TEST BANK chapter 8 application the costs of taxation

Chapter /Application: the Costs of Taxation ❖ 17 Chapter Application: the Costs of Taxation TRUE/FALSE Total surplus is always equal to the sum of consumer surplus and producer surplus ANS: F DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Total surplus MSC: Interpretive Total surplus in a market does not change when the government imposes a tax on that market because the loss of consumer surplus and producer surplus is equal to the gain of government revenue ANS: F DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Total surplus MSC: Interpretive When a tax is imposed on buyers, consumer surplus and producer surplus both decrease ANS: T DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus | Producer surplus MSC: Interpretive When a tax is imposed on buyers, consumer surplus decreases but producer surplus increases ANS: F DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus | Producer surplus MSC: Interpretive When a tax is imposed on sellers, producer surplus decreases but consumer surplus increases ANS: F DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus | Producer surplus MSC: Interpretive When a tax is imposed on sellers, consumer surplus and producer surplus both decrease ANS: T DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus | Producer surplus MSC: Interpretive Taxes affect market participants by increasing the price paid by the buyer and received by the seller ANS: F DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Taxes MSC: Applicative Taxes affect market participants by increasing the price paid by the buyer and decreasing the price received by the seller ANS: T DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Taxes MSC: Applicative A tax raises the price received by sellers and lowers the price paid by buyers ANS: F DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Efficiency MSC: Interpretive 10 Normally, both buyers and sellers of a good become worse off when the good is taxed ANS: T DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Welfare MSC: Interpretive 11 When a good is taxed, the tax revenue collected by the government equals the decrease in the welfare of buyers and sellers caused by the tax ANS: F DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Welfare | Tax revenue MSC: Interpretive 18 ❖ Chapter /Application: the Costs of Taxation 12 A tax places a wedge between the price buyers pay and the price sellers receive ANS: T DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Efficiency MSC: Interpretive 13 A tax on a good causes the size of the market to increase ANS: F DIF: REF: 8-1 LOC: Supply and demand TOP: Efficiency NAT: Analytic MSC: Interpretive 14 A tax on a good causes the size of the market to shrink ANS: T DIF: REF: 8-1 LOC: Supply and demand TOP: Efficiency NAT: Analytic MSC: Interpretive 15 When a tax is imposed, the loss of consumer surplus and producer surplus as a result of the tax exceeds the tax revenue collected by the government ANS: T DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Welfare MSC: Interpretive 16 Economists use the government’s tax revenue to measure the public benefit from a tax ANS: T DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Welfare MSC: Interpretive 17 Because taxes distort incentives, they cause markets to allocate resources inefficiently ANS: T DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Efficiency MSC: Interpretive 18 Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade ANS: T DIF: REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Deadweight loss MSC: Interpretive 19 As the price elasticities of supply and demand increase, the deadweight loss from a tax increases ANS: T DIF: REF: 8-2 NAT: Analytic LOC: Elasticity TOP: Elasticity | Deadweight loss MSC: Applicative 20 The greater the elasticity of demand, the smaller the deadweight loss of a tax ANS: F DIF: REF: 8-2 NAT: Analytic LOC: Elasticity TOP: Elasticity | Deadweight loss MSC: Interpretive 21 The more inelastic are demand and supply, the greater is the deadweight loss of a tax ANS: F DIF: REF: 8-2 NAT: Analytic LOC: Elasticity TOP: Elasticity | Deadweight loss MSC: Applicative 22 The elasticities of the supply and demand curves in the market for cigarettes affect how much a tax distorts that market ANS: T DIF: REF: 8-2 NAT: Analytic LOC: Elasticity TOP: Elasticity | Deadweight loss MSC: Interpretive 23 If a tax did not induce buyers or sellers to change their behavior, it would not cause a deadweight loss ANS: T DIF: REF: 8-2 NAT: Analytic LOC: Supply and demand TOP: Deadweight loss MSC: Interpretive 24 The most important tax in the U.S economy is the tax on corporations’ profits ANS: F DIF: REF: 8-2 NAT: Analytic LOC: Supply and demand TOP: Labor MSC: Definitional 25 The Social Security tax, and to a large extent, the federal income tax, are labor taxes ANS: T DIF: REF: 8-2 NAT: Analytic LOC: Supply and demand TOP: Labor MSC: Interpretive Chapter /Application: the Costs of Taxation ❖ 19 26 Taxes on labor tend to increase the number of hours that people choose to work ANS: F DIF: REF: 8-2 NAT: Analytic LOC: Supply and demand TOP: Labor MSC: Interpretive 27 Taxes on labor tend to encourage the elderly to retire early ANS: T DIF: REF: 8-2 LOC: Supply and demand TOP: Labor NAT: