Deck 6: The Efficiency of Markets and the Costs of Taxation

Question 1

Consumer surplus is the difference between:

A) supply and demand.
B) the price the producer receives and the willingness to sell a good.
C) the willingness to pay for a good and the willingness to sell a good.
D) the willingness to pay for a good and the amount that is paid to get it.
E) the price paid for a good and the amount of the good produced.

Answer 1

D

Question 2

When the price of a good decreases and all else is held constant:

A) producer surplus increases.
B) both consumer surplus and producer surplus decrease.
C) both consumer surplus and producer surplus increase.
D) producer surplus decreases.
E) consumer surplus decreases.

Answer 2

D

Question 3

Holding all else constant, when the price of a good increases:

A) consumer surplus increases.
B) producer surplus decreases.
C) both producer surplus and consumer surplus increase.
D) both consumer surplus and producer surplus decrease.
E) consumer surplus decreases.

Answer 3

E

Question 4

Producer surplus is the difference between:

A) supply and demand.
B) the price the producer receives and the willingness to sell a good.
C) the willingness to pay for a good and the willingness to sell a good.
D) the willingness to pay for a good and the amount that is paid to get it.
E) the price paid for a good and the amount of the good produced.

Question 5

When looking at a supply and demand graph, you would find consumer surplus:

A) above the demand curve and below the supply curve.
B) below the demand curve and above market price.
C) to the right of equilibrium quantity and above market price.
D) above the demand curve and above the supply curve.
E) below market price and above the supply curve.

Question 6

Consider the market for socks. The current price of a pair of plain white socks is $5.00. Two consumers, Jeff and Samir, are willing to pay $7.25 and $8.00, respectively, for a pair of plain white socks. Two sock manufacturers are willing to sell plain white socks for as little as $4.00 and $4.15 per pair. What is the total producer surplus in this market?

A) $0.15
B) $8.15
C) $0.85
D) $1.00
E) $1.85

Question 7

All else held constant, a decrease in the price of a good would necessarily:

A) increase social welfare.
B) decrease producer surplus.
C) decrease consumer surplus.
D) increase demand for the good.
E) increase producer surplus.

Question 8

When looking at a graph, the area under the demand curve and above market price is defined as:

A) tax revenue.
B) spending surplus.
C) consumer benefit.
D) producer surplus.
E) consumer surplus.

Question 9

The difference between the willingness to pay for a good and the amount that is paid to get it is also known as:

A) consumer expenditure.
B) surplus spending.
C) consumer benefit.
D) producer profit.
E) consumer surplus.

Question 10

Producer surplus is defined as the:

A) difference between the willingness to pay for a good and the willingness to sell it.
B) difference between the price the seller receives and the willingness to sell it.
C) difference between the willingness to pay for a good and the price paid to get it.
D) quantity of units that consumers want to buy at the market price.
E) total revenue earned from producing and selling some good.

Question 11

All else being held constant, an increase in the price of a good would necessarily:

A) increase social welfare.
B) decrease producer surplus.
C) decrease consumer surplus.
D) increase consumer surplus.
E) increase the supply of the good.

Question 12

Holding all else constant, when the price of a good decreases:

A) producer surplus increases.
B) consumer surplus increases.
C) both consumer surplus and producer surplus increase.
D) consumer surplus decreases.
E) both consumer surplus and producer surplus decrease.

Question 13

The difference between the willingness to sell a good and the price a producer receives is also known as:

A) producer profit.
B) producer surplus.
C) consumer waste.
D) tax revenue.
E) producer benefit.

Question 14

Consumer surplus is defined as the:

A) difference between the willingness to pay for a good and the willingness to sell it.
B) total revenue earned from producing and selling some good.
C) difference between the willingness to pay for a good and the price paid to get it.
D) quantity of units that consumers want to buy at the market price.
E) difference between the price the seller receives and the willingness to sell it.

Question 15

MJM Products, Inc., designs and sells flannel jackets. The company is willing to sell a men's flannel jacket for as little as $45. Its main competitor is RL Outriggers, which is willing to sell the same men's flannel jacket for as little as $40. The current market price of that type of jacket is $57. What is the total producer surplus for the two firms?

