Question 1

Scenario 8-1
Erin would be willing to pay as much as $100 per week to have her house cleaned. Ernesto's opportunity cost of cleaning Erin's house is $70 per week.
-Refer to Scenario 8-1. Assume Erin is required to pay a tax of $40 when she hires someone to clean her house for a week. Which of the following is correct?

Accepted Answer

A)  Erin will now clean her own house. 
B)  Ernesto will continue to clean Erin's house, but his producer surplus will decline. 
C)  Total economic welfare consumer surplus plus producer surplus plus tax revenue) will increase. 
D)  Erin will continue to hire Ernesto to clean her house, but her consumer surplus will decline.

Question 2

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

Accepted Answer

A)  40 per month. 
B)  50 per month. 
C)  75 per month. 
D)  100 per month.

Question 3

Who once said that taxes are the price we pay for a civilized society?

Accepted Answer

A)  Milton Friedman 
B)  Theodore Roosevelt 
C)  Arthur Laffer 
D)  Oliver Wendell Holmes, Jr.

Question 4

Figure 8-8
Suppose the government imposes a $10 per unit tax on a good. 
-Refer to Figure 8-8. One effect of the tax is to

Accepted Answer

A)  reduce consumer surplus from $180 to $72. 
B)  reduce producer surplus from $96 to $24. 
C)  create a deadweight loss of $72. 
D)  All of the above are correct.

Question 5

A tax raises the price received by sellers and lowers the price paid by buyers.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following quantities decrease in response to a tax on a good?

Accepted Answer

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 well-being 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.

Question 7

Suppose that the market for product X is characterized by a typical, downward-sloping, linear demand curve and a typical, upward-sloping, linear supply curve. Suppose the price elasticity of supply is 0.7. Will the deadweight loss from a $3 tax per unit be smaller if the absolute value of the price elasticity of demand is 0.6 or if the absolute value of the price elasticity of demand is 1.5?

Accepted Answer

The answer of Suppose that the market for product X...

Question 8

Figure 8-4
The vertical distance between points A and B represents a tax in the market. 
-Refer to Figure 8-4. The price that buyers effectively pay after the tax is imposed is

Accepted Answer

A)  $12. 
B)  between $8 and $12. 
C)  between $5 and $8. 
D)  $5.

Question 9

A tax is imposed on a certain good. The tax produces revenue of $5,000 for the government. The tax reduces consumer surplus by $3,000 and it reduces producer surplus by $4,000. What is the amount of the deadweight loss of the tax?

Accepted Answer

The answer of A tax is imposed on a certain...

Question 10

Figure 8-7
The vertical distance between points A and B represents a tax in the market. 
-Refer to Figure 8-7. Suppose a 20th unit of the good were sold by a seller to a buyer. Which of the following statements is correct?

Accepted Answer

A)  For the 20th unit, the difference between the buyer's value and the seller's cost is less than the tax per unit. 
B)  For the 20th unit, the difference between the buyer's value and the seller's cost is greater than the tax per unit. 
C)  For the 20th unit, the difference between the buyer's value and the seller's cost is equal to the tax per unit. 
D)  It makes sense for the buyer to buy and for the seller to sell the 20th unit, with or without the tax in place.

Question 11

Using demand and supply diagrams, show the difference in deadweight loss between a) a market with inelastic demand and supply and b) a market with elastic demand and supply.

Accepted Answer

The answer of Using demand and supply diagrams, show the...

Question 12

Figure 8-9
The vertical distance between points A and C represents a tax in the market. 
-Refer to Figure 8-9. The amount of amount of deadweight loss as a result of the tax is

Accepted Answer

A)  $4,000. 
B)  $5,000. 
C)  $6,000. 
D)  $10,000.

Question 13

The demand for chicken wings is more elastic than the demand for razor blades. Suppose the government levies an equivalent tax on chicken wings and razor blades. The deadweight loss would be larger in the market for

Accepted Answer

A)  chicken wings than in the market for razor blades because the quantity of chicken wings would fall by more than the quantity of razor blades. 
B)  chicken wings than in the market for razor blades because the quantity of razor blades would fall by more than the quantity of chicken wings. 
C)  razor blades than in the market for chicken wings because the quantity of chicken wings would fall by more than the quantity of razor blades. 
D)  razor blades than in the market for chicken wings because the quantity of razor blades would fall by more than the quantity of chicken wings.

Question 14

If the government imposes a $3 tax in a market, the equilibrium price will rise by $3.

Accepted Answer

A) True 
 B)False

Exam 8: Application: The Costs of Taxation

Who once said that taxes are the price we pay for a civilized society?

Figure 8-8 Suppose the government imposes a $10 per unit tax on a good. -Refer to Figure 8-8. One effect of the tax is to

A tax raises the price received by sellers and lowers the price paid by buyers.

Which of the following quantities decrease in response to a tax on a good?

Figure 8-4 The vertical distance between points A and B represents a tax in the market. -Refer to Figure 8-4. The price that buyers effectively pay after the tax is imposed is

A tax is imposed on a certain good. The tax produces revenue of $5,000 for the government. The tax reduces consumer surplus by $3,000 and it reduces producer surplus by $4,000. What is the amount of the deadweight loss of the tax?

Figure 8-7 The vertical distance between points A and B represents a tax in the market. -Refer to Figure 8-7. Suppose a 20th unit of the good were sold by a seller to a buyer. Which of the following statements is correct?

Using demand and supply diagrams, show the difference in deadweight loss between a) a market with inelastic demand and supply and b) a market with elastic demand and supply.

Figure 8-9 The vertical distance between points A and C represents a tax in the market. -Refer to Figure 8-9. The amount of amount of deadweight loss as a result of the tax is

The demand for chicken wings is more elastic than the demand for razor blades. Suppose the government levies an equivalent tax on chicken wings and razor blades. The deadweight loss would be larger in the market for

If the government imposes a $3 tax in a market, the equilibrium price will rise by $3.