Economics Chapter 8 Key

Chapter 8 1. Which of the following quantities decrease in response to a tax on a good? a. the equilibrium quantity in the market for the good, the effective price of the good paid by buyers, and consumer surplus b. the equilibrium quantity in the market for the good, producer surplus, and the wellbeing of buyers of the good c. the effective price received by sellers of the good, the wedge between the effective price paid by buyers and the effective price received by sellers, and consumer surplus d. None of the above is necessarily correct unless we know whether the tax is levied on buyers or on sellers. ANSWER: b 2. For a good that is taxed, the area on the relevant supplyanddemand graph that represents government’s tax revenue is a. smaller than the area that represents the loss of consumer surplus and producer surplus caused by the tax. b. bounded by the supply curve, the demand curve, the effective price paid by buyers, and the effective price received by sellers. c. a right triangle. d. a triangle, but not necessarily a right triangle. ANSWER: a 3. In the market for widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. The equilibrium quantity in the market for widgets is 200 per month when there is no tax. Then a tax of $5 per widget is imposed. As a result, the government is able to raise $800 per month in tax revenue. We can conclude that the equilibrium quantity of widgets has fallen by a. 40 per month. b. 50 per month. c. 75 per month. d. 100 per month. ANSWER: a 1 4. Suppose a tax of $5 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 200 units to 100 units. The tax decreases consumer surplus by $450 and decreases producer surplus by $300. The deadweight loss from the tax is a. $250. b. $500. c. $750. d. $1,000. ANSWER: a 5. Suppose a tax is imposed on each new hearing aid that is sold. The supply curve is a typical upward-sloping straight line, and the demand curve is a typical downwardsloping straight line. As a result of the tax, the equilibrium quantity of hearing aids decreases from 10,000 to 9,000, and the deadweight loss of the tax is $60,000. We can conclude that the tax on each hearing aid is a. $60. b. c. $120. $160. d. $200. ANSWER: b 6. Suppose a tax of $3 is imposed on each new garden hose that is sold, resulting in a deadweight loss of $22,500. The supply curve is a typical upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. Before the tax was imposed, the equilibrium quantity of garden hoses was 100,000. We can conclude that the equilibrium quantity of garden hoses after the tax is imposed is a. 75,000. b. 85,000. c. 90,000. d. 95,000. ANSWER: b 7. Kate is a personal trainer whose client William pays $80 per hour-long session. William values this service at $100 per hour, while the opportunity cost of Kate’s time is $75 per hour. The government places a tax of $10 per hour on personal trainers. After the tax, what is likely to happen in the market for personal training? 2 a. Kate and William will agree to a new price somewhere between $85 and $100. b. Kate and William will agree to a new price somewhere between $70 and $110. c. Kate will no longer offer personal training services to William because she must charge more than $100 in order to cover her opportunity costs and pay the tax. d. The price will remain at $80, and Kate will pay the $10 tax. ANSWER: a 8. Suppose Rebecca needs a dog sitter so that she can travel to her sister’s wedding. Rebecca values dog sitting for the weekend at $200. Susan is willing to dog sit for Rebecca so long as she receives at least $150. Rebecca and Susan agree on a price of $175. Suppose the government imposes a tax of $10 on dog sitting. The tax has made Rebecca and Susan worse off by a total of a. $50. b. $40. c. $20. d. $10. ANSWER: d 9. Which of the following statements is correct regarding the imposition of a tax on gasoline? a. The incidence of the tax depends upon whether the buyers or the sellers are required to remit tax payments to the government. b. The incidence of the tax depends upon the price elasticities of demand and supply. c. The amount of tax revenue raised by the tax depends upon whether the buyers or the sellers are required to remit tax payments to the government. d. The amount of tax revenue raised by the tax does not depend upon the amount of the tax per unit. ANSWER: b 10. Suppose a tax of $1 per unit is imposed on a good. The more elastic the supply of the good, other things equal, the a. smaller is the response of quantity supplied to the tax. 3 b. larger is the tax burden on sellers relative to the tax burden on buyers. c. larger is the deadweight loss of the tax. d. All of the above are correct. ANSWER: c 11. Which of the following statements is correct regarding a tax on a good and the resulting deadweight loss? a. The greater are the price elasticities of supply and demand, the greater is the deadweight loss. b. The greater is the price elasticity of supply and the smaller is the price elasticity of demand, the greater is the deadweight loss. c. The smaller are the decreases in quantity demanded and quantity supplied, the greater the deadweight loss. d. The smaller is the wedge between the effective price to sellers and the effective price to buyers, the greater is the deadweight loss. ANSWER: a 12. Assume the supply curve for diapers is a typical, upward-sloping straight line, and the demand curve for diapers is a typical, downward-sloping straight line. Suppose the equilibrium quantity in the market for diapers is 1,000 per month when there is no tax. Then a tax of $0.50 per diaper is imposed. The effective price paid by buyers increases from $1.50 to $1.90 and the effective price received by sellers falls from $1.50 to $1.40. The government’s tax revenue amounts to $475 per month. Which of the following statements is correct? a. After the tax is imposed, the equilibrium quantity of diapers is 900 per month. b. The demand for diapers is more elastic than the supply of diapers. c. The deadweight loss of the tax is $12.50. d. The tax causes a decrease in consumer surplus of $380. ANSWER: c 13. Suppose the price of milk is $2.39 per gallon, and the equilibrium quantity of milk is 100 thousand gallons per day with no tax on milk. Starting from this initial situation, which of the following scenarios would result in the smallest deadweight loss? a. The price elasticity of demand for milk is 0.3, the price elasticity of supply for milk is 0.7, and the milk tax amounts to $0.40 per gallon. 