ch 8

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

b

When a tax on a good starts small and is gradually increased, tax revenue will a. rise. b. fall. c. first rise and then fall. d. first fall and then rise. e. do none of the above.

b

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

c

A tax on gasoline is likely to a. cause a greater deadweight loss in the long run when compared to the short run. b. cause a greater deadweight loss in the short run when compared to the long run. c. generate a deadweight loss that is unaffected by the time period over which it is measured. d. None of the above is correct.

a

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 a. increases by more than 50 percent. b. increases by exactly 50 percent. c. increases by less than 50 percent and may even decline.

a

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 ________ . a. no, landowners b. sizable, landowners c. sizable, farmers d. no, farmers

a

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.$15. b.$30. c.$85. d.$100.

a

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? a. $0, −$10, $0 b. $0, $0, $10 c. +$10, −$10, $10 d. +$10, −$10, $0

a

Suppose the supply of diamonds is relatively inelastic. A tax on diamonds would generate a a. small deadweight loss and the burden of the tax would fall on the seller of diamonds. b. large deadweight loss and the burden of the tax would fall on the buyer of diamonds. c. large deadweight loss and the burden of the tax would fall on the seller of diamonds. d. small deadweight loss and the burden of the tax would fall on the buyer of diamonds.

a

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

a

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.5,000 per month. b.4,700 per month. c.12,500 per month. d.2,000 per month.

b

Labor taxes may distort labor markets greatly if, A. Labor supply is highly inelastic. B. The number of hours many part-time workers want to work is very sensitive to the wage rate. C. Many workers choose to work 40 hours per week regardless of their earnings. D. "Underground" workers do not respond to changes in the wages of legal jobs because they prefer not to pay taxes.

b

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.$15. b.$30. c.$85. d.$100.

b

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 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. b.Soraya is still willing to pay Dominic $65 to plow her driveway, but Dominic will decline her offer. c.Dominic is still willing to plow Soraya's lawn for $65, but Soraya is no longer willing to pay that price. d.Dominic and Soraya still engage in a mutually-agreeable trade at a price of $65.

b

The Laffer curve illustrates that, in some circumstances, the government can reduce a tax on a good and increase the a. deadweight loss. b. government's tax revenue. c. price paid by consumers. d. equilibrium quantity.

b

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. deadweight curve. b. tax revenue curve. c. Laffer curve. d. Reagan curve. e. None of the above is correct.

b

A tax on a good has a deadweight loss if a. the tax revenue is greater than the reduction in consumer and producer surplus. b. the reduction in producer surplus is greater than the reduction in consumer surplus. c. the reduction in consumer and producer surplus is greater than the tax revenue. d. the reduction in consumer surplus is greater than the reduction in producer surplus.

c

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

d

As more people become elderly, which allows them to choose when to retire, we would expect the deadweight loss from the federal income tax to a.decrease, and the revenue generated from the tax to increase. b.increase, and the revenue generated from the tax to increase. c.increase, and the revenue generated from the tax to decrease. d.decrease, and the revenue generated from the tax to decrease.

c

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.$5 b.$15 c.$0 d.$50

c

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 a. $150 b. $50 c. $25 d. $100

c

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. a. small, large b. large, small c. small, small d. large, large

c

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

c

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 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. b.Meghan and Reggie will agree to a new price somewhere between $77 and $102. c.The price will remain at $110, and Meghan will pay the $8 tax. d.Meghan and Reggie will agree to a new price somewhere between $93 and $125.

c

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 a. increases by more than 50 percent. b. The answer depends on whether supply or demand is more elastic. c. increases by less than 50 percent and may even decline. d. increases by exactly 50 percent.

c

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. a. no, consumers b. sizable, consumers c. sizable, producers

c

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

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

c

Which of the following events is consistent with an increase in the deadweight loss of a motor oil tax from $2 million to $12 million? a.The tax on motor oil increases from $1.00 per liter to $4.00 per liter. b.The tax on motor oil increases from $1.00 per liter to $1.50 per liter. c.The tax on motor oil increases from $1.00 per liter to $2.00 per liter. d.The change in the deadweight loss cannot be determined with the information provided.

c

The size of the deadweight loss that results from a tax on cola is smaller, the a.more substitutes there are for cola. b.less of a necessity cola drinkers consider cola to be. c.more time cola sellers have to adjust to the tax. d.less time cola sellers have to adjust to the tax.

d

Taxes on labor income tend to encourage a. workers to work fewer hours. b. second earners to stay home. c. the elderly to retire early. d. the unscrupulous to enter the underground economy. e. all of the above.

e