Analytic MSC: Interpretive 28 Taxes on labor tend to encourage second earners to stay at home rather than work in the labor force ANS: T DIF: REF: 8-2 NAT: Analytic LOC: Supply and demand TOP: Labor MSC: Interpretive 29 Economists disagree on whether labor taxes have a small or large deadweight loss ANS: T DIF: REF: 8-2 NAT: Analytic LOC: Supply and demand TOP: Labor | Deadweight loss MSC: Definitional 30 The demand for bread is less elastic than the demand for donuts; hence, a tax on bread will create a larger deadweight loss than will the same tax on donuts, other things equal ANS: F DIF: REF: 8-2 NAT: Analytic LOC: Elasticity TOP: Elasticity | Deadweight loss MSC: Applicative 31 The larger the deadweight loss from taxation, the larger the cost of government programs ANS: T DIF: REF: 8-2 NAT: Analytic LOC: Supply and demand TOP: Deadweight loss MSC: Interpretive 32 A tax on insulin is likely to cause a very large deadweight loss to society ANS: F DIF: REF: 8-2 NAT: Analytic LOC: Elasticity TOP: Deadweight loss | Elasticity MSC: Applicative 33 The deadweight loss of a tax rises even more rapidly than the size of the tax ANS: T DIF: REF: 8-3 NAT: Analytic LOC: Supply and demand TOP: Deadweight loss MSC: Interpretive 34 As the size of a tax increases, the government's tax revenue rises, then falls ANS: T DIF: REF: 8-3 NAT: Analytic LOC: Supply and demand TOP: Laffer curve MSC: Interpretive 35 Tax revenues increase in direct proportion to increases in the size of the tax ANS: F DIF: REF: 8-3 NAT: Analytic LOC: Supply and demand TOP: Tax revenue MSC: Interpretive 36 If the size of a tax doubles, the deadweight loss doubles ANS: F DIF: REF: 8-3 NAT: LOC: Supply and demand TOP: Deadweight loss MSC: Applicative Analytic 37 If the size of a tax triples, the deadweight loss increases by a factor of six ANS: F DIF: REF: 8-3 NAT: Analytic LOC: Supply and demand TOP: Deadweight loss MSC: Applicative 38 A tax on unimproved land falls entirely on landowners because the supply of land is perfectly inelastic ANS: T DIF: REF: 8-3 NAT: Analytic LOC: Supply and demand TOP: Land tax MSC: Interpretive 39 Because the supply of land is perfectly elastic, the deadweight loss of a tax on land is very large ANS: F DIF: REF: 8-3 NAT: Analytic LOC: Elasticity TOP: Land tax | Deadweight loss MSC: Interpretive 20 ❖ Chapter /Application: the Costs of Taxation 40 Economist Arthur Laffer made the argument that tax rates in the United States were so high that reducing the rates would increase tax revenue ANS: T DIF: REF: 8-3 NAT: Analytic LOC: Supply and demand TOP: Laffer curve MSC: Definitional 41 The Laffer curve is the curve showing how tax revenue varies as the size of the tax varies ANS: T DIF: REF: 8-3 NAT: Analytic LOC: Supply and demand TOP: Laffer curve MSC: Definitional 42 The result of the large tax cuts in the first Reagan Administration demonstrated very convincingly that Arthur Laffer was correct when he asserted that cuts in tax rates would increase tax revenue ANS: F DIF: REF: 8-3 NAT: Analytic LOC: Supply and demand TOP: Laffer curve MSC: Interpretive 43 The idea that tax cuts would increase the quantity of labor supplied, thus increasing tax revenue, became know as supply-side economics ANS: T DIF: REF: 8-3 NAT: Analytic LOC: Supply and demand TOP: Supply-side economics MSC: Definitional 44 The Laffer curve illustrates how taxes in markets with greater elasticities of demand compare to taxes in markets with smaller elasticities of supply ANS: F DIF: REF: 8-3 NAT: Analytic LOC: Supply and demand TOP: Laffer curve MSC: Definitional 45 The more elastic are supply and demand in a market, the greater are the distortions caused by a tax on that market, and the more likely it is that a tax cut in that market will raise tax revenue ANS: T DIF: REF: 8-3 NAT: Analytic LOC: Elasticity TOP: Elasticity | Deadweight loss MSC: Applicative 46 When the government imposes taxes on buyers and sellers of a good, society loses some of the benefits of market efficiency ANS: T DIF: REF: 8-4 NAT: Analytic LOC: Supply and demand TOP: Efficiency MSC: Interpretive SHORT ANSWER Suppose the government levies a tax of the vertical distance from point A to point B Using the graph shown, determine the value of each of the following: a equilibrium price before the tax b consumer surplus before the tax c producer surplus before the tax d total surplus before the tax e consumer surplus after the tax f producer surplus after the tax g total tax revenue to the government h total surplus (consumer surplus+producer surplus+tax revenue) after the tax i deadweight loss Chapter /Application: the Costs of Taxation ❖ 21 Price 22 20 18 Supply A 16 14 12 10 B Demand 100 200 300 400 500 600 700 800 900 1000 Quantity ANS: a b c d e f g h i DIF: TOP: $10 $3,600 $2,400 $6,000 $900 $600 $3,000 $4,500 $1,500 Welfare REF: 8-1 MSC: Applicative NAT: Analytic LOC: Supply and demand John has been in the habit of mowing Willa's lawn each week for $20 John's opportunity cost is $15, and Willa would be willing to pay $25 to have her lawn mowed What is the maximum tax the government can impose on lawn mowing without discouraging John and Willa from continuing their mutually beneficial arrangement? ANS: If the tax is less than $10, there will exist a price at which both John and Willa will still benefit from