of the motor increases from $230 to $280. The deadweight loss of the tax attributable to Martin is: A. $250. B. $20. C. $30. D. $50.

B. $20.

With a $4 subsidy in the figure, buyers pay _____ and sellers receive _____. A. $9; $7 B. $3; $7 C. $7; $3 D. $5; $9

B. $3; $7

Which of the following statements is TRUE regarding cigarette taxes? A. Cigarette manufacturers tend to ship their product from low-tax states to high-tax states. B. After-tax prices received by cigarette manufacturers are about the same in all states. C. Cigarette manufacturers bear almost all of the cigarette taxes. D. The elasticity of cigarette supply in all states is very small so cigarette manufacturers receive higher after-tax prices in higher-tax states.

B. After-tax prices received by cigarette manufacturers are about the same in all states.

(Figure: Taxes and Deadweight Loss) In the diagram, the deadweight loss is ______ and government tax revenue is ______. A. C; E B. C + E; B + D C. D + F; B + D D. C + E; B

B. C + E; B + D

In the diagram, the demand curve that incorporates a $2 tax per unit is: A. D2. B. D4. C. D3. D. D1.

B. D4.

Which of the following statements is TRUE? I. Buyers bear the majority of the tax burden if the tax is originally imposed on buyers. II. Buyers bear the majority of the tax burden if the tax is originally imposed on sellers. III. Buyers and sellers will always bear equal amounts of the tax burden. IV. Buyers and sellers will jointly bear the tax.: A. II only B. IV only C. III only D. I only

B. IV only

Which of the following statements is NOT true regarding subsidies? A. When a subsidy is present, the price received by sellers exceeds the price paid by buyers. B. The main beneficiary of a subsidy is the party that directly receives the check from the government. C. Similar to a tax, a subsidy also creates a deadweight loss. D. Subsidies create inefficient increases in trade.

B. The main beneficiary of a subsidy is the party that directly receives the check from the government.

By law, workers pay half the Social Security tax and employers pay the other half. Is this a fair way to allocate the tax? A. No, workers should pay the whole tax. B. Yes, the legal responsibility for the tax has nothing to do with who ultimately pays, so it is as good an allocation as any other. C. Economics cannot answer such a question. D. No, employers should pay the whole tax.

B. Yes, the legal responsibility for the tax has nothing to do with who ultimately pays, so it is as good an allocation as any other.

A mandate that requires employers to provide health insurance will cause the price of physical capital to:: A. decrease. B. increase. C. change, but it's uncertain how. D. remain the same.

B. increase.

If instead of a per-unit subsidy, the government offered to pay for half the good's price, no matter the price: A. demand would be perfectly elastic. B. instead of a parallel shift in demand, the subsidy should be modeled as a demand curve that is twice as steep. C. there would be no change in how we model the subsidy. D. the wedge method would no longer work.

B. instead of a parallel shift in demand, the subsidy should be modeled as a demand curve that is twice as steep.

(Figure: Soda Market) Suppose the U.S. Congress passes a tax of $0.70 on each can of soda. Using the diagram and the "wedge shortcut," determine how much deadweight loss this would create. A. $70,000 B. $21,000 C. $10,500 D. $35,000

C. $10,500

(Figure: Supply and Demand with Subsidy) Refer to the figure. With a $2-per-unit subsidy, the price received by sellers is ________ and the price paid by consumers is ________. A. $3; $2 B. $2; $4 C. $4; $2 D. $3; $4

C. $4; $2

(Figure: Tax on Sellers) In the diagram, sellers receive _____ without the tax and _____ with the tax. A. $7; $3 B. $6; $4 C. $4; $3 D. $4; $7

C. $4; $3

(Figure: Consumer and Producer Surplus) According to the figure, what is the value of the deadweight loss? A. $900 B. The deadweight loss cannot be calculated. C. $50 D. $100

C. $50

(Figure: Tax on Sellers of Gadgets) According to the figure, what is the amount of the deadweight loss caused by the imposition of the tax on gadgets? A. $100 B. $0.50 C. $50 D. $1

C. $50

By law, workers pay half the Social Security tax and employers pay the other half. However, the price of labor (wages) does not adjust very quickly. If the government wanted to temporarily create a shortage of labor (or combat a surplus of labor), what should it do? A. Increase the tax on both parties. B. Move the whole tax onto employers (demanders of labor). C. Move the whole tax onto workers (suppliers of labor) D. Neither, because this change would have a long-run effect on who pays the Social Security tax.

