Practice Questions Application Taxation

Practice Questions Consumer surplus, producer surplus and market efficiency Application: Taxation 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.* 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. 3. 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. 4. A tax affects a. buyers only. b. sellers only. c. buyers and sellers only. d. buyers, sellers, and the government.* 5. 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. 6. 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. Page 1 of 11 7. A tax placed on buyers of airline tickets shifts the a. demand curve for airline tickets downward, decreasing the price received by sellers of airline tickets and causing the quantity of airline tickets to increase. b. demand curve for airline tickets downward, decreasing the price received by sellers of airline tickets and causing the quantity of airline tickets to decrease.* c. supply curve for airline tickets upward, decreasing the effective price paid by buyers of airline tickets and causing the quantity of airline tickets to increase. d. supply curve for airline tickets upward, increasing the effective price paid by buyers of airline tickets and causing the quantity of airline tickets to decrease. 8. Suppose a tax is imposed on the sellers 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.* Figure 8-1 Price P' Supply J K I L Y P'' P''' M B N Demand Quantity 9. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. Total surplus before the tax is measured by the area a. I+Y. b. J+K+L+M. c. L+M+Y. d. I+J+K+L+M+Y.* 10. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by I+J+K+L+M+Y represents a. total surplus before the tax.* b. total surplus after the tax. c. consumer surplus before the tax. d. deadweight loss from the tax. 11. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. Total surplus after the tax is measured by the area a. I+Y. b. J+K+L+M.* c. I+Y+B. d. I+J+K+L+M+Y. Page 2 of 11 12. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by J+K+L+M represents a. total surplus after the tax.* b. total surplus before the tax. c. deadweight loss from the tax. d. tax revenue. 13. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by K+L represents a. tax revenue.* b. consumer surplus before the tax. c. producer surplus after the tax. d. total surplus before the tax. 14. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The tax revenue is measured by the area a. K+L.* b. I+Y. c. J+K+L+M. d. I+J+K+L+M+Y. 15. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by L+M+Y represents a. consumer surplus after the tax. b. consumer surplus before the tax. c. producer surplus after the tax. d. producer surplus before the tax.* 16. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The producer surplus before the tax is measured by the area a. I+J+K. b. I+Y. c. L+M+Y.* d. M. 17. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by M represents a. consumer surplus after the tax. b. consumer surplus before the tax. c. producer surplus after the tax.* d. producer surplus before the tax. 18. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The producer surplus after the tax is measured by the area a. M.* b. L+M+N+Y+B. c. L+M+Y. d. J. Page 3 of 11 19. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by J+K+I represents a. consumer surplus after the tax. b. consumer surplus before the tax.* c. producer surplus after the tax. d. producer surplus before the tax. 20. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The consumer surplus before the tax is measured by the area a. M. b. L+M+Y. c. J. d. J+K+I.* 21. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by J represents a. consumer surplus after the tax.* b. consumer surplus before the tax. c. producer surplus after the tax. d. producer surplus before the tax. 22. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by I+Y represents the a. deadweight loss due to the tax.* b. loss in consumer surplus due to the tax. c. loss in producer surplus due to the tax. d. total surplus before the tax. Figure 8-2 The vertical distance between points A and B represents a tax in the market. Price 12 11 10 Supply 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 23. 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. Page 4 of 11 24. 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. 25. 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. 26. 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. 27. Refer to Figure 8-2. The per-unit burden of the tax on buyers is a. $2. b. $3.* c. $4. d. $5. 28. Refer to Figure 8-2. The per-unit burden of the tax on sellers is a. $2.* b. $3. c. $4. d. $5. 