Econ 202 - Study Guide Chapter 8

The difference between what the buyer pays and the seller receives when a tax is place in a market

Tax Wedge

The reduction in total surplus that results from a tax

Deadweight Loss

True or False: A larger tax always generated more tax revenue

False

True or False: A tax collected from buyers generated a smaller deadweight loss than a tax collected from sellers

False

True or False: A tax on cigarettes would likely generate a larger deadweight loss than a tax on luxury boats

False

True or False: A tax will generate a greater deadweight loss if supply and demand are both inelastic

False

True or False: Deadweight loss in the reduction in consumer surplus that results from a tax

False

True or False: If John values having his hair cut at $20 and Mary's cost of providing the haircut is $10, any tax on haircuts larger than $10 will eliminate the gains from trade and cause a $20 loss of total surplus.

False

True or False: When a tax is place on a good, the revenue the govt. collects is exactly equal to the loss of consumer and producer surplus from the tax

False

A graph showing the relationship between the size of a tax and the tax revenue collected

Laffer Curve

True or False: A deadweight loss results when a tax cases market participants to fail to produce and consume units on which the benefits to the buyers exceed the cost to the sellers

True

True or False: A larger tax always generates a larger deadweight loss

True

True or False: A tax causes a deadweight loss because it eliminates some of the potential gains from trade

True

True or False: If a tax is doubled, the deadweight loss from the tax more than doubles

True

True or False: If a tax is place on a good and it reduces the quantity sold, there me be a deadweight loss from the tax

True

True or False: If a tax is place on a good in a market where supply is perfectly inelastic, there is no deadweight loss and the sellers bear the entire burden of the tax

True

True or False: If an income tax rate is high enough, a reduction in the tax rate could increase tax revenue

True

True or False: In general, a tax raises the price buyers pay, lowers the price the sellers receive, and reduces the quantity sold

True

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

The reduction of a tax: a. could increase tax revenue if the tax had been extremely high. b. will always reduce tax revenue regardless of the prior size of the tax. c. will have no impact on tax revenue. d. causes a market to become less efficient.

a. could increase tax revenue if the tax had been extremely high.

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. both supply and demand are relatively elastic.

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.

c. Laffer curve.

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

c. a tax on cruise line tickets

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.

c. first rise and then fall.

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

c. increases by a factor of four.

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. generated no tax revenue. d. caused a deadweight loss.

d. caused a deadweight loss.

Suppose the supply of unimproved land is relatively inelastic. A tax on unimproved land would generate a: a. large deadweight loss and the burden of the tax would fall on the renter. b. small deadweight loss and the burden of the tax would fall on the renter. c. large deadweight loss and the burden of the tax would fall on the landlord. d. small deadweight loss and the burden of the tax would fall on the landlord.

d. small deadweight loss and the burden of the tax would fall on the landlord.

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. all of the above.