ECON EXAM 2 - Chapter 6/8

total tax revenue

T * Q (size of tax multiplied by the quantity sold) equals the areas of the rectangle between the supply and demand curves

Which of the following statements is correct regarding the imposition of a tax on gasoline?

The burden of the tax depends upon the price elasticities of demand and supply.

When a binding price ceiling is imposed on a market to benefit buyers,

some buyers benefit, and some buyers are harmed.

Suppose a tax of $5 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 200 units to 100 units. The tax decreases consumer surplus by $450 and decreases producer surplus by $300. The deadweight loss from the tax is

$250.

taxes have dead weight loss..

bc they cause buyers to consume less and sellers to produce less ad these changes in behavior shrink the size of the market below the level that maximizes total surplus, larger elasticity imply larger deadweight loss

Suppose that the demand for picture frames is highly inelastic, and the supply of picture frames is highly elastic. A tax of $1 per frame levied on picture frames will increase the price paid by buyers of picture frames by

between $0.50 and $1.

Similarities between bears of incident

buyers always pay higher price sellers always receive lower price reduce amount of sales (lower market) Consumer surplus, producer surplus, and total surplus all fall ( consumer, seller ad marker all worse off) mathematically outcomes will be the same! gov' rev increase

The demand for salt is inelastic, and the supply of salt is elastic. The demand for caviar is elastic, and the supply of caviar is inelastic. Suppose that a tax of $1 per pound is levied on the sellers of salt, and a tax of $1 per pound is levied on the buyers of caviar. We would expect that most of the burden of these taxes will fall on

buyers of salt and the sellers of caviar.

If the government removes a tax on a good, then the price paid by buyers will

decrease, and the price received by sellers will increase

The price paid by buyers in a market will decrease if the government

decreases a tax on the good sold in that market.

buyers bear incident

demand curve shifts down by the size of tax equilibrium quantity falls equilibrium price falls price that buyers pay rises price sellers receive falls consumer surplus falls producer surplus falls government revenue increases total surplus falls reduction in total surplus is the market inefficiency =DWL buyers and sellers share burden of tax

dead weight loss

fall in total surplus that results from a tax -govr' restricting mutually beneficial gains from trade reduction in total surplus due to a tax

If the government levies a $1,000 tax per boat on sellers of boats, then the price paid by buyers of boats would

increase by less than $1,000.

If the government removes a binding price ceiling from a market, then the price paid by buyers will

increase, and the quantity sold in the market will increase.

If the government removes a tax on a good, then the quantity of the good sold wil

increase.

price ceiling

legal maximum on the price at which a good/service can be sold -rent control

price floor

legal minimum on the price at which a good can be sold minimum wage

price ceiling above equilibrium price

not binding -ceiling has not effect on market or welfare surplus

price ceiling below equilibrium price

permanent shortage amount sold decreases reduction in bought and sold

prce floor above equilibrium price

permanent surplus not sure if greater or less

price controls

price set above equilibrium or below equilibrium

reduction in dead weight loss (elasticity of curves)

reduction in q> in elastic market *markets with relatively inelastic supply/demand curve have smaller dwl

size of tax effects on size of dwl

size of tax grows larger size of dwl grows larger bc tax reduces size of market tax revenue does not continually increase it first rises with the size of a tax but if it gets large enough tax revenue starts to fall

sellers bears incident

supply curve shifts up by the size of tax equilibrium quantity falls equilibrium price rises price for buyers raises price sellers receive falls consumer surplus- falls producer surplus falls government revenue increase total surplus falls (now inefficient=has dwl) -buyers and sellers share the burden of the tax

Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then the

supply curve will shift downward by $20, and the effective price received by sellers will increase by less than $20.

If a price floor is not binding, then

the equilibrium price is above the price floor.

If a price ceiling is not binding, then

the equilibrium price is below the price ceiling

Which of the following quantities decrease in response to a tax on a good?

the equilibrium quantity in the market for the good, producer surplus, and the well-being of buyers of the good

elastic demand inelastic supply

when demand curve is more elastic the incidence of the tax falls more heavily on producers than on consumers

A binding price floor will reduce a firm's total revenue

when demand is elastic.

elastic supply, inelastic demand

when supply is more elastic the incidence of the tax falls more heavily on consumers than on producers

In the market for widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. The equilibrium quantity in the market for widgets is 200 per month when there is no tax. Then a tax of $5 per widget is imposed. The price paid by buyers increases by $2 and the after-tax price received by sellers falls by $3. The government is able to raise $750 per month in revenue from the tax. The deadweight loss from the tax is

$125.

tax 2 components

1. incidence (who pays the tax) 2. burden ( who feels the effects of the tax)

In the market for widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. The equilibrium quantity in the market for widgets is 200 per month when there is no tax. Then a tax of $5 per widget is imposed. As a result, the government is able to raise $750 per month in tax revenue. We can conclude that the equilibrium quantity of widgets has fallen by

50 per month.

Assume the supply curve for cigars is a typical, upward-sloping straight line, and the demand curve for cigars is a typical, downward-sloping straight line. Suppose the equilibrium quantity in the market for cigars is 1,000 per month when there is no tax. Then a tax of $0.50 per cigar is imposed. The effective price paid by buyers increases from $1.50 to $1.90 and the effective price received by sellers falls from $1.50 to $1.40. The government's tax revenue amounts to $475 per month. Which of the following statements is correct?

The demand for cigars is less elastic than the supply of cigars. The tax causes a decrease in consumer surplus of $390 and a decrease in producer surplus of $97.50. The deadweight loss of the tax is $12.50.

Suppose sellers of perfume are required to send $1.00 to the government for every bottle of perfume they sell. Further, suppose this tax causes the price paid by buyers of perfume to rise by $0.60 per bottle. Which of the following statements is correct?

The effective price received by sellers is $0.40 per bottle less than it was before the tax.

Suppose the government has imposed a price ceiling on laptop computers. Which of the following events could transform the price ceiling from one that is not binding into one that is binding?

The number of firms selling laptop computers decreases.

Suppose the government has imposed a price floor on cellular phones. Which of the following events could transform the price floor from one that is binding to one that is not binding?

Traditional land line phones become more expensive

If the government removes a binding price floor from a market, then the price paid by buyers will

decrease, and the quantity sold in the market will increase

tax affect of welfare

tax on a good: reduces consumer surplus and producer surplus because the fall in producer and consumer surplus exceeds tax revenue there is a deadweight loss losses to buyers and sellers from a tax exceed the revenue raised by the government

excise tax

tax when purchasing or selling a particular good or service -explicit for certain good

Differences between bearers of incident

when sellers bear incident -supply curve shifts up when buyers bear incident -demand curve shifts down both decrease in curves = size of tax

who is hurt more

who ever has the more inelastic curve