A) $95
B) $12
C) $17
D) $29
E) $5

Question 16

Muddy's Bakery and Lilly's Sweetshop both sell cupcakes. The market price of one chocolate cupcake is $2.50. Muddy's is willing to sell a cupcake for as little as $1.65; Lilly's is willing to sell a cupcake for as little as $1.75. What is the total producer surplus for the two firms?

A) $0.75
B) $1.60
C) $0.85
D) $2.50
E) $3.40

Question 17

Consider the market for socks. The current price of a pair of plain white socks is $5.00. Two consumers, Jeff and Samir, are willing to pay $7.25 and $8.00, respectively, for a pair of plain white socks. Two sock manufacturers are willing to sell plain white socks for as little as $4.00 and $4.15 per pair. How much is total consumer surplus in this market?

A) $2.25
B) $3.00
C) $0.75
D) $5.25
E) $15.25

Question 18

Bob is willing to pay $65 for a new pair of shoes. Bill is willing to pay $50 for the same shoes. The shoes have a price of $45. What is the total consumer surplus for Bob and Bill?

A) $15
B) $20
C) $5
D) $25
E) $35

Question 19

Jamal is willing to pay $85 for a new jacket that sells for $70. Eddie is willing to pay $65 for that same jacket. What is the total consumer surplus for Jamal and Eddie?

A) $30
B) $15
C) $20
D) $25
E) $155

Question 20

When the price of a good increases and all else is held constant:

A) both consumer surplus and producer surplus decrease.
B) both consumer surplus and producer surplus increase.
C) consumer surplus decreases.
D) producer surplus decreases.
E) producer surplus increases.

Question 21

Consider the market for socks. The current price of a pair of plain white socks is $5.00. Two consumers, Jeff and Samir, are willing to pay $7.25 and $8.00, respectively, for a pair of plain white socks. Two sock manufacturers are willing to sell plain white socks for as little as $4.00 and $4.15 per pair. What is the total producer AND consumer surplus (i.e., social welfare) in this market?

A) $7.10
B) $5.25
C) $1.85
D) $23.40
E) $4.50

Question 22

Social welfare (i.e., the sum of producer and consumer surplus) is maximized when:

A) the government taxes most goods and services.
B) very few consumers and producers exist within a market.
C) the market reaches its equilibrium price and quantity.
D) supply and demand are perfectly inelastic.
E) the government imposes price controls.

Question 23

Which areas represent the amount of consumer surplus lost due to the tax?

A) A + F
B) B + C
C) A
D) A + B + F
E) B + F

Question 24

Which of the following statements is concerned with equity rather than efficiency?

A) Almost all taxes create some amount of deadweight loss.
B) Excise taxes tend to raise prices for consumers and reduce sales for firms.
C) Tax rates on the wealthy are too low and should be raised.
D) The incidence of a tax does not depend on who actually pays it.
E) Taxes generate revenues that governments spend on services.

Question 25

Social welfare is measured as the sum of:

A) tax revenue and deadweight loss.
B) deadweight loss and consumer surplus.
C) producer surplus and tax revenue.
D) consumer surplus and tax revenue.
E) consumer surplus and producer surplus.

Question 26

Which areas represent consumer surplus before the tax is imposed?

A) A + B + F
B) A
C) C + G + E
D) B + C
E) F + G

Question 27

Which of the following statements is concerned with equity rather than efficiency?

A) Imposing a tax on a good reduces the incentive to buy that good.
B) The burden of a sales tax is typically shared by consumers and stores.
C) Deadweight loss is the lost social welfare from a tax.
D) Tax rates on middle-class households are too high and should be reduced.
E) Taxes cause producers and consumers to lose surplus.

Question 28

When looking at a graph, the area above the supply curve and below market price is defined as:

A) consumer surplus.
B) producer surplus.
C) producer benefit.
D) business profit.
E) tax revenue.

Question 29

When looking at a supply and demand graph, you would find producer surplus:

A) above the demand curve and below the supply curve.
B) below the demand curve and above market price.
C) to the right of equilibrium quantity and above market price.
D) above the demand curve and above the supply curve.
E) below market price and above the supply curve.

