The Design of the Tax System 2991
14. When the government taxes labor earnings we can expect people to
a. work more so they can keep the same standard of living.
b. work less and enjoy more leisure.
c. quit their present job and find one that pays better.
d. stop working altogether and go on welfare.
15. The resources that a taxpayer devotes to complying with the tax laws are a type of
a. consumption tax.
b. value-added tax.
c. deadweight loss.
d. producer surplus.
2992 The Design of the Tax System
16. The resources that a taxpayer devotes to complying with the tax laws are a type of
a. marginal tax.
b. administrative burden.
c. deadweight loss.
d. Both b and c are correct.
17. The deadweight loss of a tax is
a. the reduction in economic welfare of taxpayers that exceeds the revenue raised by the
government.
b. the improved efficiency created as people reallocate resources according to the tax incentive
rather than the true costs and benefits.
c. the loss in tax revenues.
d. Both a and b are correct.
The Design of the Tax System 2993
18. Because taxes distort incentives, they typically result in
a. deadweight losses.
b. reductions in consumer surplus.
c. reductions in producer surplus.
d. All of the above are correct.
19. Taxes can create deadweight losses because they
a. allow the government to fund private goods.
b. create administrative burdens as people comply with tax laws.
c. allow the government to fund public goods.
d. Both b and c are correct.
2994 The Design of the Tax System
20. Taxes create deadweight losses because they
a. reduce costs for firms.
b. distort incentives.
c. cause prices to decrease.
d. create revenue for the government.
21. An optimal tax is one that minimizes the
a. external benefit.
b. total deadweight loss from the tax.
c. income taxes.
d. horizontal equity.
The Design of the Tax System 2995
22. Deadweight losses occur in markets in which
a. firms decide to downsize.
b. the government imposes a tax.
c. profits fall because of low consumer demand.
d. equilibrium prices fall.
23. Deadweight losses represent the
a. inefficiency that taxes create.
b. shift in benefit from producers to consumers.
c. part of consumer and producer surplus that is now revenue to the government.
d. increase in revenue to the government.
2996 The Design of the Tax System
24. One reason that deadweight losses are so difficult to avoid is that
a. taxes affect the decisions that people make.
b. income taxes are not paid by everyone.
c. consumption taxes must be universally applied to all commodities.
d. the administrative burden is hard to calculate.
25. Deadweight losses are associated with
a. taxes that distort the incentives that people face.
b. taxes that target expenditures on survivor’s benefits for Social Security.
c. taxes that have no efficiency losses.
d. lump–sum taxes.
The Design of the Tax System 2997
26. When taxes are imposed on a commodity,
a. there is never a deadweight loss.
b. some consumers alter their consumption by not purchasing the taxed commodity.
c. tax revenue will rise by the amount of the tax multiplied by the before-tax level of consumption.
d. the taxes do not distort incentives.
27. In the absence of taxes, Carlos would prefer to purchase a large fishing boat with a 75 hp motor.
The government has recently decided to place a tax on boats with 75 hp motors or higher. If
Carlos decides to purchase a smaller boat with a 50 hp motor as a result of the tax, which of the
following statements is correct?
a. Other people who choose to purchase large boats will incur the cost of the deadweight loss of
the tax.
b. There are no deadweight losses as long as some people still choose to purchase large boats.
c. In order to determine the size of the deadweight loss, we must add the revenues from the tax to
the loss in Carlos’s consumer surplus.
d. Carlos is worse off, and his loss of welfare is part of the deadweight loss of the tax.
2998 The Design of the Tax System
28. Taxes create deadweight loss when they
a. distort behavior.
b. cause the price of the product to increase.
c. don’t raise sufficient government revenue.
d. cannot be computed easily.
29. Athos, Porthos,and Aramis each like to take fencing lessons. The price of a fencing lesson is $11.
Athos values a lesson at $16, Porthos at $14, and Aramis at $12. Suppose that if the government
taxes fencing lessons at $2 each, the price will rise to $13. A consequence of the tax is that
consumer surplus shrinks by
a. $4 and tax revenues increase by $6, so there is a deadweight loss of $2.
b. $6 and tax revenues increase by $6, so there is no deadweight loss.
c. $5 and tax revenues increase by $6, so there is no deadweight loss.
d. $5 and tax revenues increase by $4, so there is a deadweight loss of $1.
