Microecon Chapter 8: Application: The Costs of Taxation

Tax Wedge

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

Deadweight loss

The reduction in total surplus that results from a tax

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

Laffer curve

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

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

The graph that shows the relationship between the size of a tax and the tax revenue collected by the government is known as 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. increase 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 diamonds is relatively inelastic. A tax on diamonds would generate a a. large DWL and the burden of a tax would fall on the buyer of diamonds. b. small DWL and the burden of a tax would fall on the buyer of diamonds. c. large DWL and the burden of a tax would fall on the seller of diamonds. d. small DWL and the burden of a tax would fall on the seller of diamonds.

d. small DWL and the burden of a tax would fall on the seller of diamonds.

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