Chapter 8 Quiz

A tax on a good causes the size of the market to shrink.

True

As the price elasticities of supply and demand increase, the deadweight loss from a tax increases.

True

Economists use the government's tax revenue to measure the public benefit from a tax.

True

The idea that tax cuts would increase the quantity of labor supplied, thus increasing tax revenue, became known as supply-side economics.

True

The larger the deadweight loss from taxation, the larger the cost of government programs.

True

The more elastic the supply, the larger the deadweight loss from a tax, all else equal.

True

Which of the following help us evaluate how taxes affect economic well-being? i. Consumer surplus ii. Producer surplus iii. Tax revenue iv. Deadweight loss a. i and ii only b. i, ii, and iii only c. iii and iv only d. i, ii, iii, and iv

d. i, ii, iii, and iv

A tax on a good causes the size of the market to increase.

False

A tax on insulin is likely to cause a very large deadweight loss to society.

False

Economists dismiss the idea that lower tax rates can lead to higher tax revenue, because there is a consensus that the relevant elasticities of demand and supply are very low.

False

If the government imposes a $3 tax in a market, the buyers and sellers will share an equal burden of the tax.

False

If the size of a tax doubles, the deadweight loss doubles.

False

Taxes drive a wedge into the market by raising the price that sellers receive and lowering the price that buyers pay.

False

The greater the elasticity of demand, the smaller the deadweight loss of a tax.

False

When a good is taxed, the tax revenue collected by the government equals the decrease in the welfare of buyers and sellers caused by the tax.

False

When a tax is imposed on buyers, consumer surplus decreases but producer surplus increases.

False

The optimal tax is difficult to determine because although revenues rise and fall as the size of the tax increases, deadweight loss continues to increase.

True

When a tax is imposed on buyers, consumer surplus and producer surplus both decrease.

True

When a tax is imposed on sellers, consumer surplus and producer surplus both decrease.

True

To fully understand how taxes affect economic well-being, we must: a. Assume that economic well-being is not affected if all tax revenue is spent on goods and services for the people who are being taxed. b. Compare the taxes raised in the United States with those raised in other countries, especially France. c. Compare the reduced welfare of buyers and sellers to the amount of revenue the government raises. d. Take into account the fact that almost all taxes reduce the welfare of buyers, increase the welfare of sellers, and raise revenue for the government.

c. Compare the reduced welfare of buyers and sellers to the amount of revenue the government raises.