A+ Test Prep 8.1

Refer to the Figure. The loss of consumer surplus as a result of the tax is a.$200. b.$320. c.$160. d.$360.

a.$200. Correct. Consumer surplus before the tax was ½ x 60 x ($20 - $8) = $360. Consumer surplus after the tax is ½ x 40 x ($20 - $12) = $160. The loss of consumer surplus as a result of the tax is $200.

Refer to the Figure. The amount of the tax on each unit of the good is a.$4. b.$6. c.$2. d.$8.

b.$6. Correct. The vertical distance between points Y and Z represents the tax. The price at point Y is $12 and the price at point Z is $6; the distance between the two points is $6.

Refer to the Figure. The amount of deadweight loss as a result of the tax is a.$40. b.$60. c.$20. d.$120.

b.$60. Correct. Deadweight loss is the triangle from point Y to point Z to the original equilibrium point at a price of $8 and quantity of 60. The area of this triangle is computed as ½ x (60 - 40) x ($12 - $6) = $60.

The benefit that government receives from a tax is measured by a.the shift in the supply curve. b.tax revenue. c.the increase in producer surplus. d.deadweight loss.

b.tax revenue. Correct. Tax revenue is the benefit that government receives from a tax.

Refer to the Figure. Suppose the government imposes a tax of P3 - P1. The tax revenue is measured by the area a.C+G. b.B+C+F+G. c.B+F. d.F+G+H+I+J.

c.B+F. Correct. Tax revenue is the tax per unit multiplied by the number of units sold. When the tax of P3 - P1 is imposed, the number of units sold is Q1. Tax revenue is illustrated as area B+F on this graph.

Refer to the Figure. The amount of tax revenue received by the government is a.$80. b.$160. c.$6. d.$240.

d.$240. Correct. Tax revenue is the tax per unit, $6, multiplied by the number of units sold after the tax is imposed, 40 units.

Refer to the Figure. Suppose the government imposes a tax of P3 - P1, the total surplus before the tax is measured by the area a.F+G+H+I+J. b.A+B+F+H. c.C+G. d.A+B+C+F+G+H.

d.A+B+C+F+G+H. Correct. Total surplus before a tax is imposed is measured by the area below the demand curve and above the supply curve up to the equilibrium point, illustrated as area A+B+C+F+G+H in this graph.

Refer to the Figure. The imposition of the tax causes the quantity sold to a.decrease by 6 units. b.increase by 20 units. c.increase by 6 units. d.decrease by 20 units.

d.decrease by 20 units. Correct. When the tax is imposed, the quantity sold decreases from 60 units to 40 units, a decrease of 20 units.

A tax placed on sellers of alcohol shifts the a.demand curve for alcohol to the left, decreasing the price received by sellers of alcohol and causing the quantity of alcohol to decrease. b.supply curve for alcohol to the left, decreasing the effective price paid by buyers of alcohol and causing the quantity of alcohol to increase. c.demand curve for alcohol to the left, decreasing the price received by sellers of alcohol and causing the quantity of alcohol to increase. d.supply curve for alcohol to the left, increasing the effective price paid by buyers of alcohol and causing the quantity of alcohol to decrease.

d.supply curve for alcohol to the left, increasing the effective price paid by buyers of alcohol and causing the quantity of alcohol to decrease. Correct. When a tax is placed on sellers of alcohol, the supply curve shifts to the left. The effective price paid by buyers of alcohol increases and the quantity of alcohol decreases.

Refer to the Figure. The loss of producer surplus as a result of the tax is a.$100. b.$160. c.$80. d.$180.

a.$100. Correct. Producer surplus before the tax was ½ x 60 x ($8 - $2) = $180. Producer surplus after the tax is ½ x 40 x ($6 - $2) = $80. The loss of producer surplus as a result of the tax is $100.

A $1.25 tax per pack of cigarettes placed on the sellers of cigrarettes will shift the supply curve a.to the right by less than $1.25. b.to the left by exactly $1.25. c.to the right by exactly $1.25. d.to the left by less than $1.25.

b.to the left by exactly $1.25. Correct. A tax placed on the sellers will shift the supply curve to the left by exactly the amount of the tax.