C. Move the whole tax onto workers (suppliers of labor).

In the market for Good X—a necessity good without any good substitutes—the workers and capital in the industry can easily find work producing other goods. The burden of the tax is likely to fall: A. evenly between buyers and sellers. B. more heavily on buyers, given that demand is more elastic than supply. C. more heavily on buyers, given that demand is more inelastic than supply. D. more heavily on sellers, given that supply is more inelastic than demand.

C. more heavily on buyers, given that demand is more inelastic than supply.

Legislators impose a tax of $0.70 on soda that reduces the quantity of soda sold from 130,000 cans of soda to 100,000, cans. How much of the $0.70 tax per can will producers pay? A. $0.35 B. $0.70 C. $0.60 D. $0.10

D. $0.10

(Figure: Deadweight Loss) Which of the areas in this figure represents the lost consumer surplus resulting from a $2 tax? A. A B. B C. B + C D. B + E

D. B + E

(Figure: Tax on Supply and Demand) According to the figure, if the tax is placed on sellers, the equilibrium is at Point: A. A, and the equilibrium price and quantity are P4 and Q3. B. C, and the equilibrium price and quantity are P1 and Q2 C. A, and the equilibrium price and quantity are P3 and Q2. D. B, and the equilibrium price and quantity are P3 and Q2.

D. B, and the equilibrium price and quantity are P3 and Q2.

In the figure, demand curve _____ is the least elastic demand curve, and the lost gains from trade because of a tax are greater with demand curve _____. A. D2; D1 B. D2; D2 C. D1; D1 D. D1; D2

D. D1; D2

Which of the following statements is TRUE? I. Subsidizing buyers is no different than subsidizing sellers. II. Unlike taxes, subsidies do not create deadweight losses. III. Subsidies are payments the government makes to either producers or consumers. IV. Taxpayers pay for subsidies. A. I, II, III, and IV B. I and II only C. II and III only D. I, III, and IV only

D. I, III, and IV only

The supply of financial capital is very internationally mobile. People can move their bank and brokerage accounts around the world and invest in foreign corporations with a click of the mouse. The supply of labor is less internationally mobile. People have strong ties to the countries in which they live. Assuming that the demand for labor and for financial capital have similar elasticities, which of the following is TRUE? A. Taxes on labor will have no deadweight loss at all. B. Taxes on financial capital will raise more revenue than similar taxes on labor. C. Taxes on labor and financial capital are interchangeable. D. Taxes on labor will have less deadweight loss than similar taxes on financial capital.

D. Taxes on labor will have less deadweight loss than similar taxes on financial capital.

In Virginia, the state taxes automobiles. In Northern Virginia, there is ample public transportation, and many neighborhoods are very walkable. In the rest of the state, there is less public transportation, and neighborhoods are more spread out. Other things equal, which of the following is likely to be an effect of the car tax? A. The deadweight loss of the tax will be higher in the rest of the state. B. The car tax will raise relatively more money in Northern Virginia. C. The deadweight loss will be the same throughout the state. D. The deadweight loss of the tax will be higher in Northern Virginia.

D. The deadweight loss of the tax will be higher in Northern Virginia.

If the elasticity of supply is 1, and the elasticity of demand is 3 (in absolute value), then for a tax of $1 buyers will pay: A. an extra 50 cents and sellers will receive 50 cents less. B. an extra 75 cents and sellers will receive 25 cents less. C. nothing extra since this is the special case where demand is unit elastic. D. an extra 25 cents and sellers will receive 75 cents less.

D. an extra 25 cents and sellers will receive 75 cents less.

The typical teen-age smoker has a more elastic demand for cigarettes than does a typical older smoker. We expect a given cigarette tax to ______ a teen-age smoker's consumption by______ than an older smoker's consumption. A. reduce; less B. increase; less C. increase; more D. reduce; more

D. reduce; more

The difference between what buyers pay for a unit of a good and what sellers receive is known as the: A. brokerage fee. B. cost of production. C. overhead. D. tax.

D. tax.

The supply of financial capital is very mobile. People can move their bank and brokerage accounts around the world and invest in foreign corporations with a click of the mouse. Therefore, taxes on financial capital: A. are a good idea. B. will not be a significant source of deadweight loss. C. are profitable for the government. D. will not raise very much revenue from suppliers of financial capital.

D. will not raise very much revenue from suppliers of financial capital.