Basic C.08-Costs of Taxation

Chapter 8
Applications: The Costs of Taxation

1. The market will be in equilibrium with a tax on sales of a good when
a. the quantity demanded equals the quantity supplied and the price buyers pay exceeds the price
sellers receive by the per-unit tax.
b. the price received by the seller equals the price paid by the buyer and the quantity demanded is
less than the quantity supplied by the amount of the tax.
c. the tax is equal to the price paid by the buyer and quantity demanded is equal to the quantity
supplied.
d. there cannot be a market equilibrium with a tax on sales.
ANSWER: a
2. The tax rate on a good is the

a. total amount of taxes paid by consumers on that good.
b. total amount of taxes paid by producers on that good.
c. total amount of taxes paid by both producers and consumers on that good.
d. per-unit tax on a good, expressed as a percentage of its price.
ANSWER: d
3. Deadweight loss
a. means that there is a loss to some individuals without a corresponding gain to others.
b. is not really a loss to society because what one individual loses another individual gains.
c. can be eliminated by sales taxes.
d. can occur even if output is at the efficient level.
ANSWER: a
4. Deadweight loss measures the

a. the amount people would pay to gain an additional unit of a good.
b. the loss from economic inefficiency.
c. the difference between two efficient situations.
d. the amount required to compensate producers for lost surplus due to the imposition of a sales
tax.
ANSWER: b
5. The deadweight loss from an economically inefficient situation is equal to

a. consumer surplus minus producer surplus.
b. consumer surplus plus producer surplus.
c. the consumer and producer surplus that people could gain by eliminating that inefficiency.
d. the increase in consumer surplus minus the increase in producer surplus that people could gain
by eliminating that inefficiency.
ANSWER: c
6. A per-unit tax on a good creates deadweight loss because

a. it makes demand more inelastic.
b. it makes supply more elastic.
1
c. by increasing the price consumers pay, and reducing the price sellers receive, it prevents some
mutually beneficial trades.
d. the government wastes the tax revenues it receives.
ANSWER: c
7. Consider the impact of a tax in the market described in this diagram. The equilibrium price and
quantity exchanged in the market before the tax is
a. $100 and 25 units.
b. $20 and 20 units.
c. $19 and 20 units.
d. $0 and 25 units.
ANSWER: b
8. Consider the impact of a tax in the market described in this diagram. The equilibrium price and
quantity exchanged in the market after the tax is
a. $100 and 25 units.
b. $20 and 20 units.
c. $24 and 19 units.
d. $19 and 19 units.
ANSWER: c
9. Consider the impact of a tax in the market described in this diagram. The deadweight loss
attributable to the tax is
a. 2.5.
b. 5.0.
c. 95.
d. 97.5.
ANSWER: a
10. Consider the impact of a tax in the market described in this diagram. The government will collect
a. $100.
b. $95.
c. $50.
d. no money, consumers will refuse to buy this good with the $5 tax.
ANSWER: b
11.If the supply curve is perfectly elastic, a per-unit tax

a. does not create a deadweight loss.
b. does not reduce consumer surplus.
c. does not reduce producer surplus.
d. reduces consumer surplus but increases producer surplus.
ANSWER: c
12.Suppose demand for electricity is perfectly inelastic. A tax on electricity will be

a. split between producers and consumers in equal shares.
b. paid only by producers.
c. paid only by consumers.
d. split between producers and consumers in unequal shares.
ANSWER: c
13.The coastal town of Milford, Connecticut recently increased taxes on beachfront property. They did
this because
a. taxes on land generate no deadweight loss and lots of revenues for government.
b. politicians recognize that the supply of beachfront property is perfectly inelastic and so the tax
would generate no deadweight loss.
c. taxes on land are paid entirely by the suppliers since the supply of beachfront property is
perfectly inelastic.
d. All of the above are correct.
ANSWER: d
14.When the government increases taxes on labor income,

a. people tend to work harder to make up for lost income.
b. people tend to work less because their take-home wage is lower.
c. most employers reduce employment.
d. Any of the above are correct, depending on the elasticities of demand and supply.
ANSWER: d
15.Which of the following groups has a relatively elastic supply of labor?

a. heads-of-households who must support other people with their incomes
b. elderly people on Social Security, who can choose whether or not to work
c. second earners in a household, who make lower wages than the primary wage earner.
d. B and C both have relatively elastic labor supplies.
ANSWER: d
16. Which of the following groups has a relatively inelastic supply of labor?
a. heads-of-households who must support other people with their incomes.
b. Elderly people on Social Security, who can choose whether or not to work.
c. second earners in a household, who make lower wages than the primary wage earner
d. B and C, who have relatively elastic labor supplies
3
ANSWER: a
17.Henry George’s arguments were based on the idea that

a. income taxes are optimal because they distort incentives.
b. income taxes are optimal because they create no deadweight loss.
c. taxes on land are optimal because they create no deadweight loss.
d. income taxes are optimal because they are paid by employers.
ANSWER: c
18.According to supply-side economists, the U.S. tax system tends to

a. decrease interest rates and loans to businesses.
b. dampen incentives to work, save, and invest.
c. reduce unemployment and push up the price level.
d. provide lower tax rates to people who work on salary.
ANSWER: b
19.According to the Laffer Curve, when taxes are increased from 0 percent to a rate consistent with the
maximum point on the curve, tax revenue will
a. decrease.
b. increase.
c. be the same as the tax rate.
d. remain constant.
ANSWER: b
20.According to supply-side economists, a policy that __________ will cause productivity to increase,
which increases the supply of goods and services in the marketplace.
a. increases interest rates
b. decreases inflation
c. reduces marginal tax rates
d. funds capital investment in the economy
ANSWER: c
21.In the early 1980s, supply-side economists suggested that the U.S. was at
a. the minimum point along its Laffer curve.
b. the maximum point along its Laffer curve.
c. some point along the rising portion of its Laffer curve.
d. some point along the falling portion of its Laffer curve.
ANSWER: d
22.Consider these diagrams. Which shows the greatest deadweight loss to its tax?
a. A
b. B
c. C
d. D
ANSWER: d
23.Consider these diagrams. Which shows no deadweight loss to its tax?
a. A
b. B
c. C
d. D
ANSWER: a
24.The hypothesis of the supply-siders was disputed by data from the 1980s that showed
a. decreases in tax revenues when taxes were increased.
b. increases in tax revenues when taxes were increased.
c. decreases in tax revenue when taxes were decreased.
d. increases in tax revenues when property taxes were increased.
ANSWER: c
25.U.S. policymakers disagree most often about the effects of taxation because
a. some are capitalists and some are communists.
b. some are supply-siders and some are not.
c. they have different ideas about the relative elasticities of demand and supply.
d. some are rich and some are poor.
ANSWER: c

Basic C.08-Costs of Taxation

Uploaded by

Copyright:

Available Formats

Basic C.08-Costs of Taxation

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Basic C.08-Costs of Taxation

Uploaded by

Copyright:

Available Formats

Chapter 8

Applications: The Costs of Taxation

2. The tax rate on a good is the

4. Deadweight loss measures the

5. The deadweight loss from an economically inefficient situation is equal to

6. A per-unit tax on a good creates deadweight loss because

11.If the supply curve is perfectly elastic, a per-unit tax

12.Suppose demand for electricity is perfectly inelastic. A tax on electricity will be

14.When the government increases taxes on labor income,

15.Which of the following groups has a relatively elastic supply of labor?

17.Henry George’s arguments were based on the idea that

18.According to supply-side economists, the U.S. tax system tends to

You might also like