Refer to the Figure. The imposition of the tax causes the price received by sellers to a.increase by $4. b.decrease by $4. c.decrease by $2. d.decrease by $6.

c.decrease by $2. Correct. Before the tax, the price received by sellers was $8. After the tax, the price received by sellers is $6, a decrease of $2 from the pre-tax price.

Refer to the Figure. Producer surplus without the tax is a.$180, and producer surplus with the tax is $80. b.$240, and producer surplus with the tax is $120. c.$80, and producer surplus with the tax is $180. d.$360, and producer surplus with the tax is $160.

a.$180, and producer surplus with the tax is $80. Correct. Producer surplus without the tax is ½ x 60 x ($8 - $2) = $180. Producer surplus with the tax is ½ x 40 x ($6 - $2) = $80.

Refer the scenario. Dominic plows Soraya's driveway for $85. Dominic's opportunity cost of plowing Soraya's driveway is $55, and Soraya's willingness to pay Dominic to plow her driveway is $100. If Soraya hires Dominic to plow her driveway, Dominic's producer surplus is a.$30. b.$100. c.$85. d.$15.

a.$30. Correct. Producer surplus is the price the seller receives minus the opportunity cost of supplying the good or service, so Dominic's producer surplus is $85 - $55 = $30.

For automotive oil, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. A tax of $1.50 per liter is imposed on automotive oil. The tax reduces the equilibrium quantity in the market by 500 units. The deadweight loss from the tax is a.$375. b.$750. c.$650. d.$333.

a.$375. Correct. The deadweight loss is the triangle between the demand and supply curves up to the quantity sold after the tax. The base of the triangle is the reduction in the equilibrium quantity due to the tax and the height of the triangle is the amount of the tax per unit. The deadweight loss is ½ x 500 x $1.50 = $375.

Refer to the Figure. The per-unit burden of the tax on buyers is a.$4. b.$6. c.$2. d.$8.

a.$4. Correct. The per-unit burden of the tax on the buyers is measured as the difference between the price buyers pay after the tax, $12, and the price buyers paid before the tax, $8.

In the market for ink cartridges for printers, 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 ink cartridges is 5,000 per month when there is no tax. Then a tax of $2.50 per cartridge is imposed. As a result, the government is able to raise $11,750 per month in tax revenue. We can conclude that the after-tax quantity of cartridges is a.4,700 per month. b.12,500 per month. c.5,000 per month. d.2,000 per month.

a.4,700 per month. Correct. Tax revenue is tax per unit multiplied by the after-tax quantity of cartridges. Because tax revenue is $11,750 and the tax per unit is $2.50, the after tax quantity of cartridges is $11,750 / $2.50 = 4,700 cartridges per month.

Refer to the Figure. The price that sellers effectively receive after the tax is imposed is a.P1. b.P2. c.P0. d.P3.

a.P1. Correct. When the tax of P3 - P1 is imposed, the quantity sold decreases from Q0 to Q1 and the price that sellers effectively receive is P1.

Refer to the Figure. The equilibrium price before the tax is imposed is a.P2. b.P3. c.P1. d.P4.

a.P2. Correct. The equilibrium price before the tax is imposed is at the intersection of the demand and supply curves, P2.

Refer to the Figure. Consumer surplus before the tax was levied is represented by area a.R+S+U. b.V+W+X. c.R. d.X.

a.R+S+U. Correct. Consumer surplus is measured by the area below the demand curve and above the price. Before the tax, consumer surplus is represented by area R+S+U.

