Chapter 8/Applications: The Costs of Taxation ✦ 45 Chapter 8 Applications: The Costs of Taxation 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 perunit 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 the quantity demanded equals the quantity supplied and the price buyers pay exceeds the price sellers receive by the perunit tax SECTION: 1 OBJECTIVE: 1 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 perunit tax on a good, expressed as a percentage of its price ANSWER: d perunit tax on a good, expressed as a percentage of its price SECTION: 1 OBJECTIVE: 1 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 means that there is a loss to some individuals without a corresponding gain to others SECTION: 1 OBJECTIVE: 1 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 the loss from economic inefficiency SECTION: 1 OBJECTIVE: 1 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 the consumer and producer surplus that people could gain by eliminating that inefficiency SECTION: 1 OBJECTIVE: 1 46 ✦ Chapter 8/Applications: The Costs of Taxation A perunit tax on a good creates deadweight loss because a it makes demand more inelastic b it makes supply more elastic 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 by increasing the price consumers pay, and reducing the price sellers receive, it prevents some mutually beneficial trades SECTION: 1 OBJECTIVE: 1 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 $20 and 20 units SECTION: 1 OBJECTIVE: 1 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 $24 and 19 units SECTION: 1 OBJECTIVE: 1 Chapter 8/Applications: The Costs of Taxation ✦ 47 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 2.5 SECTION: 1 OBJECTIVE: 2 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 $95 SECTION: 1 OBJECTIVE: 2 11 If the supply curve is perfectly elastic, a perunit 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 does not reduce producer surplus SECTION: 2 OBJECTIVE: 2 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 paid only by consumers SECTION: 2 OBJECTIVE: 3 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 All of the above are correct SECTION: 2 OBJECTIVE: 3 48 ✦ Chapter 8/Applications: The Costs of Taxation 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 takehome 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 Any of the above are correct, depending on the elasticities of demand and supply SECTION: 2 OBJECTIVE: 3 15 Which of the following groups has a relatively elastic supply of labor? a headsofhouseholds 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 B and C both have relatively elastic labor supplies SECTION: 2 OBJECTIVE: 3 16 Which of the following groups has a relatively inelastic supply of labor? a headsofhouseholds 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 ANSWER: a headsofhouseholds who must support other people with their incomes. SECTION: 2 OBJECTIVE: 3 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 taxes on land are optimal because they create no deadweight loss SECTION: 2 OBJECTIVE: 3 18 According to supplyside 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 dampen incentives to work, save, and invest SECTION: 3 OBJECTIVE: 4 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 increase SECTION: 3 OBJECTIVE: 4 Chapter 8/Applications: The Costs of Taxation ✦ 49 20 According to supplyside 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 reduces marginal tax rates SECTION: 3 OBJECTIVE: 4 21 In the early 1980s, supplyside 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 some point along the falling portion of its Laffer curve SECTION: 3 OBJECTIVE: 4 22 Consider these diagrams. Which shows the greatest deadweight loss to its tax? a A b B c C d D ANSWER: d D SECTION: 3 OBJECTIVE: 4 23 Consider these diagrams. Which shows no deadweight loss to its tax? a A b B c C d D ANSWER: a A SECTION: 3 OBJECTIVE: 4 24 The hypothesis of the supplysiders 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 decreases in tax revenues when taxes were decreased SECTION: 3 OBJECTIVE: 4 50 ✦ Chapter 8/Applications: The Costs of Taxation 25 U.S. policymakers disagree most often about the effects of taxation because a some are capitalists and some are communists b some are supplysiders 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 they have different ideas about the relative elasticities of demand and supply SECTION: 3 OBJECTIVE: 4 ...46 ✦ Chapter 8/Applications: The Costs of Taxation A perunit tax on a good creates deadweight loss because... $20 and 20 units c $24 and 19 units d $19 and 19 units ANSWER: c $24 and 19 units SECTION: 1 OBJECTIVE: 1 Chapter 8/Applications: The Costs of Taxation ✦ 47 Consider the impact of a tax in the market described in this diagram. The deadweight loss ... All of the above are correct ANSWER: d All of the above are correct SECTION: 2 OBJECTIVE: 3 48 ✦ Chapter 8/Applications: The Costs of Taxation 14 When the government increases taxes on labor income,