When a Tax is Levied On a Good Practice Questions

Multiple Choice 1.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. ANS: D 2. 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. ANS: B 3. 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. ANS: C 4. 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). ANS: C 5. The decrease in total surplus that results from a market distortion, such as a tax, is called a a. wedge loss. b. revenue loss. c. deadweight loss. d. consumer surplus loss. ANS: C 6. A tax on a good a. gives buyers an incentive to buy more of the good than they otherwise would buy. b. gives sellers an incentive to produce less of the good than they otherwise would produce. c. creates a benefit to the government, the size of which exceeds the loss in surplus to buyers and sellers. d. All of the above are correct. ANS: B 7. Taxes cause deadweight losses because taxes a. reduce the sum of producer and consumer surpluses by more than the amount of tax revenue. b. prevent buyers and sellers from realizing some of the gains from trade. c. cause marginal buyers and marginal sellers to leave the market, causing the quantity sold to fall. d. All of the above are correct. ANS: D 8. Deadweight loss measures the loss a. in a market to buyers and sellers that is not offset by an increase in government revenue. b. in revenue to the government when buyers choose to buy less of the product because of the tax. c. of equality in a market due to government intervention. d. of total revenue to business firms due to the price wedge caused by the tax. ANS: A Figure 8-2 The vertical distance between points A and B represents a tax in the market. Price 12 11 Supply 10 A 9 8 7 6 5 4 B 3 2 1 Demand 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Quantity 9. Refer to Figure 8-2. The imposition of the tax causes the quantity sold to a. increase by 1 unit. b. decrease by 1 unit. c. increase by 2 units. d. decrease by 2 units. ANS: B 10. Refer to Figure 8-2. The imposition of the tax causes the price paid by buyers to a. decrease by $2. b. increase by $3. c. decrease by $4. d. increase by $5. ANS: B 11. Refer to Figure 8-2. The imposition of the tax causes the price received by sellers to a. decrease by $2. b. increase by $3. c. decrease by $4. d. increase by $5. ANS: A 12. Refer to Figure 8-2. The amount of the tax on each unit of the good is a. $1. b. $4. c. $5. d. $9. ANS: C 13. Refer to Figure 8-2. The per-unit burden of the tax on buyers is a. $2. b. $3. c. $4. d. $5. ANS: B 14. Refer to Figure 8-2. The per-unit burden of the tax on sellers is a. $2. b. $3. c. $4. d. $5. ANS: A 15. Refer to Figure 8-2. The amount of tax revenue received by the government is a. $2.50. b. $4. c. $5. d. $9. ANS: C 16. Refer to Figure 8-2. The amount of deadweight loss as a result of the tax is a. $2.50. b. $5. c. $7.50. d. $10. ANS: A 17. Refer to Figure 8-2. The loss of consumer surplus as a result of the tax is a. $1.50. b. $3. c. $4.50. d. $6. ANS: C 18. Refer to Figure 8-2. The loss of producer surplus as a result of the tax is a. $1. b. $2. c. $3. d. $4. ANS: C 19. Refer to Figure 8-2. Consumer surplus without the tax is a. $6, and consumer surplus with the tax is $1.50. b. $6, and consumer surplus with the tax is $4.50. c. $10, and consumer surplus with the tax is $1.50. d. $10, and consumer surplus with the tax is $4.50. ANS: A 20. The Laffer curve relates a. the tax rate to tax revenue raised by the tax. b. the tax rate to the deadweight loss of the tax. c. the price elasticity of supply to the deadweight loss of the tax. d. government welfare payments to the birth rate. ANS: A