The Design of the Tax System 2999
30. Athos, Porthos,and Aramis each like to take fencing lessons. The price of a fencing lesson is $10.
Athos values a fencing lesson at $15, Porthos at $13, and Aramis at $11. Suppose that if the
government taxes fencing lessons at 50 cents each, the price rises to $10.50. A consequence of
the tax is that consumer surplus shrinks by
a. $1.50 and tax revenues increase by $1.50, so there is no deadweight loss.
b. $9.00 and tax revenues increase by $1.50, so there is a deadweight loss of $7.50.
c. $7.50 and tax revenues increase by $7.50, so there is no deadweight loss.
d. $7.50 and tax revenues increase by $1.50, so there is a deadweight loss of $6.
31. Leonard, Sheldon, Raj, and Penny each like to attend comic-book conventions. The price of a
ticket to a convention is $50. Leonard values a ticket at $70, Sheldon at $65, Raj at $60, and
Penny at $55. Suppose that if the government taxes tickets at $5 each, the price will rise to $55.
A consequence of the tax is that consumer surplus shrinks by
a. $50 and tax revenues increase by $20, so there is a deadweight loss of $30.
b. $30 and tax revenues increase by $20, so there is a deadweight loss of $10.
c. $20 and tax revenues increase by $20, so there is no deadweight loss.
d. $50 and tax revenues increase by $20, so there is no deadweight loss.
3000 The Design of the Tax System
32. Leonard, Sheldon, Raj, and Penny each like science fiction moves. The price of a special boxed
set of Star Trek DVDs is $50. Leonard values the set of movies at $70, Sheldon at $65, Raj at
$60, and Penny at $55. Suppose that if the government taxes DVDs at $10 each, the price rises to
$60. A consequence of the tax is that consumer surplus shrinks by
a. $50 and tax revenues increase by $30, so there is a deadweight loss of $20.
b. $35 and tax revenues increase by $30, so there is a deadweight loss of $5.
c. $20 and tax revenues increase by $20, so there is no deadweight loss.
d. $15 and tax revenues increase by $20, so there is no deadweight loss.
33. Suppose Luke values a scoop of Italian gelato at $4. Leia values a scoop of Italian gelato at $6.
The pre-tax price of a scoop of Italian gelato is $2. The government imposes a “fat tax” of $3 on
each scoop of Italian gelato, and the price rises to $5. The deadweight loss from the tax is
a. $1.
b. $2.
c. $3.
d. $4.
The Design of the Tax System 3001
34. Suppose Luke values a scoop of Italian gelato at $4. Leia values a scoop of Italian gelato at $6.
The pre-tax price of a scoop of Italian gelato is $2. The government imposes a “fat tax” of $3
oneach scoop of Italian gelato, and the price rises to $5. The deadweight loss from the tax is
a. $4, and the deadweight loss comes from both Luke and Leia.
b. $4, and the deadweight loss comes only from Luke because he does not buy gelato after the
tax.
c. $2, and the deadweight loss comes from both Luke and Leia.
d. $2, and the deadweight loss comes only from Luke because he does not buy gelato after the
tax.
35. Wilma values a decorative garden rock at $15, while Fred values it at $10. The price of a
decorative garden rock is $9. If the government imposes a $2 tax per decorative garden rock and
the price of the rock rises to $11, what part of the deadweight loss comes from Wilma, and what
part comes from Fred?
a. none comes from Wilma; $1 comes from Fred
b. none comes from Wilma; $3 comes from Fred
c. $2 comes from Wilma; $1 comes from Fred
d. $4 comes from Wilma; $3 comes from Fred
3002 The Design of the Tax System
36. Suppose Tyler values a basketball at $20. Jacqui values a basketball at $25. The pre–tax price of a
basketball $10. The government imposes a tax of $5 on each basketball, and the price rises to
$15. The deadweight loss from the tax is
a. $25.
b. $15.
c. $10.
d. $0.
37. Suppose Tyler values a basketball at $20. Jacqui values a basketball at $16. The pre–tax price of a
basketball $15.The government imposes a tax of $2 on each basketball, and the price rises to $17.
The deadweight loss from the tax is
a. $1.
b. $2.
c. $3.
d. $6.
The Design of the Tax System 3003
38. Suppose Hillary values a large order of French fries at $4. Bill values a large order of French
fries at $7. The pre- tax price of a large order of French fries is $2. The government imposes a
“fat tax” of $3 on each large order of French fries, and the price rises to $5. The deadweight loss
from the tax is
a. $4, and the deadweight loss comes from both Hillary and Bill.
b. $4, and the deadweight loss comes only from Hillary because she does not buy a large French
fries after the tax.
c. $2, and the deadweight loss comes from both Hillary and Bill.
d. $2, and the deadweight loss comes only from Hillary because she does not buy a large French
fries after the tax.
39. Suppose Darby values a certain smart phone at $400. Jake values the same smart phone at $300.
The pre-tax price of this smart phone is $250. The government imposes a tax of $75 on each
smart phone, and the price rises to $325. The deadweight loss from the tax is
a. $150.
b. $100.
c. $50.
d. $0.
