Deck 8: Application: The Costs of Taxation

Question 1

Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade.

Answer 1

True

Question 2

A tax raises the price received by sellers and lowers the price paid by buyers.

Answer 2

False

Question 3

A tax places a wedge between the price buyers pay and the price sellers receive.

Answer 3

True

Question 4

Taxes affect market participants by increasing the price paid by the buyer and decreasing the price received by the seller.

Question 5

When a tax is imposed on buyers, consumer surplus and producer surplus both decrease.

Question 6

A tax on a good causes the size of the market to increase.

Question 7

When a tax is imposed on buyers, consumer surplus decreases but producer surplus increases.

Question 8

Because taxes distort incentives, they cause markets to allocate resources inefficiently.

Question 9

Total surplus is always equal to the sum of consumer surplus and producer surplus.

Question 10

When a good is taxed, the tax revenue collected by the government equals the decrease in the welfare of buyers and sellers caused by the tax.

Question 11

When a tax is imposed on sellers, consumer surplus and producer surplus both decrease.

Question 12

A tax on a good causes the size of the market to shrink.

Question 13

If the government imposes a $3 tax in a market, the buyers and sellers will share an equal burden of the tax.

Question 14

If the government imposes a $3 tax in a market, the equilibrium price will rise by $3.

Question 15

Normally, both buyers and sellers of a good become worse off when the good is taxed.

Question 16

Economists use the government's tax revenue to measure the public benefit from a tax.

Question 17

Taxes affect market participants by increasing the price paid by the buyer and received by the seller.

Question 18

When a tax is imposed, the loss of consumer surplus and producer surplus as a result of the tax exceeds the tax revenue collected by the government.

Question 19

When a tax is imposed on sellers, producer surplus decreases but consumer surplus increases.

Question 20

Total surplus in a market does not change when the government imposes a tax on that market because the loss of consumer surplus and producer surplus is equal to the gain of government revenue.

Question 21

Taxes on labor tend to encourage the elderly to retire early.

Question 22

When a tax is imposed on a good, consumer surplus decreases and producer surplus remains unchanged.

Question 23

The greater the elasticity of demand, the smaller the deadweight loss of a tax.

Question 24

The elasticities of the supply and demand curves in the market for cigarettes affect how much a tax distorts that market.

Question 25

Taxes on labor tend to increase the number of hours that people choose to work.

Question 26

Economists disagree on whether labor taxes have a small or large deadweight loss.

Question 27

The most important tax in the U.S. economy is the tax on corporations' profits.

Question 28

The larger the deadweight loss from taxation, the larger the cost of government programs.

Question 29

Taxes on labor tend to encourage second earners to stay at home rather than work in the labor force.

Question 30

If a tax did not induce buyers or sellers to change their behavior, it would not cause a deadweight loss.

Question 31

The demand for bread is less elastic than the demand for donuts; hence, a tax on bread will create a larger deadweight loss than will the same tax on donuts, other things equal.

Question 32

When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is relatively inelastic.

Question 33

The more inelastic are demand and supply, the greater is the deadweight loss of a tax.

Question 34

A tax on insulin is likely to cause a very large deadweight loss to society.

Question 35

As the price elasticities of supply and demand increase, the deadweight loss from a tax increases.

Question 36

When a tax is imposed on a good, the resulting decrease in consumer surplus is always larger than the resulting decrease in producer surplus.

Question 37

The Social Security tax, and to a large extent, the federal income tax, are labor taxes.

Question 38

Tax revenue equals the size of the tax multiplied by the quantity sold in the market after the tax is levied.

Question 39

Taxes create deadweight losses.

Question 40

Taxes drive a wedge into the market by raising the price that sellers receive and lowering the price that buyers pay.

Question 41

The result of the large tax cuts in the first Reagan Administration demonstrated very convincingly that Arthur Laffer was correct when he asserted that cuts in tax rates would increase tax revenue.

Question 42

Economists dismiss the idea that lower tax rates can lead to higher tax revenue, because there is a consensus that the relevant elasticities of demand and supply are very low.

