Chapter 8

Applications: The Costs of Taxation

1. A tax on a good
a. raises the price buyers pay and lowers the price sellers receive.
b. raises both the price buyers pay and the price sellers receive.
c. lowers both the price buyers pay and the price sellers receive.
d. lowers the price buyers pay and raises the price sellers receive.
ANSWER: a. raises the price buyers pay and lowers the price sellers receive.

2. A tax placed on kite buyers will shift

a. demand upward, causing both the price received by sellers and the equilibrium quantity to fall.
b. demand downward, causing both the price received by sellers and the equilibrium quantity to fall.
c. supply downward, causing the price received by sellers to fall and equilibrium quantity to rise.
d. supply upward, causing the price received by sellers to rise and equilibrium quantity to fall.
ANSWER: b. demand downward, causing both the price received by sellers and the equilibrium quantity to fall.

3. Whether a tax is levied on the buyer or seller of the good does not matter because
a. sellers always bear the full burden of the tax.
b. buyers always bear the full burden of the tax.
c. buyers and sellers will share the burden of the tax.
d. sellers bear the full burden if the tax is levied on them, and buyers bear the full burden if the tax is levied on
them.
ANSWER: c. buyers and sellers share the burden of the tax.

4. A tax imposed on a market with an inelastic demand and an elastic supply will cause
a. sellers to pay the majority of the tax.
b. buyers to pay the majority of the tax.
c. the tax burden to be equally divided between buyers and sellers.
d. the tax burden to be divided, but it cannot be determined how.
ANSWER: b. buyers to pay the majority of the tax.

5. One result of a tax, whether the tax is placed on the buyer or the seller, is that the
a. size of the market is reduced.
b. price the seller receives is higher.
c. supply curve will shift upward.
d. demand curve will shift upward.
ANSWER: a. size of the market is reduced.

6. A $2.00 tax placed on the sellers of potting soil will shift the supply curve
a. right (downward) by exactly $2.00.
b. left (upward) by less than $2.00.
c. left (upward) by exactly $2.00.
d. right (downward) by less than $2.00.
ANSWER: c. left (upward) by exactly $2.00.
7. The NET benefit received by buyers in the market is measured by
a. the demand curve.
b. consumer surplus.
c. the amount buyers are willing to pay for the good.
d. the equilibrium price.
ANSWER: b. consumer surplus.

8. The benefit received by the government from a tax is measured by

a. deadweight loss.
b. tax revenue.
c. equilibrium price.
d. total surplus.
ANSWER: b. tax revenue.

9. When the government places a tax on a product

a. the cost of the tax to buyers and sellers will be less than the revenue raised from the tax by the government.
b. the cost of the tax to buyers and sellers will equal the revenue raised from the tax by the government.
c. the cost of the tax to buyers and sellers exceeds the revenue raised from the tax by the government.
d. without additional information, such as the elasticity of demand for this product, it is impossible to compare tax
cost with tax revenue.
ANSWER: c. the cost of the tax to buyers and sellers exceeds the revenue raised from the tax by the government.

10. Deadweight loss measures the

a. loss in a market to buyers and sellers that is not offset by an increase in government revenue.
b. loss in revenue to the government when buyers choose to buy less of the product.
c. loss of efficiency in a market as a result of government intervention.
d. lost revenue to businesses because of higher prices to consumers from the tax.
ANSWER: a. loss in a market to buyers and sellers that is not offset by an increase in government revenue.

11. Assume that the demand for pretzels is relatively inelastic and that the demand for potato chips is relatively elastic.
If the same percentage tax were placed on both goods, the tax on which product would create a larger deadweight
loss?
a. the tax on pretzels
b. the tax on potato chips
c. The taxes would create the same amount of deadweight loss.
d. This question is impossible to answer without knowing the price of both pretzels and potato chips.
ANSWER: b. the tax on potato chips
12. According to the graph, without a tax, the equilibrium price and quantity would be
a. $16 and 300.
b. $10 and 600.
c. $10 and 300.
d. $6 and 300.
ANSWER: b. $10 and 600.

13. According to the graph, without a tax, consumer surplus in this market would be
a. $1500.
b. $2400.
c. $3000.
d. $3600.
ANSWER: d. $3600.

14. According to the graph, without a tax, producer surplus in this market would be
a. $1500.
b. $2400.
c. $3000.
d. $3600.
ANSWER: b. $2400.

15. According to the graph, without a tax, total surplus in this market would be
a. $2400.
b. $3000.
c. $3600.
d. $6000.
ANSWER: d. $6000.
16. According to the graph, if a tax is imposed in this market, the price buyers would now pay for the good would be
a. $2.
b. $6.
c. $10.
d. $16.
ANSWER: d. $16.

17. According to the graph, if a tax is imposed in this market, the price sellers would receive for their product would be
a. $2.
b. $6.
c. $10.
d. $16.
ANSWER: b. $6.

18. According to the graph, if a tax is imposed in this market, consumer surplus would be
a. $600.
b. $900.
c. $1500.
d. $3000.
ANSWER: b. $900.