the lawnmowing arrangement If the tax is $10, a price can be set which will leave John and Willa neither better off nor worse off from the lawn-mowing arrangement If the tax is greater than $10, all possible prices will leave at least one of the parties worse off from the lawn-mowing arrangement DIF: TOP: Efficiency REF: 8-1 MSC: Applicative NAT: Analytic LOC: Supply and demand 22 ❖ Chapter /Application: the Costs of Taxation Use the following graph shown to fill in the table that follows P4 Price Supply A P3 B C D G P2 P1 F Demand Q2 Q1 Quantity WITHOUT TAX WITH TAX CHANGE Consumer surplus Producer surplus Tax revenue Total surplus ANS: Consumer surplus Producer surplus Tax revenue Total surplus DIF: TOP: Welfare WITHOUT TAX A+B+C D+F+G None A+B+C+D+F+G REF: 8-1 MSC: Applicative WITH TAX A F B+D A+B+D+F NAT: Analytic CHANGE –(B+C) –(D+G) (B+D) –(C+G) LOC: Supply and demand Suppose that instead of a supply-demand diagram, you are given the following information: Qs = 100 + 3P Qd = 400 - 2P From this information compute equilibrium price and quantity Now suppose that a tax is placed on buyers so that Qd = 400 - (2P + T) If T = 15, solve for the new equilibrium price and quantity (Note: P is the price received by sellers and P + T is the price paid by buyers.) Compare these answers for equilibrium price and quantity with your first answers What does this show you? ANS: Prior to the tax, the equilibrium price would be $60 and the equilibrium quantity would be 280 After the tax is imposed, P, the price received by sellers would be $57 The price paid by buyers would be $72 The quantity sold would be 271 The new answer shows three obvious facts First, buyers pay more with a tax Second, sellers receive less with a tax Third, the size of the market shrinks when a tax is imposed on a product DIF: TOP: Taxes REF: 8-1 MSC: Analytical NAT: Analytic LOC: Supply and demand Chapter /Application: the Costs of Taxation ❖ 23 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 ANS: DIF: TOP: REF: 8-2 Deadweight loss | Elasticity NAT: Analytic MSC: Applicative LOC: Elasticity 24 ❖ Chapter /Application: the Costs of Taxation Illustrate on three demand-and-supply graphs how the size of a tax (small, medium and large) can alter total revenue and deadweight loss ANS: DIF: TOP: REF: Deadweight loss 8-3 NAT: Analytic MSC: Applicative LOC: Supply and demand Sec00 - Application: The Costs of Taxation MULTIPLE CHOICE In 1776, the American Revolution was sparked by anger over a the extravagant lifestyle of British royalty b the crimes of British soldiers stationed in the American colonies c British taxes imposed on the American colonies d the failure of the British to protect American colonists from attack by hostile Native Americans ANS: C NAT: Analytic MSC: Definitional DIF: REF: LOC: Supply and demand 8-0 TOP: Anger over British taxes played a significant role in bringing about the a election of John Adams as the second American president b American Revolution c War of 1812 d “no new taxes” clause in the U.S Constitution Taxes Chapter /Application: the Costs of Taxation ❖ 25 ANS: B NAT: Analytic MSC: Definitional DIF: REF: LOC: Supply and demand 8-0 TOP: Taxes DIF: REF: LOC: Supply and demand 8-0 TOP: Taxes DIF: REF: LOC: Supply and demand 8-0 TOP: Taxes | Economic welfare To fully understand how taxes affect economic well-being, we must compare the a benefit to buyers with the loss to sellers b price paid by buyers to the price received by sellers c profits earned by firms to the losses incurred by consumers d decrease in total surplus to the increase in revenue raised by the government ANS: D NAT: Analytic MSC: Interpretive Taxes To fully understand how taxes affect economic well-being, we must a assume that economic well-being is not affected if all tax revenue is spent on goods and services for the people who are being taxed b compare the taxes raised in the United States with those raised in other countries, especially France c compare the reduced welfare of buyers and sellers to the amount of revenue the government raises d take into account the fact that almost all taxes reduce the welfare of buyers, increase the welfare of sellers, and raise revenue for the government ANS: C NAT: Analytic MSC: Interpretive TOP: Who once said that taxes are the price we pay for a civilized society? a Milton Friedman b Theodore Roosevelt c Arthur Laffer d Oliver Wendell Holmes, Jr ANS: D NAT: Analytic MSC: Definitional 8-0 Who once said that taxes are the price we pay for a civilized society? a Aristotle b George Washington c Oliver Wendell Holmes, Jr d Ronald Reagan ANS: C NAT: Analytic MSC: Definitional DIF: REF: LOC: Supply and demand DIF: REF: LOC: Supply and demand 8-0 TOP: Taxes | Economic welfare To fully understand how taxes affect economic well-being, we must compare the a consumer surplus to the producer surplus b price paid by buyers to the price received by sellers c reduced welfare of buyers and sellers to the revenue raised by the government d consumer surplus to the deadweight loss ANS: C NAT: Analytic MSC: Interpretive DIF: REF: LOC: Supply and demand 8-0 TOP: Taxes | Economic welfare 26 ❖ Chapter /Application: the Costs of Taxation Sec01 - Application: The Costs of Taxation - The Deadweight Loss of Taxation MULTIPLE CHOICE 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 