Question 30

Questions about the equity of a tax are concerned mostly with:

A) efficiency.
B) tax revenue.
C) fairness.
D) deadweight loss.
E) elasticity.

Question 31

Which of the following statements is concerned with efficiency rather than equity?

A) Sales taxes on food are regressive and should be eliminated.
B) Income taxes should be raised on low-income families so that everyone pays.
C) The United States should implement a wealth tax on upper-income households.
D) Excise taxes tend to raise prices for consumers.
E) The overall tax system in the United States should be much more progressive.

Question 32

Which areas represent producer surplus before the tax is imposed?

A) F + G
B) E + C + G
C) A + B + C + E
D) B + C + F + G
E) E

Question 33

Producer surplus is depicted by the area:

A) above market price and below the supply curve.
B) between the supply curve and the demand curve.
C) below market price and above the supply curve.
D) above market price and below the demand curve.
E) above the demand curve and below the supply curve.

Question 34

A market has reached an efficient outcome when:

A) producers are able to produce and sell as much as they like.
B) total surplus is minimized.
C) producer surplus is greater than consumer surplus.
D) consumers are able to purchase as much as they like.
E) total surplus is maximized.

Question 35

Consumer surplus plus producer surplus equals:

A) deadweight loss.
B) economic profit.
C) social welfare.
D) tax revenue.
E) market distortions.

Question 36

Which of the following statements is concerned with efficiency rather than equity?

A) It is not fair to tax the income earned by the wealthy at higher rates than the poor.
B) Excise taxes on tobacco products affect low-income families the most and should be reduced.
C) Our income tax system should be more progressive than it is now.
D) Taxes cause distortions in markets and reduce social welfare.
E) The best type of income tax is a flat tax because it treats everyone the same.

Question 37

Which areas represent consumer surplus after the tax is imposed?

A) A
B) A + B
C) A + B + F
D) F + G
E) B + C + F

Question 38

Explain what happens to the amount of consumer surplus and producer surplus when the supply of scarves suddenly declines (shifts left).

A) Producer surplus declines and consumer surplus is unchanged.
B) Consumer surplus declines and producer surplus is unchanged.
C) Consumer surplus declines and producer surplus declines.
D) Consumer surplus is unchanged and producer surplus is unchanged.
E) Producer surplus increases and consumer surplus increases.

Question 39

A tax on apples would cause consumers to suffer because:

A) consumer surplus would increase.
B) the price of apples would increase and fewer apples would be purchased.
C) revenues for apple growers would decrease.
D) the government would collect revenue from the tax.
E) producer surplus would decrease.

Question 40

The price-quantity combination found where the supply and demand curves intersect is a unique combination that is efficient because:

A) producers can sell as much as they want.
B) total surplus is maximized.
C) tax revenue is sufficient to pay for government services.
D) consumers can buy as much as they want.
E) new products are being introduced.

Question 41

Which party is responsible for paying this tax out of pocket?

A) consumers
B) producers
C) both consumers and producers
D) some consumers and some producers, but not all consumers and producers
E) some consumers and no producers

Question 42

What is the total amount of producer and consumer surplus (i.e., social welfare) in this market before the tax is imposed?

A) A + B + C + E + F + G
B) A + C
C) A + B + C + E
D) F + G
E) B + C + F + G

Question 43

What areas represent the total tax revenue created as a result of the tax?

A) A + C
B) A + E
C) B + C
D) A + E + F + G
E) A + B + C + D + E + F + G

Question 44

After a tax is imposed, the price paid by consumers ___________ and the price received by producers ___________.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) is unaffected; is unaffected

Question 45

Excise taxes are taxes that are:

A) applied to all goods and activities.
B) usually applied to inferior goods.
C) usually applied to income and capital gains.
D) never applied to goods or activities.
E) applied to a particular good or activity.

Question 46

Which areas represent the amount of producer surplus lost due to the tax?

A) G
B) A + B + C + E
C) C
D) C + G
E) B + F

Question 47

Which areas represent the revenue collected from this tax?

