Microeconomics Ch. 8

A tax on a good a. raises the price that buyers effectively pay and raises the price that sellers effectively receive. b. raises the price that buyers effectively pay and lowers the price that sellers effectively receive. c. lowers the price that buyers effectively pay and raises the price that sellers effectively receive. d. lowers the price that buyers effectively pay and lowers the price that sellers effectively receive.

b. raises the price that buyers effectively pay and lowers the price that sellers effectively receive.

The amount of deadweight loss from a tax depends upon a. the price elasticity of demand. b. the price elasticity of supply. c. the amount of the tax per unit. d. All of the above are correct.

d. All of the above are correct.

Which of the following would likely have the smallest deadweight loss relative to the tax revenue? a. a head tax (that is, a tax everyone must pay regardless of what one does or buys) b. an income tax c. a tax on compact discs d. a tax on caviar

a. a head tax (that is, a tax everyone must pay regardless of what one does or buys)

Deadweight loss is the a. decline in total surplus that results from a tax. b. decline in government revenue when taxes are reduced in a market. c. decline in consumer surplus when a tax is placed on buyers. d. loss of profits to business firms when a tax is imposed.

a. decline in total surplus that results from a tax.

When cigarettes are taxed and sellers of cigarettes are required to pay the tax to the government, a. the size of the cigarette market is reduced. b. the price paid by buyers of cigarettes decreases. c. the demand for cigarettes decreases. d. there is a movement downward and to the right along the demand curve for cigarettes.

a. the size of the cigarette market is reduced.

The supply curve and the demand curve for widgets are straight lines. Suppose the equilibrium quantity in the market for widgets is 200 per month when there is no tax. Then a tax of $5 per widget is imposed. The price paid by buyers increases by $2 and the after-tax price received by sellers falls by $3. The government is able to raise $750 per month in revenue from the tax. The deadweight loss from the tax is a. $250. b. $125. c. $75. d. $50.

b. $125.

Suppose the equilibrium quantity in the market for widgets is 200 per month when there is no tax. Then a tax of $5 per widget is imposed. As a result, the government is able to raise $750 per month in tax revenue. We can conclude that the equilibrium quantity of widgets has fallen by a. 25 per month. b. 50 per month. c. 75 per month. d. 100 per month.

b. 50 per month.

Which of the following ideas is the most plausible? a. Reducing a high tax rate is less likely to increase tax revenue than is reducing a low tax. b. Reducing a high tax rate is more likely to increase tax revenue than is reducing a low tax rate. c. Reducing a high tax rate will have the same effect on tax revenue as reducing a low tax rate. d. Reducing a tax rate can never increase tax revenue.

b. Reducing a high tax rate is more likely to increase tax revenue than is reducing a low tax rate.

Consider a good to which a per-unit tax applies. The size of the deadweight that results from the tax is smaller, the a. larger is the price elasticity of demand. b. smaller is the price elasticity of supply. c. larger is the amount of the tax. d. All of the above are correct.

b. smaller is the price elasticity of supply.

Suppose a tax of $4 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 2,000 units to 1,700 units. The tax decreases consumer surplus by $3,000 and it decreases producer surplus by $4,400. The deadweight loss of the tax is a. $200. b. $400. c. $600. d. $1,200.

c. $600.

The supply curve and the demand curve for cigars are straight lines. Suppose the equilibrium quantity in the market for cigars is 1,000 per month when there is no tax. Then a tax of $0.50 per cigar is imposed. The effective price paid by buyers increases from $1.50 to $1.90 and the effective price received by sellers falls from $1.50 to $1.40. The government's tax revenue amounts to $475 per month. Which of the following statements is correct? a. After the tax is imposed, the equilibrium quantity of cigars is 900 per month. b. The demand for cigars is more elastic than the supply of cigars. c. The deadweight loss of the tax is $12.50. d. The tax causes a decrease in consumer surplus of $380.

c. The deadweight loss of the tax is $12.50.

The supply curve and the demand curve for a good are straight lines. When the good is taxed, the area on the relevant supply-and-demand graph that represents the deadweight loss is a. larger than the area that represents consumer surplus in the absence of the tax. b. larger than the area that represents government's tax revenue. c. a triangle. d. All of the above are correct.

c. a triangle.

