Name: 
 

Chapter 8


Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

1. 
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 American public.
b.
know the dollar amount of all taxes raised in the country each year.
c.
compare the reduced welfare of buyers and sellers to the amount of government revenue raised.
d.
compare the expenditures of the 50 state governments with that of the federal government.
 

2. 
If a tax is imposed on a market with elastic demand and inelastic supply,
a.
buyers will bear most of the burden of the tax.
b.
sellers will bear most of the burden of the tax.
c.
the burden of the tax will be shared equally between buyers and sellers.
d.
it is impossible to determine how the burden of the tax will be shared.
 

3. 
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.
 

4. 
When a tax is imposed on a good we know that the losses to buyers and sellers
a.
are equal to the revenue raised by the government.
b.
are less than the revenue raised by the government.
c.
exceed the revenue raised by the government.
d.
cannot be compared to the tax revenue raised by the government since the amount of the tax will vary from good to good.
 

5. 
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.
 
 
Figure 8-2
chapter8_files/i0070000.jpg
 

6. 
Refer to Figure 8-2. The equilibrium price before the tax is
a.
P1.
b.
P2.
c.
P3.
d.
None of the above are correct.
 

7. 
Refer to Figure 8-2. The per unit burden of the tax on buyers is
a.
P3 - P1.
b.
P3 - P2.
c.
P2 - P1.
d.
Q2 - Q1.
 

8. 
Refer to Figure 8-2. The amount of the tax imposed is
a.
P3 - P1.
b.
P3 - P2.
c.
P2 - P1.
d.
Q2 - Q1.
 

9. 
The amount of tax revenue received by the government is equal to the area
a.
P3 A C P1.
b.
A B C.
c.
P2 D A P3.
d.
P1 C D P2.
 
 
Figure 8-3
chapter8_files/i0120000.jpg
 

10. 
Refer to Figure 8-3. The equilibrium price before the tax is
a.
$24.
b.
$16.
c.
$10.
d.
$8.
 

11. 
Refer to Figure 8-3. The price sellers receive after the tax is
a.
$24.
b.
$14.
c.
$10.
d.
$8.
 
 
Figure 8-4
chapter8_files/i0150000.jpg
 

12. 
Refer to Figure 8-4. The total surplus (consumer, producer, and government) with the tax is represented by area
a.
A + B + C.
b.
D + E + F.
c.
A + B + D + F.
d.
C + E.
 
 
Figure 8-5
chapter8_files/i0170000.jpg
 

13. 
Refer to Figure 8-5. 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.
 

14. 
Refer to Figure 8-5. If a tax is imposed in this market, consumer surplus would be
a.
$600.
b.
$900.
c.
$1500.
d.
$3000.
 

15. 
Refer to Figure 8-5. 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.
 
 
Figure 8-6
chapter8_files/i0210000.jpg
 

16. 
Refer to Figure 8-6. The reduction in producer surplus caused by the tax would be
a.
$100.
b.
$80.
c.
$70.
d.
$60.
 

17. 
Taxes cause deadweight losses because
a.
they transfer purchasing power to the government which always wastes money.
b.
they prevent buyers and sellers from realizing some of the gains from trade.
c.
marginal buyers and sellers leave the market causing the quantity sold to fall.
d.
Both b and c are correct.
 

18. 
Today's property tax
a.
taxes only the value of land.
b.
is exactly the same as Henry George's single tax proposal.
c.
taxes land and the improvements to the land.
d.
has no deadweight loss since the amount of revenue going to the government equals the reduction in the landowner's surplus.
 

19. 
The views held by Arthur Laffer and Ronald Reagan that cuts in tax rates would encourage people to increase the quantity of labor they supplied became known as
a.
Laffer economics.
b.
welfare economics.
c.
supply-side economics.
d.
microeconomics.
 

20. 
Which of the following statements is true for most markets?
a.
As the tax rate increases, tax revenue continually rises and deadweight loss continually falls.
b.
As the tax rate rises, tax revenue rises for a while, but eventually begins to fall; deadweight loss rises but also begins to fall as tax revenue falls.
c.
As the tax rate rises, tax revenue rises for a while, but eventually begins to fall; deadweight loss continually rises.
d.
As the tax rate rises, tax revenue rises for a while, but eventually begins to fall; deadweight loss falls for a while, but begins to rise as tax revenue falls.
 

True/False
Indicate whether the sentence or statement is true or false.
 

21. 
Often, the tax revenue collected by the government equals the reduced welfare of buyers and sellers caused by the tax.
 

22. 
When the government imposes taxes on buyers and sellers of a good, society loses some of the benefits of market efficiency.
 

Short Answer
 

23. 
John has been in the habit of mowing Willa's lawn each week for $20. John's opportunity cost is $15, and Willa would be willing to pay $25 to have her lawn mowed. What is the maximum tax the government can impose on lawn mowing without discouraging John and Willa from continuing their mutually beneficial arrangement?
 

24. 
Use the following graph shown to fill in the table that follows.

chapter8_files/i0320000.jpg

 
WITHOUT TAX
WITH TAX
CHANGE
Consumer surplus
   
Producer surplus
   
Tax revenue
   
Total surplus
   
 

25. 
Suppose that instead of a supply-demand diagram, you are given the following information:

Qs = 100 + 3P
Qd = 400 - 2P

From this information compute equilibrium price and quantity. Now suppose that a tax is placed on buyers so that
Qd = 400 - (2P + T).

If T = 15, solve for the new equilibrium price and quantity. (Note: P is the price received by sellers and P + T is the price paid by buyers.) Compare these answers for equilibrium price and quantity with your first answers. What does this show you?
 



 
Check Your Work     Reset Help