A) A + B + F
B) B + C
C) F + G
D) E
E) A + E

Question 48

When a tax is imposed on some good, what tends to happen to consumer prices and producer prices?

A) Consumer prices decrease and producer prices increase.
B) Consumer prices increase and producer prices decrease.
C) Consumer prices increase and producer prices increase.
D) Consumer prices decrease and producer prices increase.
E) Consumer prices and producer prices converge at the same point.

Question 49

Which areas represent producer surplus after the tax is imposed?

A) E + C + G
B) E + C
C) E + G
D) F + G
E) E

Question 50

What is the amount of the tax, as measured along the y axis?

A) P_C + P_S
B) P_e ? P_S
C) P_C ? P_S
D) P_C ? P*
E) P_e + P_S

Question 51

In most cases, taxes reduce economic efficiency because:

A) they lower prices for consumers and cause firms to suffer.
B) they increase firms' profits at the expense of consumers.
C) taxes are perceived as unfair by some taxpayers.
D) the government often spends tax revenues on programs that some voters don't like.
E) they reduce consumer surplus and producer surplus.

Question 52

What areas represent the total lost consumer and producer surplus (i.e., social welfare) as a result of the tax?

A) A + B + C + E + F + G
B) A + C
C) A + B + C + E
D) F + G
E) B + C + F + G

Question 53

A tax on apples would cause apple growers to suffer because:

A) consumer surplus would decrease.
B) the government would collect revenue from the tax.
C) consumers would pay higher prices.
D) producer surplus would increase.
E) revenues and profits from growing apples would decrease.

Question 54

The difference between the price consumers pay and the price sellers receive after a tax is imposed is equal to the:

A) loss of social welfare from the tax.
B) dollar amount of the tax.
C) deadweight loss from the tax.
D) revenue from the tax.
E) lost profit from the tax.

Question 55

What areas represent the deadweight loss created as a result of the tax?

A) A + B + C + E + F + G
B) A + C
C) A + B + C + E
D) F + G
E) B + C + F + G

Question 56

What areas represent the total cost to society, in terms of lost social welfare, created as a result of the tax?

A) B + C + F + G
B) A + B + F
C) C + E + G
D) A + B + C + E
E) F + G

Question 57

A tax on consumers would cause the __________curve(s) to shift to the __________.

A) demand; right
B) supply; left
C) supply and demand; left
D) supply and demand; right
E) demand; left

Question 58

What is the total amount of producer and consumer surplus (i.e., social welfare) in this market after the tax is imposed?

A) A + B + C + E + F + G
B) A + E
C) A + B + C + E
D) F + G
E) B + C + F + G

Question 59

It is said that taxes drive a wedge between prices. This statement is true because taxes cause:

A) both consumer and producer prices to increase.
B) the consumer price to increase but leave producer prices unchanged.
C) both consumer and producer prices to decrease.
D) the consumer price to decrease and the producer price to increase.
E) the consumer price to increase and the producer price to decrease.

Question 60

A tax on apples would cause the price paid by consumers to ___________ and the price received by producers to _____________.

A) increase; increase
B) increase; decrease
C) decrease; increase, then decrease
D) decrease; decrease
E) increase, then decrease; increase

Question 61

The revenue generated from a tax equals the:

A) amount of the good sold times the original price of the good.
B) amount of the tax times the quantity sold after the tax is imposed.
C) total social welfare lost as a result of the tax.
D) deadweight loss from the tax.
E) total consumer and producer surplus before the tax.

Question 62

If a tax causes the supply curve to shift, we know that the tax is paid out of pocket by:

A) consumers.
B) producers.
C) the government.
D) both producers and consumers.
E) consumer, producers, and the government.

Question 63

When a tax is imposed on some good, what happens to the amount of the good bought and sold?

A) It increases.
B) It decreases.
C) It decreases, but only if the tax is imposed on producers.
D) It decreases, but only if the tax is imposed on consumers.
E) It increases, but only if the tax is imposed on consumers.

Question 64

When a tax is imposed on some good, what usually happens to consumer and producer surplus?