When a tax is levied on buyers of a good, a. government collects too little revenue to justify the tax if the equilibrium quantity of the good decreases as a result of the tax. b. there is an increase in the quantity of the good supplied. c. a wedge is placed between the price buyers pay and the price sellers effectively receive. d. the effective price to buyers decreases because the demand curve shifts leftward.

c. a wedge is placed between the price buyers pay and the price sellers effectively receive.

Taxes cause deadweight losses because a. taxes reduce the sum of producer and consumer surpluses by more than the amount of the tax revenue. b. taxes prevent buyers and sellers from realizing some of the gains from trade. c. taxes cause marginal buyers and marginal sellers to leave the market, causing the quantity sold to fall. d. All of the above are correct.

d. All of the above are correct.

When a tax is placed on the buyers of a product, a result is that a. buyers effectively pay less than before and sellers effectively receive less than before. b. buyers effectively pay less than before and sellers effectively receive more than before. c. buyers effectively pay more than before and sellers effectively receive less than before. d. buyers effectively pay more than before and sellers effectively receive more than before.

c. buyers effectively pay more than before and sellers effectively receive less than before.

If the labor supply curve is nearly vertical, a tax on labor a. has a large deadweight loss. b. raises a small amount of tax revenue. c. has little impact on the amount of work that workers are willing to do. d. results in a large tax burden on the firms that hire labor.

c. has little impact on the amount of work that workers are willing to do.

Suppose the tax on liquor is increased so that the tax goes from being a "medium" tax to being a "large" tax. As a result, it is likely that a. tax revenue increases and the deadweight loss increases. b. tax revenue increases and the deadweight loss decreases. c. tax revenue decreases and the deadweight loss increases. d. tax revenue decreases and the deadweight loss decreases.

c. tax revenue decreases and the deadweight loss increases.

A $2.00 tax placed on the sellers of potting soil, for every bag of potting soil they sell, will shift the supply curve a. downward by exactly $2.00. b. downward by less than $2.00. c. upward by exactly $2.00. d. upward by less than $2.00.

c. upward by exactly $2.00.

Nobel Prize-winning economist Milton Friedman said that, "In my opinion, the least bad tax is the property tax on the unimproved value of land." Why? a. Land owners can afford the tax better than other people. b. A tax on unimproved land would be sufficient to fund government, so all other taxes could be abolished. c. Such a tax could generate more government revenue than any tax on labor or capital. d. A tax on unimproved land would have no deadweight loss.

d. A tax on unimproved land would have no deadweight loss.

The supply curve and the demand curve for a good are straight lines. When the good is taxed, the area on the relevant supply-and-demand graph that represents a. government's tax revenue is a rectangle. b. the deadweight loss of the tax is a triangle. c. the loss of consumer surplus caused by the tax is neither a rectangle nor a triangle. d. All of the above are correct.

d. All of the above are correct.

The supply curve and the demand curve for cigars are straight lines. Suppose the equilibrium quantity in the market for cigars is 1,000 per month when there is no tax. Then a tax of $0.50 per cigar is imposed. The effective price paid by buyers increases from $1.50 to $1.90 and the effective price received by sellers falls from $1.50 to $1.40. The government's tax revenue amounts to $475 per month. Which of the following statements is correct? a. The demand for cigars is less elastic than the supply of cigars. b. The tax causes a decrease in consumer surplus of $390 and a decrease in producer surplus of $97.50. c. the deadweight loss of the tax is $12.50. d. All of the above are correct.

d. All of the above are correct.

When a tax is imposed on a good for which demand is elastic and supply is elastic, a. sellers effectively pay the majority of the tax. b. buyers effectively pay the majority of the tax. c. the tax burden is equally divided between buyers and sellers. d. None of the above is correct, further information would be required to determine how the burden of the tax is distributed between buyers and sellers.

d. None of the above is correct, further information would be required to determine how the burden of the tax is distributed between buyers and sellers.

In which of the following cases is it most likely that an increase in the size of a tax will decrease tax revenue? a. The price elasticity of demand is small and the price elasticity of supply is large. b. The price elasticity of demand is large and the price elasticity of supply is small. c. The price elasticity of demand and the price elasticity of supply are both small. d. The price elasticity of demand and the price elasticity of supply are both large.

d. The price elasticity of demand and the price elasticity of supply are both large.