Refer to the scenario. Dominic plows Soraya's driveway for $65. Dominic's opportunity cost of plowing Soraya's driveway is $55, and Soraya's willingness to pay Dominic to plow her driveway is $100. Assume Dominic is required to pay a tax of $15 each time he plows a driveway. Which of the following results is most likely if the price of the plowing services remains at $65? a.Soraya is still willing to pay Dominic $65 to plow her driveway, but Dominic will decline her offer. b.Dominic and Soraya still engage in a mutually-agreeable trade at a price of $65. c.Dominic is still willing to plow Soraya's lawn for $65, but Soraya is no longer willing to pay that price. d.Soraya will no longer be willing to pay $65 to get her driveway plowed, and Dominic will decide it is no longer in his interest to plow Soraya's driveway.

a.Soraya is still willing to pay Dominic $65 to plow her driveway, but Dominic will decline her offer. Correct. With the imposition of the $15 tax, Dominic will only be willing to plow Soraya's driveway for a price of $55 + $15 = $70 or more. If the price of plowing remains at $65, Dominic will no longer be willing to plow Soraya's driveway since his opportunity cost (including the tax) is greater than the revenue he would receive. Even though Soraya would still be willing to pay the same $65 price, since her willingness to pay ($100) is still greater than the price, Dominic would not agree. There are still opportunities for mutually beneficially trades between Soraya and Dominic, at prices below $100 and above $70, however, these two individuals would no longer trade at $65.

Refer to the Figure. The loss of producer surplus associated with some sellers dropping out of the market as a result of the tax is represented by area a.W. b.W+Z. c.V+W. d.V.

a.W. Correct. When the tax is imposed, the quantity sold decreases from Q0 to Q1 units. The loss of producer surplus associated with these units is from some sellers dropping out of the market. This share of the loss of producer surplus is represented by area W.

Relative to a situation in which hotel rooms are not taxed, the imposition of a tax on hotel rooms causes the equilibrium quantity of hotel rooms to a.decrease, and the price buyers pay for hotel rooms to increase. b.increase, and the price buyers pay for hotel rooms to decrease. c.decrease, and the price buyers pay for hotel rooms to decrease. d.increase, and the price buyers pay for hotel rooms to increase.

a.decrease, and the price buyers pay for hotel rooms to increase. Correct. When a tax is imposed on a good, the equilibrium quantity of the good decreases and the price that buyers pay for the good increases. The price that sellers receive decreases.

Refer to the Figure. The imposition of the tax causes the price paid by buyers to a.increase by $4. b.decrease by $4. c.decrease by $2. d.increase by $6.

a.increase by $4. Correct. Before the tax, the price paid by buyers was $8. After the tax, the price paid by buyers is $12, an increase of $4 over the pre-tax price.

A deadweight loss is a consequence of a tax on a good because the tax a.induces buyers to consume less, and sellers to produce less. b.increases buyers' willingness to pay, but sellers are not willing to supply more. c.decreases sellers' cost of production, but buyers are not willing to buy more. d.causes a shortage in the market.

a.induces buyers to consume less, and sellers to produce less. Correct. A tax increases the price the buyers must pay, so the quantity demanded decreases. A tax also decreases the price the sellers receive, so the quantity supplied decreases.

Candida teaches piano lessons to Ed once a week for $40. Ed values this service at $50 per week, while the opportunity cost of Candida's time is $25 per week. The government places a tax of $30 per week on piano teachers. After the tax, what is the total surplus? a.$15 b.$0 c.$5 d.$50

b.$0 Correct. The difference between Ed's willing to pay and Candida's opportunity cost of her time is $50 - $25 = $25. Because the tax is larger than the surplus generated from their transaction, they will not find a mutually agreeable price and there will be no total surplus.

Refer to the Figure. Consumer surplus without the tax is a.$180, and consumer surplus with the tax is $80. b.$360, and consumer surplus with the tax is $160. c.$160, and consumer surplus with the tax is $360. d.$720, and consumer surplus with the tax is $320.

b.$360, and consumer surplus with the tax is $160. Correct. Consumer surplus without the tax is ½ x 60 x ($20 - $8) = $360. Consumer surplus with the tax is ½ x 40 x ($20 - $12) = $160.