Question 43

When the government imposes taxes on buyers or sellers of a good, society

A)loses some of the benefits of market efficiency.
B)gains efficiency but loses equality.
C)is better off because the government's tax revenues exceed the deadweight loss.
D)moves from an elastic supply curve to an inelastic supply curve.

Question 44

As the size of a tax increases, the government's tax revenue rises, then falls.

Question 45

The more elastic the supply, the larger the deadweight loss from a tax, all else equal.

Question 46

The Social Security tax is a labor tax.

Question 47

The Laffer curve illustrates how taxes in markets with greater elasticities of demand compare to taxes in markets with smaller elasticities of supply.

Question 48

Economist Arthur Laffer made the argument that tax rates in the United States were so high that reducing the rates would increase tax revenue.

Question 49

The idea that tax cuts would increase the quantity of labor supplied, thus increasing tax revenue, became known as supply-side economics.

Question 50

If the size of a tax triples, the deadweight loss increases by a factor of six.

Question 51

Tax revenues increase in direct proportion to increases in the size of the tax.

Question 52

The demand for beer is more elastic than the demand for milk, so a tax on beer would have a smaller deadweight loss than an equivalent tax on milk, all else equal.

Question 53

If the size of a tax doubles, the deadweight loss doubles.

Question 54

The more elastic are supply and demand in a market, the greater are the distortions caused by a tax on that market, and the more likely it is that a tax cut in that market will raise tax revenue.

Question 55

When a good is taxed, the deadweight loss is larger the more elastic are demand and supply.

Question 56

The deadweight loss of a tax rises even more rapidly than the size of the tax.

Question 57

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

Question 58

The Laffer curve is the curve showing how tax revenue varies as the size of the tax varies.

Question 59

The optimal tax is difficult to determine because although revenues rise and fall as the size of the tax increases, deadweight loss continues to increase.

Question 60

Suppose that a university charges students a $100 "tax" to register for business classes. The next year the university raises the "tax" to $150. The deadweight loss from the "tax" triples.

Question 61

If the tax on a good is tripled, the deadweight loss of the tax

A)remains constant.
B)triples.
C)increases by a factor of 9.
D)increases by a factor of 12.

Question 62

As the tax on a good increases from $1 per unit to $2 per unit to $3 per unit and so on, the

A)tax revenue increases at first, but it eventually peaks and then decreases.
B)deadweight loss increases at first, but it eventually peaks and then decreases.
C)tax revenue always increases, and the deadweight loss always increases.
D)tax revenue always decreases, and the deadweight loss always increases.

Question 63

Figure 8-19
The vertical distance between points A and B represents the original tax.
Refer to Figure 8-19. The original tax can be represented by the vertical distance AB. Suppose the government is deciding whether to lower the tax to CD or raise it to FG. Which of the following statements is correct?

A)Compared to the original tax, the larger tax will decrease both tax revenue and deadweight loss.
B)Compared to the original tax, the smaller tax will increase both tax revenue and deadweight loss.
C)Compared to the original tax, the larger tax will decrease tax revenue and increase deadweight loss.
D)Both a and b are correct.

Question 64

If the size of a tax increases, tax revenue

A)increases.
B)decreases.
C)remains the same.
D)may increase, decrease, or remain the same.

Question 65

Figure 8-19
The vertical distance between points A and B represents the original tax.
Refer to Figure 8-19. The original tax can be represented by the vertical distance AB. Suppose the government is deciding whether to lower the tax to CD or raise it to FG. Which of the following statements is not correct?

A)Compared to the original tax, the larger tax will increase tax revenue.
B)Compared to the original tax, the smaller tax will decrease deadweight loss.
C)Compared to the original tax, the smaller tax will decrease tax revenue.
D)Compared to the original tax, the larger tax will increase deadweight loss.

Question 66

If the tax on a good is increased from $0.30 per unit to $0.90 per unit, the deadweight loss from the tax

A)remains constant.
B)increases by a factor of 4.
C)increases by a factor of 9.
D)increases by a factor of 16.

