The figure above shows the market for MP3 players, where S is the supply curve and D is the
demand curve before any tax is imposed. The government imposes a $10 per unit tax on sellers
of MP3 players.
7) Based on the figure above, after the tax is imposed, the price paid by the buyer is ________
per MP3 player.
A) $105
B) $100
C) $95
D) $110
E) $90
8) Based on the figure above, after the tax is imposed, the price received (and kept) by the seller
is ________ per MP3 player.
A) $95
B) $105
C) $100
D) $110
E) $90
9) Based on the figure above, the tax ________ the price paid by the buyer by ________ per
MP3 player.
A) raises; $5
B) lowers; $5
C) raises; $10
D) lowers; $10
E) raises; $7.50
10) Based on the figure above, the tax ________ the price received (and kept) by the seller by
________ per MP3 player.
A) lowers; $5
B) raises; $5
C) raises; $10
D) lowers; $10
E) lowers; $2.50
11) Based on the figure above, after the tax is imposed, the government collects tax revenue of
________ a week.
A) $20,000
B) $10,000
C) $50,000
D) $60,000
E) $40,000
12) Based on the figure above, the burden of the tax
A) is split equally between the buyer and the seller.
B) falls mostly on buyers.
C) falls mostly on sellers.
D) falls entirely on buyers.
E) falls entirely on sellers.
The figure above shows the market for MP3 players, where S is the supply curve and D is the
demand curve before any tax is imposed. The government imposes a $10 per unit tax on sellers
of MP3 players.
13) In the figure above, at the market equilibrium with the tax, marginal benefit ________
marginal cost, and the quantity of MP3 players sold is ________.
A) exceeds; inefficient
B) is below; inefficient
C) is below; efficient
D) exceeds; efficient
E) equals; efficient
14) Based on the figure above, the deadweight loss from the tax is
A) $15,000 per week.
B) $20,000 per week.
C) $35,000 per week.
D) $17,500 per week.
E) zero.
15) Based on the figure above, after the tax is imposed the consumer surplus
A) decreases by $17,500.
B) increases by $17,500.
C) decreases by $7,500.
D) increases by $7,500.
E) does not change.
The figure above shows the demand (D) and supply (S) curves for insulin before any tax is
imposed. The government imposes a $0.20 a dose tax on sellers of insulin.
16) After the tax is imposed, the price paid by the buyer is ________, and the price received (and
kept) by the seller is ________.
A) $2.20; $2.00
B) $2.00; $2.20
C) $2.00; $2.00
D) $2.20; $2.20
E) $2.00; $1.80
17) Based on the figure above, at the market equilibrium with the tax, marginal benefit ________
marginal cost, and the quantity of insulin sold is ________.
A) equals; efficient
B) exceeds; inefficient
C) is below; inefficient
D) is below; efficient
E) exceeds; efficient
8.5 Integrative Questions
1) The phrase “tax incidence” refers to
A) how easy it is to evade the tax.
B) how taxes redistribute income.
C) the degree of progressiveness or regressiveness of the tax.
D) who actually bears the burden of paying the tax.
E) how much the government collects in revenue from a tax.
2) If the demand curve for hamburgers is downward sloping and the supply curve for
hamburgers is upward sloping, then a tax imposed on hamburgers ________ the price paid by
buyers and ________ the price received and kept by sellers.
A) raises; raises
B) raises; lowers
C) lowers; raises
D) lowers; lowers
E) does not change; does not change
3) We can see the inefficiencies created by a sales tax because
A) a deadweight loss occurs.
B) the tax creates an excess burden.
C) at the quantity produced, marginal benefit equals marginal cost.
D) Both answers A and B are correct.
E) Both answers B and C are correct.
4) If neither the demand nor the supply for goods or labor is perfectly inelastic, then a sales tax
on a good ________ a deadweight loss and an income tax ________ a deadweight loss.