In the market for cigarettes, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. A tax of $3.50 per pack is imposed on cigarettes. The tax reduces the equilibrium quantity in the market by 5,000 packs. The deadweight loss from the tax is a.There is no deadweight loss from a tax on cigarettes because the socially optimal quantity is less than the market quantity. b.$8,750. c.$1,428.57. d.$17,500.

b.$8,750. Correct. The deadweight loss is the triangle between the demand and supply curves up to the quantity sold after the tax. The base of the triangle is the reduction in the equilibrium quantity due to the tax and the height of the triangle is the amount of the tax per unit. The deadweight loss is ½ × 5,000 × $3.50 = $8,750.

Refer to the Figure. Suppose the government imposes a tax of P3 - P1. Total surplus after the tax is measured by the area a.C+G. b.A+B+F+H. c.I+J. d.A+B+C+F+G+H.

b.A+B+F+H. Correct. When the tax is imposed, the quantity sold decreases from Q2 to Q1. Total surplus is measured by the area below the demand curve and above the supply curve up to the quantity sold, illustrated as area A+B+F+H on this graph.

Refer the scenario. Dominic plows Soraya's driveway for $85. Dominic's opportunity cost of plowing Soraya's driveway is $55, and Soraya's willingness to pay Dominic to plow her driveway is $100. Assume Dominic is required to pay a tax of $15 each time he plows a driveway. Which of the following results is most likely? a.Soraya still willing to pay Dominic to plow her driveway, but Dominic will decline her offer. b.Dominic and Soraya still engage in a mutually-agreeable trade. c.Dominic still willing to plow Soraya's driveway, but Soraya will decide to shovel her own driveway. d.Soraya now will decide to shovel her own driveway, and Dominic will decide it is no longer in his interest to plow Soraya's driveway.

b.Dominic and Soraya still engage in a mutually-agreeable trade. Correct. With the imposition of the $15 tax, Dominic will be willing to plow Soraya's driveway for $55 + $15 = $70 or more. Soraya's willingness to pay is greater than $70 so Dominic and Soraya still engage in a mutually-agreeable trade.

Refer to the Figure. The tax causes a reduction in consumer surplus that is represented by area a.S+V. b.S+U. c.R. d.U+W.

b.S+U. Correct. Consumer surplus without the tax is represented by area R+S+U. Consumer surplus with the tax is represented by area R. The tax causes a reduction in consumer surplus of area S+U.

Refer to the figure. With a tax in the amount of P3 − P1, the deadweight loss from taxation is represented by area: a.Y + Z. b.U + W. c.S + V. d.V + W.

b.U + W. Correct. Deadweight loss is the decrease in total surplus that results from a market distortion, such as a tax. Due to the tax, the quantity decreases from Q0 to Q1, resulting in a loss of total surplus represented by area U + W.

Refer to the Figure. Producer surplus before the tax was levied is represented by area a.R+S+U. b.V+W+X. c.R. d.X.

b.V+W+X. Correct. Producer surplus is measured by the area below the price and above the supply curve. Before the tax, producer surplus is represented by area V+W+X.

Refer to the Figure. The tax causes a reduction in producer surplus that is represented by area a.X+V. b.V+W. c.X. d.Y+Z.

b.V+W. Correct. Producer surplus without the tax is represented by area V+W+X. Producer surplus with the tax is represented by area X. The tax causes a reduction in producer surplus of area V+W.

Suppose a tax is imposed on the sellers of cigarettes. Due to the tax, consumers buy fewer cigarettes and producers sell fewer cigarettes resulting in a a.loss of producer surplus and a gain in consumer surplus called tax revenue. b.loss of total surplus called a deadweight loss. c.gain in tax revenue called a deadweight loss. d.loss of consumer surplus and a gain in producer surplus called tax revenue.

b.loss of total surplus called a deadweight loss. Correct. When consumers buy less and producers sell less, there is a reduction in both consumer surplus and producer surplus. Deadweight loss is the decrease in total surplus that results from a market distortion, such as a tax. With a tax, consumers who continue to buy and sellers who continue to sell also have less surplus than they had before the tax. This reduction is the tax revenue that the government receives from the tax.