ANS: D NAT: Analytic MSC: Interpretive DIF: REF: LOC: Supply and demand 8-1 TOP: Taxes DIF: REF: LOC: Supply and demand TOP: Taxes TOP: Tax incidence TOP: Tax revenue 8-1 DIF: REF: LOC: Supply and demand 8-1 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 ANS: C NAT: Analytic MSC: Interpretive Tax burden A tax affects a buyers only b sellers only c buyers and sellers only d buyers, sellers, and the government ANS: D NAT: Analytic MSC: Interpretive TOP: 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 ANS: B NAT: Analytic MSC: Interpretive 8-1 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 ANS: B NAT: Analytic MSC: Interpretive DIF: REF: LOC: Supply and demand DIF: REF: LOC: Supply and demand 8-1 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 ANS: C NAT: Analytic MSC: Applicative DIF: REF: LOC: Supply and demand 8-1 TOP: Total surplus 68 ❖ Chapter /Application: the Costs of Taxation 44 The Social Security tax is a tax on a capital b labor c consumption expenditures d earnings during retirement ANS: B LOC: Elasticity 45 REF: 8-2 MSC: Applicative NAT: Analytic DIF: TOP: Labor REF: 8-2 MSC: Applicative NAT: Analytic DIF: TOP: Labor REF: 8-2 MSC: Definitional NAT: Analytic DIF: TOP: Labor REF: 8-2 MSC: Applicative NAT: Analytic The more freedom people are given to choose the date of their retirement, the a more elastic is the supply of labor b less elastic is the supply of labor c steeper is the labor supply curve d smaller is the decrease in employment that will result from a tax on labor ANS: A LOC: Elasticity 50 Labor The more freedom young mothers have to work outside the home, the a more elastic the supply of labor will be b less elastic the supply of labor will be c more vertical the labor supply curve will be d smaller is the decrease in employment that will result from a tax on labor ANS: A LOC: Elasticity 49 DIF: TOP: The marginal tax rate on labor income for many workers in the United States is almost a 30 percent b 40 percent c 50 percent d 65 percent ANS: B LOC: Elasticity 48 NAT: Analytic Interpretive If the labor supply curve is very elastic, a tax on labor a has a large deadweight loss b raises enough tax revenue to offset the loss in welfare c has a relatively small impact on the number of hours that workers choose to work d results in a large tax burden on the firms that hire labor ANS: A LOC: Elasticity 47 REF: 8-2 Labor | Social Security MSC: 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 d results in a large tax burden on the firms that hire labor ANS: C LOC: Elasticity 46 DIF: TOP: DIF: TOP: Labor REF: 8-2 MSC: Applicative NAT: Analytic NAT: Analytic Taxes on labor encourage all of the following except a older workers to take early retirement from the labor force b mothers to stay at home rather than work in the labor force c workers to work overtime d people to be paid “under the table.” ANS: C LOC: Elasticity DIF: TOP: Labor REF: 8-2 MSC: Interpretive Chapter /Application: the Costs of Taxation ❖ 69 51 Taxes on labor encourage which of the following? a labor demand to be more inelastic b mothers to stay at home rather than work in the labor force c workers to work overtime d fathers to take on second jobs ANS: B LOC: Elasticity 52 DIF: TOP: Labor REF: 8-2 MSC: Interpretive NAT: Analytic As more people become self-employed, which allows them to determine how many hours they work per week, we would expect the deadweight loss from the Social Security tax to a increase, and the revenue generated from the tax to increase b increase, and the revenue generated from the tax to decrease c decrease, and the revenue generated from the tax to increase d decrease, and the revenue generated from the tax to decrease ANS: B LOC: Elasticity DIF: TOP: REF: 8-2 Social Security | Tax revenue NAT: Analytic MSC: Applicative Sec03 - Deadweight Loss and Tax Revenue as Taxes Vary MULTIPLE CHOICE 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 ANS: A LOC: Elasticity DIF: TOP: NAT: Analytic Applicative REF: 8-3 Elasticity | Tax revenue MSC: NAT: Analytic Applicative 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 ANS: D DIF: LOC: Supply and demand REF: 8-3 Elasticity | Tax revenue MSC: An increase 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 ANS: D LOC: Elasticity DIF: TOP: REF: TOP: 8-3 Tax revenue NAT: Analytic MSC: Interpretive 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 ANS: C DIF: LOC: Supply and demand MSC: Applicative REF: TOP: 8-3 NAT: Analytic Tax revenue | Deadweight loss 70 ❖ Chapter /Application: the Costs of Taxation Figure 8-10 The vertical distance between points A and B represents the original tax Price 12 11 F 10 S A C D B G D 0.5 1.5 2.5 4.5 Quantity REF: TOP: 8-3 NAT: Analytic Tax revenue | Deadweight loss Refer to Figure 8-10 If the government changed the per-unit tax from $5.00 to $7.50, then the price paid by buyers would be $10.50, the price received by sellers would be $3, and the quantity sold in the market would be 0.5 units Compared to the original tax rate, this higher 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 ANS: C DIF: LOC: Supply and demand MSC: Analytical Refer to Figure 8-10 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 ANS: D DIF: LOC: Supply and demand MSC: Analytical 3.5 REF: TOP: 8-3 NAT: Analytic Tax revenue | Deadweight loss Refer to Figure 8-10 The original tax can be represented by the vertical distance AB Suppose the government is deciding whether to lower the tax to CD or raise it to FG Which of the following statements is correct? a Compared to the original tax, the larger tax will decrease both tax revenue and deadweight loss b Compared to the original tax, the smaller tax will increase both tax revenue and deadweight loss c Compared to the original tax, the larger tax will decrease tax revenue and increase deadweight loss d Both a and b are correct ANS: C DIF: LOC: Supply and demand MSC: Analytical REF: TOP: 8-3 NAT: Analytic Tax revenue | Deadweight loss Chapter /Application: the Costs of Taxation ❖ 71 Refer to Figure 8-10 The original tax can be represented by the vertical distance AB Suppose the government is deciding whether to lower the tax to CD or raise it to FG Which of the following statements is not correct? a Compared to the original tax, the larger tax will increase 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 ANS: A DIF: LOC: Supply and demand MSC: Analytical REF: TOP: 8-3 NAT: Analytic Tax revenue | Deadweight loss REF: TOP: 8-3 Tax revenue NAT: Analytic MSC: Applicative REF: TOP: 8-3 NAT: Analytic Tax revenue | Deadweight loss 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 ANS: D LOC: Elasticity 13 Which of the following statements is true for markets in which the demand curve slopes downward and the supply curve slopes upward? a As the size of the tax increases, tax revenue continually rises and deadweight loss continually falls b As the size of the tax increases, tax revenue and deadweight loss rise initially, but both eventually begin to fall c As the size of the tax increases, tax revenue rises initially, but it eventually begins to fall; deadweight loss continually rises d As the size of the tax increases, tax revenue rises initially, but it eventually begins to fall; deadweight loss falls initially, but eventually it begins to rise ANS: C DIF: LOC: Supply and demand MSC: Applicative 12 8-3 NAT: Analytic Tax revenue | Deadweight loss 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 ANS: A DIF: LOC: Supply and demand 11 REF: TOP: As the tax on a good increases from $1 per unit to $2 per unit to $3 per unit and so on, the a tax revenue increases at first, but it eventually peaks and then decreases b deadweight loss increases at first, but it eventually peaks and then decreases c tax revenue always increases, and the deadweight loss always increases d tax revenue always decreases, and the deadweight loss always increases ANS: A DIF: LOC: Supply and demand MSC: Applicative 10 DIF: TOP: REF: 8-3 Elasticity | Tax revenue MSC: NAT: Analytic Analytical Which of the following statements correctly describes the relationship between the size of the deadweight loss and the amount of tax revenue as the size of a tax increases from a small tax to a medium tax and finally to a large tax? a Both the size of the deadweight loss and tax revenue increase b The size of the deadweight loss increases, but the tax revenue decreases c The size of the deadweight loss increases, but the tax revenue first increases, then decreases d Both the size of the deadweight loss and tax revenue decrease 72 ❖ Chapter /Application: the Costs of Taxation ANS: C LOC: Elasticity 14 DIF: TOP: Analytic REF: TOP: 8-3 NAT: Deadweight loss Analytic REF: TOP: 8-3 NAT: Deadweight loss Analytic REF: TOP: 8-3 NAT: Deadweight loss Analytic If the tax on a good is increased from $1 per unit to $3 per unit, the deadweight loss from the tax increases by a factor of a b c d 18 ANS: C DIF: LOC: Supply and demand MSC: Analytical 19 8-3 NAT: Deadweight loss If the tax on a good is increased from $0.10 per unit to $0.40 per unit, the deadweight loss from the tax a remains constant b increases by a factor of c increases by a factor of d increases by a factor of 16 ANS: D DIF: LOC: Supply and demand MSC: Analytical 18 REF: TOP: If the tax on a good is doubled, the deadweight loss of the tax a remains constant b doubles c quadruples d increases by a percentage that cannot be determined without further information ANS: C DIF: LOC: Supply and demand MSC: Analytical 17 If the tax on a good is doubled, the deadweight loss of the tax a increases by 50 percent b doubles c triples d quadruples ANS: D DIF: LOC: Supply and demand MSC: Analytical 16 NAT: Analytic Applicative Suppose the government increases the size of a tax by 25 percent The deadweight loss from that tax a increases by 25 percent b increases by more than 25 percent c increases but by less than 25 percent d decreases by 25 percent ANS: B DIF: LOC: Supply and demand MSC: Applicative 15 REF: 8-3 Elasticity | Tax revenue MSC: REF: TOP: 8-3 NAT: Deadweight loss Analytic 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 ANS: D DIF: LOC: Supply and demand MSC: Analytical REF: TOP: 8-3 NAT: Deadweight loss Analytic Chapter /Application: the Costs of Taxation ❖ 73 20 Suppose a tax of $0.10 per unit on a good creates a deadweight loss of $100 If the tax is increased to $0.30 per unit, the deadweight loss from the new tax would be a $200 b $300 c $900 d $9,000 ANS: C DIF: LOC: Supply and demand MSC: Analytical 21 REF: TOP: 8-3 NAT: Deadweight loss Analytic REF: TOP: 8-3 NAT: Deadweight loss Analytic