A) creates; creates
B) creates; does not create
C) does not create; create
D) does not create; does not create
E) might create; might create
5) Which of the following is true?
i. A tax on buyers has the same effect as the same sized tax on sellers.
ii. The more elastic the demand, the larger is the share of the tax paid by the buyers.
iii. The U.S. income tax is regressive.
A) Only i
B) Only ii
C) Only iii
D) ii and iii
E) i and ii
6) Which of the following is true?
i. If supply is perfectly inelastic, the tax creates no deadweight loss.
ii. The elasticities of supply and demand, not Congress, determine who pays the income tax.
iii. A tax is progressive if the average tax rate falls with income.
A) Only i
B) Only ii
C) Only iii
D) ii and iii
E) i and ii
7) Which of the following is true?
i. If demand is perfectly elastic, the tax creates no deadweight loss.
ii. The more elastic the supply of a factor of production, the greater is the deadweight loss from
an income tax.
iii. A tax is regressive if the average tax rate rises with income.
A) Only i
B) Only ii
C) Only iii
D) ii and iii
E) i and ii
8) The figure above shows the impact of an income tax. The deadweight loss created by the
income tax equals area
A) bce.
B) fed.
C) acf.
D) feba.
E) The question errs because an income tax does not create a deadweight loss.
9) The figure above shows the impact of an income tax. The revenue collected by the
government equals area
A) bce.
B) feba.
C) fed.
D) acf.
E) None of the above answers is correct.
10) The imposition of ________ shifts the labor demand curve downward.
A) a sales tax
B) an income
C) a social security tax on workers
D) a social security tax on employers
E) Both answers C and D are correct.
11) ________ tax is progressive if the ________.
A) An income; average tax rate is constant as income increases
B) An income; average tax rate increases with income
C) Any; average tax rate is constant as income increases
D) Any; average tax rate decreases as income increases
E) A social security; tax is imposed on employers rather than workers
12) To levy a tax based on the benefits principle to pay for a bridge, the government
A) would impose an income tax instead of a social security tax on workers.
B) would impose a social security tax on workers instead of an income tax.
C) needs to know each person’s benefit from the bridge.
D) needs to be able to calculate the deadweight loss of a tax.
E) cannot impose the tax on anyone who uses the bridge.
13) Which of the following taxes guarantees vertical equity?
i) income tax
ii) social security tax on workers
iii) social security tax on employers
A) i only
B) i and ii
C) ii and iii
D) iii only
E) None of the above taxes guarantees vertical equity.
1) When a tax is imposed on a good, the resulting rise in the equilibrium price is usually less than
the amount of the tax itself. Why doesn’t the equilibrium price rise by the full amount of the tax?
2) How does the elasticity of demand affect the incidence of a tax?
3) Explain under what conditions a sales tax on a specific good would be paid entirely by buyers.
4) Which would be a better source of tax revenue for the government, a good with elastic or a
good with an inelastic demand? Explain your reasoning.
5) Suppose the demand for saline solution is perfectly inelastic for contact lens wearers. If the
government imposes a tax on saline solution, what occurs? Be sure to tell what happens to the
price paid by the buyers and discuss the incidence of the tax.
6) Suppose the government decides to tax salt. The demand for salt is inelastic and the supply is
quite elastic. Who bears most of the tax incidence and pays most of this tax?
7) Consider the market for dining at Mexican restaurants. Suppose the price elasticity of demand
for Mexican food is 1.23 and the price elasticity of supply is 0.47. If the government imposes a
tax on Mexican food, do consumers or producers pay most of the tax? Why?
8) Is the deadweight loss from a sales tax on a product larger the more inelastic the demand for
the good?
9) In the Village of Punjab, Sheryl owns a well, which is the only source of drinking water. The
supply of water is perfectly inelastic at a quantity of 1,000 gallons of water per day. At a price of
$2.00 per gallon, the quantity demanded per day is 1,000 gallons. The government imposes a
$0.50 per gallon tax.
a. After the tax is imposed, what is the price paid by the villagers? What is the price received by
Sheryl?
b. How much revenue does the government collect?
c. What fraction of the tax does Sheryl pay? What fraction is paid by the villagers?