ECON CH 8 Practice Problems

If John values having his hair cut at €20 and Mary's cost of providing the hair cut is €10, any tax on haircuts larger than €10 will eliminate the gains from trade and cause a €20 loss of total surplus.

False

Shelia offers to do Stephanie's housework for $20 per week. Stephanie's opportunity cost of doing housework is $30 per week, and Shelia's opportunity cost of doing housework is $10 per week. What will be Shelia's gain in producer surplus as a result of the proposed transaction? a. Shelia will gain 30$ per week b. Shelia will gain 20$ per week c. Shelia will gain 10$ per week d. Shelia will gain no producer surplus

Shelia will gain $10 per week

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

T(Q)

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

True

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

True

When a tax distorts incentives to buyers and sellers so that fewer goods are produced and sold than otherwise, the tax has a. caused a deadweight loss. b. decreased equity. c. generated no tax revenue. d. increased efficiency.

a. caused a deadweight loss.

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

both buyers and sellers are made worse off

When a tax is levied on a good.... a. only the quantity of the good sold will change b. only the price of the good sold will change c. both price and quantity of the good sold will change d. neither price nor quantity of the good sold will change

both price and quantity of the good sold will change

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

consumer surplus

Refer to figure 8-3. The price sellers receive after the tax is .... a. $24 b. $14 c. $10 d. $8

$10

reduction in total surplus that results from a tax is known as what

deadweight loss

During Ronald Regans first term in office, income tax rates were reduced significantly. The result was that ... a. income tax collection declined b. income tax collection increased c. the Laffer curve was demonstrated to be essentially correct d. the gov experienced budge surpluses for 4 consecutive years

income tax collections declined

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 gov b. the cost of the tax to buyers and sellers will equal the revenue raised from the tax by the gov c. the cost of the tax to buyers and sellers exceeds the revenue raised from the tax by the gov d. without additional info, such as the elasticity of demand for this product, it is impossible to compare tax cost w tax revenue

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

A major political problem with collecting taxes to finance government spending is that .. a. taxes make taxpayers worse off since gov spending benefits no one b. taxes make taxpayers worse off since gov spending benefits those on welfare c. the people who pay the taxes are often not the same people who benefit from the gov spending of tax funds d. taxes reduce economic welfare more than the expenditure of tax funds benefits society

the people who pay the taxes are often not the same people who benefit from the government spending of tax funds

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

the tax on labor

A tax collected from buyers generates a smaller deadweight loss than a tax collected from sellers.

False

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. not enough info

$1000

Refer to figure 8-5. If a tax is imposed in this market, total surplus would fall by... a. 1500 b. 1800 c. 2700 d. 3000

$1500

The amount of deadweight loss as a result of the tax would be equal to ... a. $210 b. $420 c. $560 d. $980

$210

Refer to figure 8-5. Total surplus with a tax imposed in this market would be a. 1500 b. 3600 c. 4500 d. 6000

$4500

refer to figure 8-5. Without a tax, total surplus in this marker would be a. $2400 b. 3000 c. 3600 d. 6000

$6000

refer to figure 8-4. The lost in total welfare resulting from the levying of the tax is represented by are a. A+B+C b. D+E+F c. A+B+D+F d. C+E

C + E

Ronald Regan believed that reducing income tax rates would do what? a. cause gov tax collections to decline b. cause gov tax collections to rise c. cause the Federal deficit (and the national debt) to increase d. have no effect on the amount of gov tax collections

Cause government tax collections to rise

A larger tax always generates more tax revenue.

False

A tax on cigarettes would likely generate a larger deadweight loss than a tax on luxury boats.

False

A tax will generate a greater deadweight loss if supply and demand are inelastic.

