Deck 8: Application: The Costs of Taxation

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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 17

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

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

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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

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

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

Because the supply of land is perfectly elastic,the deadweight loss of a tax on land is very large.

Question 33

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 34

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 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

A tax on unimproved land falls entirely on landowners because the supply of land is perfectly inelastic.

Question 40

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

Question 41

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

Question 42

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

Question 43

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

Question 44

Illustrate on three demand-and-supply graphs how the size of a tax (small,medium and large)can alter total revenue and deadweight loss.

Question 45

In 1776,the American Revolution was sparked by anger over

A) the extravagant lifestyle of British royalty.
B) the crimes of British soldiers stationed in the American colonies.
C) British taxes imposed on the American colonies.
D) the failure of the British to protect American colonists from attack by hostile Native Americans.

Question 46

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?

Question 47

To fully understand how taxes affect economic well-being,we must compare the

A) benefit to buyers with the loss to sellers.
B) price paid by buyers to the price received by sellers.
C) profits earned by firms to the losses incurred by consumers.
D) decrease in total surplus to the increase in revenue raised by the government.

Question 48

Using demand and supply diagrams,show the difference in deadweight loss between (a)a market with inelastic demand and supply and (b)a market with elastic demand and supply.

Question 49

Who once said that taxes are the price we pay for a civilized society?

A) Aristotle
B) George Washington
C) Oliver Wendell Holmes,Jr.
D) Ronald Reagan

Question 50

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

Question 51

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.

Question 52

Who once said that taxes are the price we pay for a civilized society?

A) Milton Friedman
B) Theodore Roosevelt
C) Arthur Laffer
D) Oliver Wendell Holmes,Jr.

Question 53

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 54

Suppose that instead of a supply-demand diagram,you are given the following information:
Q_s = 100 + 3P
Q_d = 400 - 2P
From this information compute equilibrium price and quantity.Now suppose that a tax is placed on buyers so that
Q_d = 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?

Question 55

To fully understand how taxes affect economic well-being,we must compare the

A) consumer surplus to the producer surplus.
B) price paid by buyers to the price received by sellers.
C) reduced welfare of buyers and sellers to the revenue raised by the government.
D) consumer surplus to the deadweight loss.

Question 56

Anger over British taxes played a significant role in bringing about the

A) election of John Adams as the second American president.
B) American Revolution.
C) War of 1812.
D) "no new taxes" clause in the U.S.Constitution.

Question 57

When a tax is levied on a good,the buyers and sellers of the good share the burden,

A) provided the tax is levied on the sellers.
B) provided the tax is levied on the buyers.
C) provided a portion of the tax is levied on the buyers,with the remaining portion levied on the sellers.
D) regardless of how the tax is levied.

Question 58

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 59

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

Question 60

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 people who are being taxed.
B) compare the taxes raised in the United States with those raised in other countries,especially France.
C) compare the reduced welfare of buyers and sellers to the amount of revenue the government raises.
D) take into account the fact that almost all taxes reduce the welfare of buyers,increase the welfare of sellers,and raise revenue for the government.

Question 61

If a tax shifts the demand curve upward (or to the right),we can infer that the tax was levied on

A) buyers of the good.
B) sellers of the good.
C) both buyers and sellers of the good.
D) We cannot infer anything because the shift described is not consistent with a tax.

Question 62

When a good is taxed,

A) both buyers and sellers of the good are made worse off.
B) only buyers are made worse off,because they ultimately bear the burden of the tax.
C) only sellers are made worse off,because they ultimately bear the burden of the tax.
D) neither buyers nor sellers are made worse off,since tax revenue is used to provide goods and services that would otherwise not be provided in a market economy.

Question 63

When a tax is imposed on the buyers of a good,the demand curve shifts

A) downward by the amount of the tax.
B) upward by the amount of the tax.
C) downward by less than the amount of the tax.
D) upward by more than the amount of the tax.

Question 64

When alcohol is taxed and sellers of alcohol are required to pay the tax to the government,

A) the quantity of alcohol bought and sold in the market is reduced.
B) the price paid by buyers of alcohol decreases.
C) the demand for alcohol decreases.
D) there is a movement downward and to the right along the demand curve for alcohol.