A) They both increase.
B) They both fall to zero.
C) They both decrease.
D) Consumer surplus increases and producer surplus decreases.
E) Consumer surplus decreases and producer surplus increases.

Question 65

The per-unit dollar amount of a tax times the quantity sold after the tax is imposed equals:

A) consumer surplus.
B) deadweight loss.
C) the tax revenue.
D) producer surplus.
E) social welfare.

Question 66

Excise taxes are popular sources of revenue for governments because:

A) they have very high levels of deadweight loss.
B) they are easy to understand.
C) consumers are rarely aware that they are paying them.
D) they are very stable sources of revenue.
E) they require very little paperwork.

Question 67

A tax on consumers of a good would shift the __________curve down and cause the price paid by consumers to ____________.

A) supply; increase
B) demand; decrease, then return to its original level
C) supply; decrease
D) demand; increase
E) supply; increase, then return to its original level

Question 68

The incidence of a tax is unrelated to:

A) how responsive producers are to the tax.
B) how responsive consumers are to the tax.
C) the elasticity of supply.
D) the elasticity of demand.
E) who pays the tax out of pocket.

Question 69

A tax on milk would likely cause a decrease in the:

A) price consumers pay for milk.
B) price of products made from milk.
C) amount of milk sold.
D) revenues from the milk tax.
E) deadweight loss from the milk tax.

Question 70

Taxes almost always cause producer prices to decrease. How much they decrease depends on:

A) the elasticities of supply and demand.
B) the amount of the tax.
C) who is legally obligated to pay the tax.
D) who pays the tax out of pocket.
E) how often the government collects the tax.

Question 71

Assume that a $0.25/gallon tax on milk causes a loss of $250 million in consumer and producer surplus and creates a deadweight loss of $45 million. From this information, we know that the tax revenue from the tax is:

A) $250 million.
B) $45 million.
C) $205 million.
D) $295 million.
E) $75 million.

Question 72

Taxes will almost always cause consumer prices to increase. How much they increase depends on:

A) how often the government collects the tax.
B) the amount of the tax.
C) who pays the tax out of pocket.
D) who is legally obligated to pay the tax.
E) the elasticities of supply and demand.

Question 73

A tax on milk would likely cause an increase in the:

A) price consumers pay for milk.
B) price producers receive for milk.
C) amount of milk sold.
D) revenues earned from selling milk.
E) profits earned by selling milk.

Question 74

When a tax is imposed, consumer surplus and producer surplus are reallocated to:

A) social welfare.
B) tax revenue and deadweight loss.
C) tax revenue.
D) deadweight loss.
E) government spending on public services.

Question 75

A tax on producers would cause ___________ the curve(s) to shift to the ___________.

A) demand; left
B) supply and demand; left
C) supply; left
D) supply; right
E) supply and demand; right

Question 76

The incidence of a tax reflects:

A) who pays the tax out of pocket.
B) how much tax revenue the tax generates.
C) who bears the burden of the tax.
D) how the tax revenue from the tax is spent.
E) government efficiency in providing goods and services.

Question 77

In the long run, both supply and demand tend to become more elastic. This suggests that, in the long run, the:

A) deadweight loss from a tax will be less than it is in the short run.
B) deadweight loss will be zero.
C) government will likely reduce tax rates.
D) tax revenue will be lower than it is in the short run.
E) tax revenue will be higher than it is in the short run.

Question 78

For any type of tax the government imposes:

A) supply plus demand equals market price.
B) tax revenue plus deadweight loss equals total lost social welfare.
C) tax revenue plus market price equals deadweight loss.
D) deadweight loss plus economic distortion equals tax revenue.
E) total lost social welfare plus tax revenue equals deadweight loss.

Question 79

When a tax is imposed on some good, the lost consumer surplus and producer surplus both typically end up as:

A) additional revenues for firms.
B) lower prices for consumers.
C) more units of output bought and sold.
D) increased social welfare.
E) tax revenue and deadweight loss.

Question 80

A tax that is applied to one specific good or service is a(n):

A) sales tax.
B) general local option sales tax.
C) property tax.
D) excise tax.
E) wealth tax.