ECON CH 8 CENGAGE QUESTIONS

Sophie pays Sky $50 to mow her lawn every week. When the government levies a mowing tax of $10 on Sky, he raises his price to $60. Sophie continues to hire him at the higher price. What is the change in producer surplus, change in consumer surplus, and deadweight loss?

$0, -$10, $0

Donna runs an inn and charges $300 a night for a room, which equals her cost. Sam, Harry, and Bill are three potential customers willing to pay $500, $325, and $250, respectively. When the government levies a tax on innkeepers of $50 per night of occupancy, Donna raises her price to $350. The deadweight loss of the tax is

$25

Deadweight loss is greatest when

both supply and demand are relatively elastic

A tax on gasoline is likely to

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

If a policymaker wants to raise revenue by taxing goods while minimizing the deadweight losses, he should look for goods with ________ elasticities of demand and ________ elasticities of supply.

small, small

A tax on a good has a deadweight loss if

the reduction in consumer and producer surplus is greater than the tax revenue

Taxes on labor income tend to encourage

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

If a tax is placed on the product in this market, consumer surplus is the area

A

If a tax is placed on the product in this market, total surplus is the area

A B C D

If there is no tax placed on the product in this market, total surplus is the area

A B C D E F

If there is no tax placed on the product in this market, consumer surplus is the area

A B E

If a tax is placed on the product in this market, tax revenue paid by the buyers is the area

B

If a tax is placed on the product in this market, tax revenue paid by the sellers is the area

C

If there is no tax placed on the product in this market, producer surplus is the area

C D F

If a tax is placed on the product in this market, producer surplus is the area

D

If a tax is placed on the product in this market, deadweight loss is the area

E F

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

Which of the following is true with regard to the burden of the tax in Exhibit? a. the sellers pay a larger portion of the tax because supply is more elastic than demand b. the buyers pay a larger portion of the tax because demand is more inelastic than supply c. the sellers pay a larger portion of the tax because supply is more inelastic than demand d. the buyers pay a larger portion of the tax because demand is more elastic than supply

c (the sellers pay a larger portion of the tax because supply is more inelastic than demand)

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

caused a deadweight loss

The reduction of a tax

could increase tax revenue if the tax had been extremely high

Which of the following would likely cause the greatest deadweight loss? a. a tax on gasoline b. a tax on salt c. a tax on cruise line tickets d. a tax on cigarettes

d (tax on cruise line tickets)

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

first rise and then fall

The Laffer curve illustrates that, in some circumstances, the government can reduce a tax on a good and increase the

government's tax revenue

If a tax on a good is doubled, the deadweight loss from the tax

increases by a factor of four

Peanut butter has an upward-sloping supply curve and a downward-sloping demand curve. If a 10 cent per pound tax is increased to 15 cents, the government's tax revenue

increases by less than 50 percent and may even decline

Eggs have a supply curve that is linear and upward-sloping and a demand curve that is linear and downward-sloping. If a 2 cent per egg tax is increased to 3 cents, the deadweight loss of the tax

increases by more than 50 percent

In the economy of Agricola, tenant farmers rent the land they use from landowners. If the supply of land is perfectly inelastic, then a tax on land would have ________ deadweight losses, and the burden of the tax would fall entirely on the ________ .

no, landowners

Suppose the demand for grape jelly is perfectly elastic (because strawberry jelly is a good substitute), while the supply is unit elastic. A tax on grape jelly would have ________ deadweight losses, and the burden of the tax would fall entirely on the ________ of grape jelly.

sizable, producers

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