REF: TOP: 8-3 NAT: Deadweight loss Analytic Assume that for good X the supply curve for a good is a typical, upward-sloping straight line, and the demand curve is a typical downward-sloping straight line If the good is taxed, and the tax is doubled, the a base of the triangle that represents the deadweight loss quadruples b height of the triangle that represents the deadweight loss doubles c deadweight loss of the tax doubles d All of the above are correct ANS: B DIF: LOC: Supply and demand MSC: Applicative 25 Analytic Which of the following events is consistent with an increase in the deadweight loss of the gasoline tax from $30 million to $120 million? a The tax on gasoline increases from $0.30 per gallon to $0.45 per gallon b The tax on gasoline increases from $0.30 per gallon to $0.60 per gallon c The tax on gasoline increases from $0.25 per gallon to $0.45 per gallon d The tax on gasoline increases from $0.25 per gallon to $1.00 per gallon ANS: B DIF: LOC: Supply and demand MSC: Analytical 24 8-3 NAT: Deadweight loss In which of the following instances would the deadweight loss of the tax on cartons of cigarettes increase by a factor of 9? a The tax on cartons of cigarettes increases from $10 to $11.11 b The tax on cartons of cigarettes increases from $10 to $20 c The tax on cartons of cigarettes increases from $10 to $30 d The tax on cartons of cigarettes increases from $10 to $90 ANS: C DIF: LOC: Supply and demand MSC: Analytical 23 REF: TOP: In which of the following instances would the deadweight loss of the tax on airline tickets increase by a factor of 9? a The tax on airline tickets increases from $20 per ticket to $60 per ticket b The tax on airline tickets increases from $20 per ticket to $90 per ticket c The tax on airline tickets increases from $15 per ticket to $60 per ticket d The tax on airline tickets increases from $15 per ticket to $135 per ticket ANS: A DIF: LOC: Supply and demand MSC: Analytical 22 REF: TOP: 8-3 NAT: Deadweight loss Analytic Assume that for good X the supply curve for a good is a typical, upward-sloping straight line, and the demand curve is a typical downward-sloping straight line If the good is taxed, and the tax is doubled, the a base of the triangle that represents the deadweight loss doubles b height of the triangle that represents the deadweight loss doubles c deadweight loss of the tax quadruples d All of the above are correct ANS: D DIF: LOC: Supply and demand MSC: Applicative REF: TOP: 8-3 NAT: Deadweight loss Analytic 74 ❖ Chapter /Application: the Costs of Taxation 26 Assume that for good X the supply curve for a good is a typical, upward-sloping straight line, and the demand curve is a typical downward-sloping straight line If the good is taxed, and the tax is tripled, the a base of the triangle that represents the deadweight loss triples b height of the triangle that represents the deadweight loss triples c deadweight loss of the tax increases by a factor of nine d All of the above are correct ANS: D DIF: LOC: Supply and demand MSC: Applicative 27 REF: TOP: 8-3 NAT: Deadweight loss Analytic REF: TOP: 8-3 Land tax NAT: Analytic MSC: Definitional DIF: TOP: Land tax REF: 8-3 MSC: Interpretive NAT: Analytic DIF: TOP: Land tax REF: 8-3 MSC: Interpretive NAT: Analytic A tax on raw land causes a a large deadweight loss b no deadweight loss c landlords to bear none of the burden of the tax d the generation of such a large amount of tax revenue that all other taxes could be eliminated ANS: B LOC: Elasticity 32 If the supply of land is fixed, the burden of a tax on land falls a partly on landowners and partly on users of land b entirely on the renters or users of land c entirely on workers d entirely on landowners ANS: D LOC: Elasticity 31 Analytic Since the amount of land is fixed, the total supply of land is a relatively elastic b perfectly elastic c perfectly inelastic d relatively inelastic ANS: C LOC: Elasticity 30 8-3 NAT: Deadweight loss Henry George argued that the government should raise a all of its revenue from a tax on land b all of its revenue from taxes on labor c most of its revenue from consumption taxes d tax revenue from multiple and diverse taxes ANS: A DIF: LOC: Supply and demand 29 REF: TOP: Suppose the tax on gasoline is raised from $0.50 per gallon to $2.50 per gallon As a result, a tax revenue necessarily increases b the deadweight loss of the tax necessarily increases c the supply curve for gasoline necessarily becomes steeper d All of the above are correct ANS: B DIF: LOC: Supply and demand MSC: Applicative 28 DIF: TOP: REF: 8-3 Land tax | Deadweight loss NAT: Analytic MSC: Interpretive Which of the following statements about a land tax is correct? a A tax on raw land causes no deadweight loss b Landowners bear the entire burden of a tax on raw land c The government’s tax revenue exactly equals the loss of the landowners d All of the above are correct ANS: D LOC: Elasticity DIF: TOP: REF: 8-3 Land tax | Deadweight loss NAT: Analytic MSC: Interpretive Chapter /Application: the Costs of Taxation ❖ 75 33 Which of the following statements about a land tax is correct? a A tax on raw land causes a small but positive deadweight loss b Landowners and renters share the burden of a tax on raw land c The government’s tax revenue exactly equals the loss of the landowners d The supply