4 b. The price elasticity of demand for milk is 0.2, the price elasticity of supply for milk is 0.5, and the milk tax amounts to $0.30 per gallon. c. The price elasticity of demand for milk is 0.2, the price elasticity of supply for milk is 0.7, and the milk tax amounts to $0.30 per gallon. d. The price elasticity of demand for milk is 0.1, the price elasticity of supply for milk is 0.5, and the milk tax amounts to $0.20 per gallon. ANSWER: d 14. Other things equal, the deadweight loss of a tax a. decreases as the size of the tax increases. b. increases as the size of the tax increases, but the increase in the deadweight loss is less rapid than the increase in the size of the tax. c. increases as the size of the tax increases, and the increase in the deadweight loss is more rapid than the increase in the size of the tax. d. increases as the price elasticities of demand and/or supply increase, but the deadweight loss does not change as the size of the tax increases. ANSWER: c 15. 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. ANSWER: a 16. 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. ANSWER: d 5 17. Suppose a tax of $0.50 per unit on a good creates a deadweight loss of $100. If the tax is increased to $2.50 per unit, the deadweight loss from the new tax would be a. $200. b. $250. c. $500. d. $2,500. ANSWER: d 18. Suppose that the market for large, 64-ounce soft drinks in the town of Pudgyville is characterized by a typical, downward-sloping, linear demand curve and a typical, upwardsloping, linear supply curve. The market is initially in equilibrium with 1,000 soft drinks sold per day. The newly-elected Mayor of Pudgyville wants to tax 64-ounce soft drinks. She is considering either a $0.10 tax or a $0.30 tax. Her chief economic advisor estimates that the number of soft drinks sold after a $0.10 tax will be 900 and after a $0.30 tax will be 500. Which tax is better? a. The $0.10 tax is better because it raises more revenue and creates a lower deadweight loss than the $0.30 tax. b. The $0.30 tax is better because it raises more revenue and creates a lower deadweight loss than the $0.10 tax. c. It is not clear which tax is better because although the $0.30 tax raises more tax revenues, it creates a larger deadweight loss than the $0.10 tax. d. It is not clear which tax is better because although the $0.10 tax raises more tax revenues, it creates a larger deadweight loss than the $0.30 tax. ANSWER: c Figure 8-22 6 19. Refer to Figure 8-22. Suppose the government changed the per-unit tax on this good from $3.00 to $1.50. Compared to the original tax rate, this lower tax rate would a. increase tax revenue and increase the deadweight loss from the tax. b. increase tax revenue and decrease the deadweight loss from the tax. c. decrease tax revenue and increase the deadweight loss from the tax. d. decrease tax revenue and decrease the deadweight loss from the tax. ANSWER: d 20. Refer to Figure 8-22. Suppose the government changed the per-unit tax from $3.00 to $4.50. Compared to the original tax rate, this higher tax rate would a. increase tax revenue and increase the deadweight loss from the tax. b. increase tax revenue and decrease the deadweight loss from the tax. c. decrease tax revenue and increase the deadweight loss from the tax. d. decrease tax revenue and decrease the deadweight loss from the tax. ANSWER: a 21. Refer to Figure 8-22. Suppose the government initially imposes a $3 per-unit tax on this good. Now suppose the government is deciding whether to lower the tax to $1.50 or raise it to $4.50. Which of the following statements is correct? a. Compared to the original tax, the smaller tax will decrease both tax revenue and b. Compared to the original tax, the larger tax will increase both tax revenue and deadweight loss. deadweight loss. 7 c. Compared to the original tax, the larger tax will decrease tax revenue and increase deadweight loss. d. Both a and b are correct. ANSWER: d 22. Refer to Figure 8-22. Suppose the government initially imposes a $3 per-unit tax on this good. Now suppose the government is deciding whether to lower the tax to $1.50 or raise it to $4.50. Which of the following statements is not correct? a. Compared to the original tax, the larger tax will decrease 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. ANSWER: a 23. Refer to Figure 8-22. Suppose the government initially imposes a $3 per-unit tax on this good. Now suppose the government is deciding whether to lower the tax to $1.50 or raise it to $4.50. Which of the following statements is not correct? a. Compared to the original tax, the larger tax will decrease 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. ANSWER: a 24. 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. ANSWER: b 25. If the labor supply curve is nearly vertical, a tax on labor a. has a large deadweight loss. b. raises a small amount of tax revenue. c. has little impact on the amount of work that workers are willing to do. d. results in a large tax burden on the firms that hire labor. 8 ANSWER: c Figure 8-15 26. Refer to Figure 8-15. Panel (a) and Panel (b) each illustrate a $4 tax placed on a market. In comparison to Panel (a), Panel (b) illustrates which of the following statements? a. When demand is relatively inelastic, the deadweight loss of a tax is smaller than when demand is relatively elastic. b. When demand is relatively elastic, the deadweight loss of a tax is smaller than when demand is relatively inelastic. c. When supply is relatively inelastic, the deadweight loss of a tax is smaller than when supply is relatively elastic. d. When supply is relatively elastic, the deadweight loss of a tax is larger than when supply is relatively inelastic. ANSWER: a 27. 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. 9 ANSWER: d 28. Suppose the tax on gasoline is decreased from $0.60 per gallon to $0.40 per gallon. As a result, a. tax revenue necessarily decreases. b. the deadweight loss of the tax necessarily decreases. c. the demand curve for gasoline necessarily becomes steeper. d. the supply curve for gasoline necessarily becomes flatter. ANSWER: b 10