3004 The Design of the Tax System
40. Suppose Max values a concert ticket at $45. Charles values the same concert ticket at $40. The
pre-tax price of a concert ticket is $30. The government imposes a tax of $5 on each concert
ticket, and the price rises to $35. The deadweight loss from the tax is
a. $15.
b. $10.
c. $5.
d. $0.
Scenario 12-1
Ken places a $20 value on a cigar, and Mark places a $17 value on it. The equilibrium price for
this brand of cigar is $15.
41. Refer to Scenario 12-1. How much total consumer surplus do Ken and Mark get when each
purchases one cigar?
a. $1
b. $2
c. $5
d. $7
The Design of the Tax System 3005
42. Refer to Scenario 12-1. Suppose the government levies a tax of $3 on each cigar, and the
equilibrium price of a cigar increases to $18. How much tax revenue is collected?
a. $0
b. $2
c. $3
d. $6
43. Refer to Scenario 12-1. Suppose the government levies a tax of $3 on each cigar, and the
equilibrium price of a cigar increases to $18. What is total consumer surplus after the tax is
levied?
a. $0
b. $2
c. $5
d. $6
3006 The Design of the Tax System
44. Refer to Scenario 12-1. Suppose the government levies a tax of $3 on each cigar, and the
equilibrium price of a cigar increases to $18. Because total consumer surplus has
a. fallen by more than the tax revenue, the tax has a deadweight loss
b. fallen by less than the tax revenue, the tax has no dead weight loss.
c. fallen by exactly the amount of the tax revenue, the tax has no deadweight loss.
d. increased by less than the tax revenue, the tax has a deadweight loss.
45. Refer to Scenario 12-1. Suppose the government levies a tax of $1 on each cigar, and the
equilibrium price of a cigar increases to $16. How much tax revenue is collected?
a. $0
b. $1
c. $2
d. $4
The Design of the Tax System 3007
46. Refer to Scenario 12-1. Suppose the government levies a tax of $1 on each cigar, and the
equilibrium price of a cigar increases to $16. What is total consumer surplus after the tax is
levied?
a. $2
b. $3
c. $4
d. $5
47. Refer to Scenario 12-1. Suppose the government levies a tax of $1 on each cigar, and the
equilibrium price of a cigar increases to $16. Because total consumer surplus has
a. fallen by more than the tax revenue, the tax has a deadweight loss.
b. fallen by less than the tax revenue, the tax has no deadweight loss.
c. fallen by exactly the amount of the tax revenue, the tax has no deadweight loss.
d. increased by less than the tax revenue, the tax has a deadweight loss.
3008 The Design of the Tax System
Scenario 12-2
Suppose that Bob places a value of $10 on a movie ticket and that Lisa places a value of $7 on a
movie ticket. In addition, suppose the price of a movie ticket is $5.
48. Refer to Scenario 12–2. What is total consumer surplus for Bob and Lisa?
a. $0
b. $2
c. $5
d. $7
49. Refer to Scenario 12-2. Suppose the government levies a tax of $1 on each movie ticket and
that, as a result, the price of a movie ticket increases to $6.00. If Bob and Lisa both purchase a
movie ticket, what is total consumer surplus for Bob and Lisa?
a. $0.00
b. $0.50
c. $5.00
d. $6.00
The Design of the Tax System 3009
50. Refer to Scenario 12-2. Suppose the government levies a tax of $1 on a movie ticket and that,
as a result, the price of a movie ticket increases to $6. If Bob and Lisa both purchase a movie
ticket, what is the deadweight loss from the tax?
a. $0
b. $1
c. $2
d. $3
51. Refer to Scenario 12-2. Suppose the government levies a tax of $3 on a movie ticket and that,
as a result, the price of a movie ticket increases to $8. What is total consumer surplus after the tax
is imposed?
a. $0
b. $1
c. $2
d. $3
3010 The Design of the Tax System
52. Refer to Scenario 12-2. Suppose the government levies a tax of $3 on a movie ticket and that,
as a result, the price of a movie ticket increases to $8. What is the deadweight loss from the tax?
a. $0
b. $1
c. $2
d. $3
Scenario 12-3
Suppose Roger and Regina receive great satisfaction from their consumption of cheesecake.
Regina would be willing to purchase only one slice and would pay up to $8 for it. Roger would be
willing to pay $11 for his first slice,$9 for his second slice, and $5 for his third slice. The current
market price is $5 per slice.
53. Refer to Scenario 12-3. How much consumer surplus does Regina receive from consuming her
slice of cheesecake?
a. $3
b. $5
c. $9 d
d. . $12