of improvements to land such as sewers and roads is perfectly inelastic ANS: C LOC: Elasticity 34 REF: 8-3 MSC: Definitional NAT: Analytic DIF: TOP: Land tax REF: 8-3 MSC: Interpretive NAT: Analytic DIF: TOP: Land tax REF: 8-3 MSC: Interpretive NAT: Analytic DIF: TOP: Land tax REF: 8-3 MSC: Interpretive NAT: Analytic If Henry George's single tax on land were applied today, a it would make the supply of land more elastic b the deadweight loss would be much larger than the deadweight loss of alternative taxes c the tax would not raise enough revenue to pay for government spending d it would increase immigration and decrease technology ANS: C LOC: Elasticity 39 Land tax Unlike the supply of raw land, the supply of improvements a is perfectly inelastic b has an elasticity that is greater than zero c cannot be taxed, even if an attempt were made to tax it d is exempt from taxation under current law ANS: B LOC: Elasticity 38 DIF: TOP: In order for Henry George's land-tax argument to be valid, the land that is taxed must be a improved land b productive land c raw land d urban land ANS: C LOC: Elasticity 37 NAT: Analytic MSC: Interpretive In order for Henry George's single tax on land not to distort economic incentives, the tax would have to be on a improvements to land b land used for commercial purposes c land used for residential purposes d raw land ANS: D LOC: Elasticity 36 REF: 8-3 Land tax | Deadweight loss Today's property tax a taxes only raw land b is exactly the same as Henry George's single-tax proposal c taxes land and the improvements to land d has no deadweight loss since the amount of revenue going to the government equals the reduction in the landowners’ surplus ANS: C LOC: Elasticity 35 DIF: TOP: DIF: TOP: Land tax REF: 8-3 MSC: Interpretive NAT: Analytic According to the economist Milton Friedman, the "least bad" tax is a tax on a income received from profits and interest b labor income c the value of unimproved land d the value of land including the improvements to the land ANS: C LOC: Elasticity DIF: TOP: Land tax REF: 8-3 MSC: Definitional NAT: Analytic 76 ❖ Chapter /Application: the Costs of Taxation 40 Nobel Prize-winning economist Milton Friedman said that, "In my opinion, the least bad tax is the property tax on the unimproved value of land." Why? a Land owners can afford the tax better than other people b A tax on unimproved land would be sufficient to fund government, so all other taxes could be abolished c Such a tax could generate more government revenue than any tax on labor or capital d A tax on unimproved land would have no deadweight loss ANS: D LOC: Elasticity 41 DIF: TOP: REF: TOP: 8-3 Tax rates NAT: Analytic MSC: Definitional REF: TOP: 8-3 NAT: Labor | Tax rates Analytic REF: TOP: 8-3 Taxes | Labor NAT: Analytic Which of the following statements is correct? a In 2008, the combined Social Security-Medicare tax amounted to 15.3 percent of a worker’s income b The White House budget office has asserted that Social Security and Medicare have promised to pay out $18 trillion more in benefits than they will receive in revenue in coming decades c If payroll taxes are increased to maintain current levels of Social Security and Medicare benefits, an expected result would be fewer hours worked per week by the average American worker d All of the above are correct ANS: D DIF: LOC: Supply and demand MSC: Interpretive 45 Analytic Which of the following statements is correct? a According to the evidence from major industrial countries, there is no significant relationship between tax rates and the average number of hours worked per week b In the early 1970s, the average French worker worked more hours per week than the average American worker; by the mid-1990s, the reverse was true c Between the early 1970s and the mid-1990s, labor taxes in France decreased while labor taxes in the United States increased d All of the above are correct ANS: B DIF: LOC: Supply and demand MSC: Interpretive 44 NAT: In countries with higher tax rates, people tend to a have higher standards of living b take fewer vacations c work less d pay less into Social Security ANS: C DIF: LOC: Supply and demand MSC: Interpretive 43 REF: 8-3 MSC: Interpretive Which of the following countries has the highest tax rate? a Italy b Canada c United States d Japan ANS: A DIF: LOC: Supply and demand 42 Land tax REF: TOP: 8-3 NAT: Analytic Taxes | Social Security | Medicare The higher a country's tax rates, the more likely that country will be a at the top of the Laffer curve b on the positively sloped part of the Laffer curve c on the negatively sloped part of the Laffer curve d experiencing small deadweight losses ANS: C DIF: LOC: Supply and demand REF: TOP: 8-3 Laffer curve NAT: Analytic MSC: Interpretive Chapter /Application: the Costs of Taxation ❖ 77 46 According to Arthur Laffer, the graph that represents the amount of tax revenue (measured on the vertical axis) as a function of the size of the tax (measured on the horizontal axis) looks like a a U b an upside-down U c a horizontal straight line d an upward-sloping line or curve ANS: B DIF: LOC: Supply and demand 47 REF: TOP: 8-3 NAT: Deadweight loss Analytic REF: TOP: 8-3 NAT: Analytic Supply-side economics REF: TOP: 8-3 Laffer curve NAT: Analytic MSC: Definitional Ronald Reagan believed that reducing