Question 65

It does not matter whether a tax is levied on the buyers or the sellers of a good 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) None of the above is correct;the incidence of the tax does depend on whether the buyers or the sellers are required to pay the tax.

Question 66

When a tax is imposed on a good,the

A) supply curve for the good always shifts.
B) demand curve for the good always shifts.
C) amount of the good that buyers are willing to buy at each price always remains unchanged.
D) equilibrium quantity of the good always decreases.

Question 67

A tax affects

A) buyers only.
B) sellers only.
C) buyers and sellers only.
D) buyers,sellers,and the government.

Question 68

One result of a tax,regardless of whether the tax is placed on the buyers or the sellers,is that the

A) size of the market is unchanged.
B) price the seller effectively receives is higher.
C) supply curve for the good shifts upward by the amount of the tax.
D) tax reduces the welfare of both buyers and sellers.

Question 69

A tax levied on the buyers of a good shifts the

A) supply curve upward (or to the left).
B) supply curve downward (or to the right).
C) demand curve downward (or to the left).
D) demand curve upward (or to the right).

Question 70

A tax levied on the sellers of a good shifts the

A) supply curve upward (or to the left).
B) supply curve downward (or to the right).
C) demand curve upward (or to the right).
D) demand curve downward (or to the left).

Question 71

If a tax shifts the supply curve upward (or to the left),we can infer that the tax was levied on

A) buyers of the good.
B) sellers of the good.
C) both buyers and sellers of the good.
D) We cannot infer anything because the shift described is not consistent with a tax.

Question 72

Suppose a tax is imposed on the buyers of fast-food French fries.The burden of the tax will

A) fall entirely on the buyers of fast-food French fries.
B) fall entirely on the sellers of fast-food French fries.
C) be shared equally by the buyers and sellers of fast-food French fries.
D) be shared by the buyers and sellers of fast-food French fries but not necessarily equally.

Question 73

To measure the gains and losses from a tax on a good,economists use the tools of

A) macroeconomics.
B) welfare economics.
C) international-trade theory.
D) circular-flow analysis.

Question 74

The government's benefit from a tax can be measured by

A) consumer surplus.
B) producer surplus.
C) tax revenue.
D) All of the above are correct.

Question 75

If a tax shifts the demand curve downward (or to the left),we can infer that the tax was levied on

A) buyers of the good.
B) sellers of the good.
C) both buyers and sellers of the good.
D) We cannot infer anything because the shift described is not consistent with a tax.

Question 76

What happens to the total surplus in a market when the government imposes a tax?

A) Total surplus increases by the amount of the tax.
B) Total surplus increases but by less than the amount of the tax.
C) Total surplus decreases.
D) Total surplus is unaffected by the tax.

Question 77

If a tax shifts the supply curve downward (or to the right),we can infer that the tax was levied on

A) buyers of the good.
B) sellers of the good.
C) both buyers and sellers of the good.
D) We cannot infer anything because the shift described is not consistent with a tax.

Question 78

A tax placed on buyers of tires shifts the

A) demand curve for tires downward,decreasing the price received by sellers of tires and causing the quantity of tires to increase.
B) demand curve for tires downward,decreasing the price received by sellers of tires and causing the quantity of tires to decrease.
C) supply curve for tires upward,decreasing the effective price paid by buyers of tires and causing the quantity of tires to increase.
D) supply curve for tires upward,increasing the effective price paid by buyers of tires and causing the quantity of tires to decrease.

Question 79

When a tax is imposed on the sellers of a good,the

A) demand curve shifts downward by less than the amount of the tax.
B) demand curve shifts downward by the amount of the tax.
C) supply curve shifts upward by less than the amount of the tax.
D) supply curve shifts upward by the amount of the tax.

Question 80

When a tax is placed on a product,the price paid by buyers

A) rises,and the price received by sellers rises.
B) rises,and the price received by sellers falls.
C) falls,and the price received by sellers rises.
D) falls,and the price received by sellers falls.