Refer to the Figure. Suppose the government imposes a tax of P3 - P1. The area measured by H represents a.consumer surplus before the tax. b.producer surplus after the tax. c.consumer surplus after the tax. d.producer surplus before the tax.

b.producer surplus after the tax. Correct. Producer surplus is measured by the area above the supply curve and below the price the sellers receive. After the tax sellers receive a price of P1, so producer surplus is illustrated by area H in this graph.

Refer the scenario. Dominic plows Soraya's driveway for $85. Dominic's opportunity cost of plowing Soraya's driveway is $55, and Soraya's willingness to pay Dominic to plow her driveway is $100. If Soraya hires Dominic to mow her lawn, Soraya's consumer surplus is a.$30. b.$85. c.$15. d.$100.

c.$15. Correct. Consumer surplus is the amount the buyer is willing to pay minus the price she must pay, so Soraya's consumer surplus is $100 - $85 = $15.

Refer to the Figure. The loss of consumer surplus for those buyers of the good who continue to buy it after the tax is imposed is a.$80. b.$2000. c.$160. d.$40.

c.$160. Correct. When the tax is imposed, the quantity sold decreases from 60 to 40 units. The loss of consumer surplus associated with the 40 units that continue to be sold after the tax is computed as 40 x ($12 - $8) = $160.

Refer to the Figure. The per-unit burden of the tax on sellers is a.$4. b.$6. c.$2. d.$8.

c.$2. Correct. The per-unit burden of the tax on the sellers is measured as the difference between the price sellers received before the tax, $8, and the price sellers receive after the tax, $6.

Refer to the Figure. The loss of producer surplus for those sellers of the good who continue to sell it after the tax is imposed is a.$40. b.$160. c.$80. d.$20.

c.$80. Correct. When the tax is imposed, the quantity sold decreases from 60 to 40 units. The loss of producer surplus associated with the 40 units that continue to be sold after the tax is computed as 40 x ($8 - $6) = $80.

Refer to the Figure. After the tax is levied, consumer surplus is represented by area a.R+S+U. b.V+W+X. c.R. d.X.

c.R. Correct. Consumer surplus is measured by the area below the demand curve and above the price that buyers pay. After the tax, consumer surplus is represented by area R.

Refer to the Figure. Suppose the government imposes a tax of P3 - P1. The area measured by A represents a.consumer surplus before the tax. b.producer surplus after the tax. c.consumer surplus after the tax. d.producer surplus before the tax.

c.consumer surplus after the tax. Correct. Consumer surplus is measured by the area below the demand curve and above the price that consumers must pay. After the tax consumers must pay a price of P3, so consumer surplus is illustrated as area A in this graph.

The decrease in total surplus that results from a market distortion, such as a tax, is called a.tax revenue. b.shortage. c.deadweight loss. d.disequilibrium.

c.deadweight loss. Correct. Deadweight loss is the decrease in total surplus that results from a market distortion, such as a tax.

Suppose a tax is imposed on the buyers of jet skis. The burden of the tax will a.fall entirely on the sellers of jet skis. b.be shared equally by the buyers and sellers of jet skis. c.fall entirely on the buyers of jet skis. d.be shared by the buyers and sellers of jet skis, but not necessarily equally.

d.be shared by the buyers and sellers of jet skis, but not necessarily equally. Correct. When a tax is imposed on a good, the burden is shared by the buyers and sellers regardless of the side of the market on which the tax is imposed. The tax burden is not necessarily divided equally.

Refer to the Figure. The loss of producer surplus associated with some sellers dropping out of the market as a result of the tax is a.$40. b.$160. c.$80. d.$20.

d.$20. Correct. When the tax is imposed, the quantity sold decreases from 60 to 40 units. The loss of producer surplus associated with these 20 units is from some sellers dropping out of the market. This share of the loss of producer surplus is computed as ½ x (60-40) x ($8 - $6) = $20.