income tax rates would a little, if anything, to encourage hard work b result in large increases in deadweight losses c raise economic well-being and perhaps even tax revenue d lower economic well-being, even though tax revenue could possibly increase ANS: C DIF: LOC: Supply and demand MSC: Definitional 51 NAT: Analytic MSC: Interpretive The Laffer curve relates a the tax rate to tax revenue raised by the tax b the tax rate to the deadweight loss of the tax c the price elasticity of supply to the deadweight loss of the tax d government welfare payments to the birth rate ANS: A DIF: LOC: Supply and demand 50 8-3 Laffer curve Supply-side economics is a term associated with the views of a Ronald Reagan and Arthur Laffer b Karl Marx c Bill Clinton and Greg Mankiw d Milton Friedman ANS: A DIF: LOC: Supply and demand MSC: Definitional 49 REF: TOP: The graph that represents the amount of deadweight loss (measured on the vertical axis) as a function of the size of the tax (measured on the horizontal axis) looks like a a U b an upside-down U c a horizontal straight line d an upward-sloping curve ANS: D DIF: LOC: Supply and demand MSC: Interpretive 48 2 REF: TOP: 8-3 NAT: Analytic Economic welfare | Laffer curve The view held by Arthur Laffer and Ronald Reagan that cuts in tax rates would encourage people to increase the quantity of labor they supplied became known as a California economics b welfare economics c supply-side economics d elasticity economics ANS: C DIF: LOC: Supply and demand MSC: Definitional REF: TOP: 8-3 NAT: Analytic Supply-side economics 78 ❖ Chapter /Application: the Costs of Taxation 52 Which of the following scenarios is not consistent with the Laffer curve? a The tax rate is very low, and tax revenue is very low b The tax rate is very high, and tax revenue is very low c The tax rate is very high, and tax revenue is very high d The tax rate is moderate (between very high and very low), and tax revenue is relatively high ANS: C DIF: LOC: Supply and demand 53 NAT: Analytic MSC: Interpretive REF: TOP: 8-3 Laffer curve NAT: Analytic MSC: Applicative REF: TOP: 8-3 NAT: Deadweight loss Analytic Which of the following ideas is the most plausible? a Reducing a high tax rate is less likely to increase tax revenue than is reducing a low tax rate b Reducing a high tax rate is more likely to increase tax revenue than is reducing a low tax rate c Reducing a high tax rate will have the same effect on tax revenue as reducing a low tax rate d Reducing a tax rate can never increase tax revenue ANS: B DIF: LOC: Supply and demand 56 8-3 Laffer curve In the early 1980s, which of the following countries had a marginal tax rate of about 80 percent? a United States b Canada c Japan d Sweden ANS: D DIF: LOC: Supply and demand MSC: Analytical 55 REF: TOP: When a country is on the downward-sloping side of the Laffer curves, a cut in the tax rate will a decrease tax revenue and decrease the deadweight loss b decrease tax revenue and increase the deadweight loss c increase tax revenue and decrease the deadweight loss d increase tax revenue and increase the deadweight loss ANS: C DIF: LOC: Supply and demand 54 REF: TOP: 8-3 Laffer curve NAT: Analytic MSC: Applicative Which of the following would likely have the smallest deadweight loss relative to the tax revenue? a a head tax (that is, a tax everyone must pay regardless of what one does or buys) b an income tax c a tax on compact discs d a tax on caviar ANS: A DIF: LOC: Supply and demand MSC: Analytical REF: TOP: 8-3 NAT: Deadweight loss Analytic Sec04 - Application: The Costs of Taxation - Conclusion MULTIPLE CHOICE When the government imposes taxes on buyers or sellers of a good, society a loses some of the benefits of market efficiency b gains efficiency but loses equality c is better off because the government’s tax revenues exceed the deadweight loss d moves from an elastic supply curve to an inelastic supply curve ANS: A LOC: Elasticity DIF: TOP: Efficiency REF: 8-4 MSC: Interpretive Taxes are costly to market participants because they a transfer resources from market participants to the government b alter incentives c distort market outcomes d All of the above are correct NAT: Analytic Chapter /Application: the Costs of Taxation ❖ 79 ANS: D LOC: Elasticity DIF: TOP: Efficiency REF: 8-4 MSC: Interpretive NAT: Analytic Taxes are of interest to a microeconomists because they consider how to balance equality and efficiency b microeconomists because they consider how best to design a tax system c macroeconomists because they consider how policymakers can use the tax system to stabilize economic activity d All of the above are correct ANS: D LOC: Elasticity DIF: TOP: Efficiency REF: 8-4 MSC: Interpretive NAT: Analytic ... welfare 26 ❖ Chapter /Application: the Costs of Taxation Sec01 - Application: The Costs of Taxation - The Deadweight Loss of Taxation MULTIPLE CHOICE When a tax is levied on a good, the buyers... the full burden of the tax c sellers always bear the full burden of the tax d sellers bear the full burden of the tax if the tax is levied on them; buyers bear the full burden of the tax if the. .. burden of the tax b buyers always bear the full burden of the tax c buyers and sellers will share the burden of the tax d None of the above is correct; the incidence of the tax does depend on whether