19. According to the graph, if a tax is imposed in this market, producer surplus would be
a. $600.
b. $900.
c. $1500.
d. $3000.
ANSWER: a. $600.

20. According to the graph, when a tax is placed on this good, the quantity sold will
a. stay at 600 and buyers will still pay $10.
b. fall to 300, but buyers will still pay $10.
c. stay at 600, but buyers will now pay $16.
d. fall to 300, and buyers will now pay $16.
ANSWER: d. fall to 300, and buyers will now pay $16.

21. According to the graph, if the government imposes a tax in this market, tax revenue will be
a. $600.
b. $900.
c. $1500.
d. $3000.
ANSWER: d. $3000.

22. According to the graph, the amount of the tax placed on this product is
a. $4.
b. $6.
c. $8.
d. $10.
ANSWER: d. $10.
23. According to the graph, total surplus with a tax imposed in this market would be
a. $1500.
b. $3600.
c. $4500.
d. $6000.
ANSWER: c. $4500.

24. According to the graph, what would happen to consumer surplus if a tax were imposed in this market?
a. It would fall by $3600.
b. It would fall by $2700.
c. It would fall by $1800.
d. It would fall by $900.
ANSWER: b. It would fall by $2700.

25. According to the graph, what would happen to producer surplus if a tax were imposed in this market?
a. It would fall by $600.
b. It would fall by $900.
c. It would fall by $1800.
d. It would fall by $2400.
ANSWER: c. It would fall by $1800.

26. According to the graph, what would happen to total surplus in this market if a tax were imposed?
a. It would fall by $1500.
b. It would increase by $1500.
c. It would fall by $3000.
d. It would increase by $3000.
ANSWER: a. It would fall by $1500.

27. According to the graph, if a tax is imposed in this market, total surplus would fall by
a. $1500.
b. $1800.
c. $2700.
d. $3000.
ANSWER: a. $1500.

28. According to the graph, the deadweight loss in this market as a result of a tax would be
a. $600.
b. $900.
c. $1500.
d. $1800.
ANSWER: c. $1500.

29. The amount of deadweight loss from taxes depends on

a. the price elasticity of demand and supply.
b. how much of the tax revenue the government plans to spend.
c. the product the government is planning to tax.
d. All of the above are correct.
ANSWER: a. the price elasticity of demand and supply.
30. Assume that the demand for diamonds is more elastic than the demand for gasoline. Compared to the decline in
purchases from a similar percentage tax on gasoline, we would expect that a tax on diamonds will cause the
quantity of diamonds purchased to decline
a. more.
b. less.
c. the same.
d. neither more or less.
ANSWER: a. more.

31. Assume that the demand for diamonds is more elastic than the demand for gasoline. A tax levied on gasoline will
cause the loss of consumer surplus to be
a. zero (because raising the price of gasoline has no effect on the amount purchased).
b. relatively large.
c. relatively small.
d. either small or large--depending on the elasticity of supply.
ANSWER: c. relatively small.

32. If the labor supply curve is nearly vertical, a tax on labor

a. has a large deadweight loss.
b. will raise small amounts of tax revenue.
c. has little impact on the amount of work workers are willing to do.
d. Both b and c are correct.
ANSWER: c. has little impact on the amount of work workers are willing to do.

33. If the supply of land is fixed, a tax on land would be paid

a. entirely by the landowners.
b. entirely by the renters or users of the land.
c. partly by landowners and partly by land users.
d. only by workers.
ANSWER: a. entirely by the landowners.

34. When the size of a tax is doubled, the deadweight loss from the tax
a. increases by the size of the tax.
b. doubles.
c. remains constant.
d. increases by a factor of four.
ANSWER: d. increases by a factor of four.

35. If the size of a tax increases, tax revenue will

a. increase.
b. decrease.
c. remain the same.
d. increase, then decrease.
ANSWER: d. increase, then decrease.

36. The Laffer curve

a. relates income tax rates to total income taxes collected.
b. was so ridiculous that economists took it as a joke, hence the name, Laffer Curve.
c. relates tax rates to deadweight welfare losses.
d. relates government welfare payments to the birth rate.
ANSWER: a. relates income tax rates to total income taxes collected.
37. If the government quadrupled the tax on gasoline, the deadweight loss from the gasoline tax would
a. more than quadruple.
b. quadruple.
c. increase, but it would not quadruple.
d. not change.
ANSWER: a. more than quadruple.

38. Suppose that the equilibrium quantity in the market for widgets has been 200 per month. Then a tax of $5 per
widget is imposed on widgets. 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.
ANSWER: b. $125.

39. Suppose that policymakers are considering placing a tax on either of two markets. In Market A, the tax will have a
significant effect on the price consumers pay, but it will not affect equilibrium quantity very much. In Market B, the
same tax will have only a small effect on the price consumers pay, but it will have a large effect on the equilibrium
quantity. In which market will the tax have a larger deadweight loss?
a. Market A
b. Market B
c. Deadweight loss will be the same in both markets.
d. There is not enough information to answer the question.
ANSWER: b. Market B