29. Refer to Figure 8-2. The amount of tax revenue received by the government is a. $2.50. b. $4. c. $5.* d. $9. 30. 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. 31. 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. 32. 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. Page 5 of 11 33. Refer to Figure 8-2. The loss of consumer surplus associated with some buyers dropping out of the market as a result of the tax is a. $0. b. $1.50.* c. $3. d. $4.50. Figure 8-3 The vertical distance between points A and C represents a tax in the market. P4 P3 P2 Price Supply A D P1 B C Demand Q1 Q2 Quantity 34. Refer to Figure 8-3. The equilibrium price before the tax is imposed is a. P1. b. P2.* c. P3. d. P4. 35. Refer to Figure 8-3. The price that buyers effectively pay after the tax is imposed is a. P1. b. P2. c. P3.* d. P4. 36. Refer to Figure 8-3. The price that sellers effectively receive after the tax is imposed is a. P1.* b. P2. c. P3. d. P4. 37. Refer to Figure 8-3. The per unit burden of the tax on buyers is a. P3 - P1. b. P3 - P2.* c. P2 - P1. d. P4 - P3. 38. Refer to Figure 8-3. The per-unit burden of the tax on sellers is a. P3 - P1. b. P3 - P2. c. P2 - P1.* d. P4 - P3. Page 6 of 11 39. Refer to Figure 8-3. The amount of the tax on each unit of the good is a. P3 - P1.* b. P3 - P2. c. P2 - P1. d. P4 - P3. 40. Refer to Figure 8-3. The amount of tax revenue received by the government is equal to the area a. P3ACP1.* b. ABC. c. P2DAP3. d. P1CDP2. 41. Refer to Figure 8-3. The amount of deadweight loss associated with the tax is equal to a. P3ACP1. b. ABC.* c. P2ADP3. d. P1DCP2. 42. Refer to Figure 8-3. The loss in consumer surplus caused by the tax is measured by the area a. P1P3AC. b. P3ABP2.* c. P1P3ABC. d. ABC. 43. Refer to Figure 8-3. The loss in producer surplus caused by the tax is measured by the area a. ABC. b. P1P3ABC. c. P1P2BC.* d. P1C0. 44. Refer to Figure 8-3. Which of the following equations is valid for the tax revenue that the tax provides to the government? a. Tax revenue = (P2 - P1)xQ1 b. Tax revenue = (P3 - P1)xQ1* c. Tax revenue = (P3 - P2)xQ1 d. Tax revenue = (P3 - P1)x(Q2 - Q1) 45. Refer to Figure 8-3. Which of the following equations is valid for the deadweight loss of the tax? a. Deadweight loss = (1/2)(P2 - P1)(Q2 + Q1) b. Deadweight loss = (1/2)(P3 - P1)(Q2 + Q1) c. Deadweight loss = (1/2)(P3 - P2)(Q2 - Q1) d. Deadweight loss = (1/2)(P3 - P1)(Q2 - Q1)* 46. 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. 47. If the labor supply curve is very elastic, a tax on labor Page 7 of 11 a. b. c. d. has a large deadweight loss.* raises enough tax revenue to offset the loss in welfare. has a relatively small impact on the number of hours that workers choose to work. results in a large tax burden on the firms that hire labor. Figure 8-13 Price Price Panel (a) 16 15 15 14 14 13 13 12 12 11 11 10 10 9 Supply 8 9 7 6 6 5 5 4 4 3 3 2 2 1 Demand 2 3 4 5 6 7 8 Quantity Supply 8 7 1 Panel (b) 16 1 Demand 1 2 3 4 5 6 7 8 Quantity 48. Refer to Figure 8-13. 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 larger 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. 49. Refer to Figure 8-13. Panel (a) and Panel (b) each illustrate a $4 tax placed on a market. In comparison to Panel (b), Panel (a) 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 larger 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. Page 8 of 11 Figure 8-15 Price S D1 D2 D3 D4 Quantity 50. Refer to Figure 8-15. Suppose the government imposes a $1 tax in each of the four markets represented by demand curves D1, D2, D3, and D4. The deadweight will be the smallest in the market represented by a. D1.* b. D2. c. D3. d. D4. 51. Refer to Figure 8-15. Suppose the government imposes a $1 tax in each of the four markets represented by demand curves D1, D2, D3, and D4. The deadweight will be the largest in the market represented by a. D1. b. D2. c. D3. d. D4.* 52. 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. 53. 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.* Page 9 of 11 54. Suppose the tax on liquor 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. Figure 8-17 The vertical distance between points A and B represents the original tax. Price 12 11 F 10 S A 9 8 C 7 6 5 D 4 3 B G 2 1 D 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Quantity 55. Refer to Figure 8-17. 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.* Page 10 of 11 56. Use the graph below to fill in the table. WITHOUT TAX WITH TAX CHANGE WITHOUT TAX WITH TAX CHANGE Consumer surplus Producer surplus Tax revenue Total surplus Suggested Answer: Consumer surplus Producer surplus Tax revenue Total surplus A+B+C D+E+F None A+B+C+D+E+F A F B+D A+B+D+F Page 11 of 11 -(B + C) -(D + E) (B + D) -(C + E)