Refer to the Figure. The loss of consumer surplus associated with some buyers dropping out of the market as a result of the tax is a.$80. b.$200. c.$160. d.$40.

d.$40. Correct. When the tax is imposed, the quantity sold decreases from 60 to 40 units. The loss of consumer surplus associated with these 20 units is from some buyers dropping out of the market. This share of the loss of consumer surplus is computed as ½ x (60-40) x ($12 - $8) = $40.

Suppose a tax of $20 per unit is imposed on a good. The supply curve is a typical upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. The tax decreases consumer surplus by $18,000 and decreases producer surplus by $18,000. The deadweight loss of the tax is $4,000. The tax decreased the equilibrium quantity of the good from a.1,800 to 1,400. b.4,000 to 2,000. c.3,200 to 1,600. d.2,000 to 1,600.

d.2,000 to 1,600. Correct. When a $20 tax leads to a deadweight loss of $4,000, the tax decreased the quantity from 2,000 to 1,600. The base of the deadweight loss triangle is the decrease in quantity, so substituting the known values, $4,000 = ½ x base x $20. Thus, the decrease in quantity is 400 units. Computing the total loss of welfare and subtracting deadweight loss, $18,000 + $18,000 -$4,000 = $32,000, and dividing by the tax per unit, $32,000 / $20 = 1,600, gives the quantity after the tax.

Refer to the Figure. Suppose the government imposes a tax of P3 - P1. The deadweight loss due to the tax is measured by the area a.B+F. b.I+J. c.B+C+F+G. d.C+G.

d.C+G. Correct. Deadweight loss is the decrease in total surplus that results from the tax. Before the tax, total surplus was A+B+C+F+G+H. After the tax, total surplus is A+B+F+H. Therefore, deadweight loss is C+G.

Meghan is a massage therapist whose client, Reggie, pays $110 per hour-long session. Reggie values this service at $125 per hour, while the opportunity cost of Meghan's time is $85 per hour. The government places a tax of $8 per hour on massage therapists. After the tax, what is likely to happen in the market for massage therapy? a.Meghan and Reggie will agree to a new price somewhere between $77 and $102. b.The price will remain at $110, and Meghan will pay the $8 tax. c.Meghan will no longer offer massage therapy to Reggie because she must charge more than $125 in order to cover her opportunity costs and pay the tax. d.Meghan and Reggie will agree to a new price somewhere between $93 and $125.

d.Meghan and Reggie will agree to a new price somewhere between $93 and $125. Correct. After the tax, Meghan will not offer massages for less than the sum of her opportunity cost and the tax, $85 + $8 = $93, and Reggie will not pay more than his value of $125.

Refer to the Figure. The price that buyers effectively pay after the tax is imposed is a.P1. b.P2. c.P0. d.P3.

d.P3. Correct. When the tax of P3 - P1 is imposed, the quantity sold decreases from Q0 to Q1 and the price that buyers effectively pay is P3.

Refer to the Figure. The loss of producer surplus for those sellers of the good who continue to sell it after the tax is imposed is represented by area a.W. b.W+Z. c.V+W+X. d.V.

d.V. Correct. When the tax is imposed, the quantity sold decreases from Q0 to Q1 units. The loss of producer surplus associated with the Q1 units that continue to be sold after the tax is represented by area V.

Refer to the Figure. After the tax is levied, producer surplus is represented by area a.R+S+U. b.V+W+X. c.R. d.X.

d.X. Correct. Producer surplus is measured by the area below the price sellers receive and above the supply curve. After the tax, producer surplus is represented by area X.

When a good is taxed a.only sellers are made worse off if the tax shifts the demand curve. b.only buyers are made worse off, because sellers pass along the tax to buyers in the form of higher prices. c.only buyers are made worse off if the tax shifts the demand curve. d.both buyers and sellers are made worse off, because the burden of the tax is shared.

d.both buyers and sellers are made worse off, because the burden of the tax is shared. Correct. When a good is taxed both buyers and sellers are made worse off, because the burden of the tax is shared.