Question 67

Figure 8-19
The vertical distance between points A and B represents the original tax.
Refer to Figure 8-19. If the government changed the per-unit tax from $5.00 to $2.50, then the price paid by buyers would be $7.50, the price received by sellers would be $5, and the quantity sold in the market would be 1.5 units. Compared to the original tax rate, this lower tax rate would

A)increase government revenue and increase the deadweight loss from the tax.
B)increase government revenue and decrease the deadweight loss from the tax.
C)decrease government revenue and increase the deadweight loss from the tax.
D)decrease government revenue and decrease the deadweight loss from the tax.

Question 68

Figure 8-19
The vertical distance between points A and B represents the original tax.
Refer to Figure 8-19. If the government changed the per-unit tax from $5.00 to $7.50, then the price paid by buyers would be $10.50, the price received by sellers would be $3, and the quantity sold in the market would be 0.5 units. Compared to the original tax rate, this higher tax rate would

A)increase government revenue and increase the deadweight loss from the tax.
B)increase government revenue and decrease the deadweight loss from the tax.
C)decrease government revenue and increase the deadweight loss from the tax.
D)decrease government revenue and decrease the deadweight loss from the tax.

Question 69

A decrease in the size of a tax is most likely to increase tax revenue in a market with

A)elastic demand and elastic supply.
B)elastic demand and inelastic supply.
C)inelastic demand and elastic supply.
D)inelastic demand and inelastic supply.

Question 70

Which of the following ideas is the most plausible?

A)Tax revenue is more likely to increase when a low tax rate is increased than when a high tax rate is increased.
B)Tax revenue is less likely to increase when a low tax rate is increased than when a high tax rate is increased.
C)Tax revenue is likely to increase by the same amount when a low tax rate is increased and when a high tax rate is increased.
D)Decreasing a tax rate can never increase tax revenue.

Question 71

Suppose the government increases the size of a tax by 20 percent. The deadweight loss from that tax

A)increases by 20 percent.
B)increases by more than 20 percent.
C)increases but by less than 20 percent.
D)decreases by 20 percent.

Question 72

Suppose the tax on automobile tires 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.

Question 73

Which of the following statements correctly describes the relationship between the size of the deadweight loss and the amount of tax revenue as the size of a tax increases from a small tax to a medium tax and finally to a large tax?

A)Both the size of the deadweight loss and tax revenue increase.
B)The size of the deadweight loss increases, but the tax revenue decreases.
C)The size of the deadweight loss increases, but the tax revenue first increases, then decreases.
D)Both the size of the deadweight loss and tax revenue decrease.

Question 74

Which of the following statements is true for markets in which the demand curve slopes downward and the supply curve slopes upward?

A)As the size of the tax increases, tax revenue continually rises and deadweight loss continually falls.
B)As the size of the tax increases, tax revenue and deadweight loss rise initially, but both eventually begin to fall.
C)As the size of the tax increases, tax revenue rises initially, but it eventually begins to fall; deadweight loss continually rises.
D)As the size of the tax increases, tax revenue rises initially, but it eventually begins to fall; deadweight loss falls initially, but eventually it begins to rise.

Question 75

If the tax on a good is doubled, the deadweight loss of the tax

A)increases by 50 percent.
B)doubles.
C)triples.
D)quadruples.

Question 76

Taxes are of interest to

A)microeconomists because they consider how to balance equality and efficiency.
B)microeconomists because they consider how best to design a tax system.
C)macroeconomists because they consider how policymakers can use the tax system to stabilize economic activity.
D)All of the above are correct.

Question 77

Taxes are costly to market participants because they

A)transfer resources from market participants to the government.
B)alter incentives.
C)distort market outcomes.
D)All of the above are correct.

Question 78

If the tax on a good is increased from $1 per unit to $4 per unit, the deadweight loss from the tax increases by a factor of

A)5.
B)9.
C)16.
D)24.

Question 79

An increase in the size of a tax is most likely to increase tax revenue in a market with

A)elastic demand and elastic supply.
B)elastic demand and inelastic supply.
C)inelastic demand and elastic supply.
D)inelastic demand and inelastic supply.

Question 80

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.