False

Refer to figure 8-5. What would happen to producer surplus if a tax were imposed in this market? a. it would fall by 600 b. it would fall by 900 c. it would fall by 1800 d. it would fall by 2400

It would fall by $1800

Refer to figure 8-5. What would happen to consumer surplus if a tax were imposed in this market? a. it would fall by 3600 b. it would fall by 2700 c. it would fall by 1800 d. it would fall by 900

It would fall by $2700

Refer to figure 8-4. The equilibrium market price before the tax is imposed is: a. P1 b. P2 c. P3 d. impossible to determine

P1

Refer to figure 8-2. The price that will be paid after the tax is... a. p1 b. p2 c. p3 d. impossible to determine

P3

Taxes caused deadweight losses bc a. they prevent buyers and sellers from realizing some gains from trade b. marginal buyers and sellers leave the market causing the quantity sold to fall c. Both A and B

They prevent buyers and sellers from realizing some of the gains from trade AND marginal buyers and sellers leave the market causing the quantity sold to fall

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

True

A larger tax always generates a larger deadweight loss.

True

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

True

Henry George argued that the government should raise ... a. all of its revenue from taxes on labor b. most of its revenue from consumption taxes c. all of its revenue from tax on land d. tax revenue from multiple and diverse taxes

all of its revenue from tax on land

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.

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 is the tax is levied on them

buyers and sellers will share the burden of the tax

A tax imposed on a market with an inelastic demand and an elastic supply will cause... a. sellers to pay 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

buyers to pay the majority of the tax

If a tax on a good is doubled, the deadweight loss from the tax a. doubles. b. stays the same. c. increases by a factor of four. d. could rise or fall.

c. increases by a factor of four.

Which of the following is true with regard to a tax on labour income? Taxes on labour income tend to encourage a. the unscrupulous to enter the underground economy. b. the elderly to retire early. c. all of the things described in these answers. d. second earners to stay home. e. workers to work fewer hours.

c. all of the things described in these answers.

The reduction of a tax a. will have no impact on tax revenue. b. will always reduce tax revenue regardless of the prior size of the tax. c. could increase tax revenue if the tax had been extremely high. d. causes a market to become less efficient.

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

When a tax on a good start small and is gradually increased, tax revenue a. will fall. b. will rise. c. will first rise and then fall. d. will first fall and then rise. e. none of these answers

c. will first rise and then fall.

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

consumer surplus, producer surplus, and tax revenue

The graph that shows the relationship between the size of a tax and the tax revenue collected by the government is known as a a. none of these answers b. Reagan curve. c. Keynesian curve. d. Laffer curve. e. Henry George curve.

d. Laffer curve.

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

Deadweight loss is greatest when a. supply is elastic and demand is perfectly inelastic. b. demand is elastic and supply is perfectly inelastic. c. both supply and demand are relatively inelastic. d. both supply and demand are relatively elastic.

d. both supply and demand are relatively elastic.

Since the supply of undeveloped land is relatively inelastic, a tax on undeveloped land would generate a. a small deadweight loss and the burden of the tax would fall on the renter. b. a large deadweight loss and the burden of the tax would fall on the landlord. c. a large deadweight loss and the burden of the tax would fall on the renter. d. a small deadweight loss and the burden of the tax would fall on the landlord.

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

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

earnings from labor.

If the supply of land is fixed, a tax on land would be paid a. entirely by the landowners b. entirely by the renters or users of the land c. partly the landowner and partly the land users d. only by workers

entirely by the landowners

Deadweight loss is the reduction in consumer surplus that results from a tax.

false

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

During Ronald Regans eight years in office... a. income tax rates rose b. income tax rates fell c.he said, "read my lips: no new taxes" d. The tax rate of high-income taxpayers rose, while the tex rates of low income taxpayers fell

income tax fell

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

increase, then decrease

One side-effect of the tax cuts made during Ronald Regans terms as president was ... a. increase tax revenues b. small budget surpluses c. large budget deficits d. decrease gov spending

large budget deficits

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

less

For Henry George's land tax argument to be valid the land must be ... a. improved land b. productive land c. raw land d. urband land

raw land

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

supply is more elastic than demand

If a tax is doubled, the deadweight loss from the tax more than doubles.

true

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

true

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

For Henry George's single tax on land to not distort economic incentives, the tax would have to be on the value of .. a. improved land b. commercial hand c. unimproved land d. urban land

unimproved land