Econ 101 chapter 8

taxes on labor income tend to encourage?

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

what would cause the greater deadweight loss?

a tax on cruise Line tickets

deadweight loss is greatest when?

both supply and demand are relatively elastic

when a tax distorts incentives to buyers and sellers so that fewer goods are produced and sold, the tax has?

cause a deadweight loss

a tax on gas is likely to?

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

the reduction of a tax

could increase tax revenue if the tax had been extremely high

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

false: a tax generates a greater deadweight loss when supply and demand are more elastic

a larger tax will always generate more tax revenue

false: as a tax increases, revenue first rises and then falls as the tax shrinks the market to a point where all trades are eliminated and tax revenue is zero.

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

false: deadweight loss is the reduction in total surplus that results from a tax

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

false: taxes collected from either the buyers or the sellers are equivalent. That is why economists simply use a tax wedge when analyzing a tax and avoid the issue altogether.

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

false: the loss in total surplus is the buyers value minus the sellers cost

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

false: the more elastic the demand curve, the greater the deadweight loss, and the demand for cigarettes (a necessity) should be more inelastic than the demand for luxury boats (a luxury).

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: loss of producer and consumer surplus exceeds the revenue from the tax. The difference is deadweight loss.

when a tax on a good starts small and is gradually increased, tax revenue will?

first rise and then fall

if a tax on a good is doubles, the deadweight loss from the tax?

increases by a factor of four

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

suppose the supply of diamonds is relatively inelastic. a tax on diamonds would generate a?

small deadweight loss and the burden of the tax would fall on the seller of diamonds.

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

true

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

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

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

true

a larger tax always generates a larger deadweight loss

true

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

true

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

true