Application: The Costs of Taxation 2131
26. The deadweight loss from a tax
a. does not vary in amount when the price elasticity of demand changes.
b. does not vary in amount when the amount of the tax per unit changes.
c. is larger, the larger is the amount of the tax per unit.
d. is smaller, the larger is the amount of the tax per unit.
27. Which of the following statements is correct regarding a tax on a good and the resulting
deadweight loss?
a. The greater are the price elasticities of supply and demand, the greater is the deadweight loss.
b. The greater is the price elasticity of supply and the smaller is the price elasticity of demand, the
greater is the deadweight loss.
c. The smaller are the decreases in quantity demanded and quantity supplied, the greater the
deadweight loss.
d. The smaller is the wedge between the effective price to sellers and the effective price to
buyers, the greater is the deadweight loss.
2132 Application: The Costs of Taxation
28. The amount of deadweight loss that results from a tax of a given size is determined by
a. whether the tax is levied on buyers or sellers.
b. the number of buyers in the market relative to the number of sellers.
c. the price elasticities of demand and supply.
d. the ratio of the tax per unit to the effective price received by sellers.
29. The amount of deadweight loss from a tax depends upon the
a. price elasticity of demand.
b. price elasticity of supply.
c. amount of the tax per unit.
d. All of the above are correct.
Application: The Costs of Taxation 2133
30. Assume the supply curve for diapers is a typical, upward-sloping straight line, and the demand
curve for diapers is a typical, downward-sloping straight line. Suppose the equilibrium quantity in
the market for diapers is 1,000 per month when there is no tax. Then a tax of $0.50 per diaper is
imposed. The effective price paid by buyers increases from
$1.50 to $1.90 and the effective price received by sellers falls from $1.50 to $1.40. The
government’s tax revenue amounts to $475 per month. Which of the following statements is
correct?
a. After the tax is imposed, the equilibrium quantity of diapers is 900 per month.
b. The demand for diapers is more elastic than the supply of diapers.
c. The deadweight loss of the tax is $12.50.
d. The tax causes a decrease in consumer surplus of $380.
31. Assume the supply curve for cigars is a typical, upward-sloping straight line, and the demand
curve for cigars is a typical, downward-sloping straight line. Suppose the equilibrium quantity in the
market for cigars is 1,000 per month when there is no tax. Then a tax of $0.50 per cigar is
imposed. The effective price paid by buyers increases from
$1.50 to $1.90 and the effective price received by sellers falls from $1.50 to $1.40. The
government’s tax revenue amounts to $475 per month. Which of the following statements is
correct?
a. The demand for cigars is less elastic than the supply of cigars.
b. The tax causes a decrease in consumer surplus of $390 and a decrease in producer surplus of
$97.50.
c. The deadweight loss of the tax is $12.50.
d. All of the above are correct.
2134 Application: The Costs of Taxation
32. Suppose that policymakers are considering placing a tax on either of two markets. In Market A,
the tax will have a significant effect on the price consumers pay, but it will not affect equilibrium
quantity very much. In Market B, the same tax will have only a small effect on the price
consumers pay, but it will have a large effect on the equilibrium quantity. Other factors are held
constant. In which market will the tax have a larger deadweight loss?
a. Market A
b. Market B
c. The deadweight loss will be the same in both markets.
d. There is not enough information to answer the question.
33. Consider a good to which a per-unit tax applies. The greater the price elasticities of demand and
supply for the good, the
a. smaller the deadweight loss from the tax.
b. greater the deadweight loss from the tax.
c. more efficient is the tax.
d. more equitable is the distribution of the tax burden between buyers and sellers.
Application: The Costs of Taxation 2135
34. Consider a good to which a per-unit tax applies. The size of the deadweight that results from the
tax is smaller, the
a. larger is the price elasticity of demand.
b. smaller is the price elasticity of supply.
c. larger is the amount of the tax.
d. All of the above are correct.
35. Consider a good to which a per-unit tax applies. The size of the deadweight that results from the
tax is smaller, the
a. less elastic is the demand for the good.
b. less elastic is the supply of the good.
c. smaller is the amount of the tax.
d. All of the above are correct.
2136 Application: The Costs of Taxation
36. Suppose the government places a per-unit tax on a good. The smaller the price elasticities of
demand and supply for the good, the
a. smaller the deadweight loss from the tax.
b. greater the deadweight loss from the tax.
c. less efficient is the tax.
d. more equitable is the distribution of the tax burden between buyers and sellers.
37. Suppose the price of milk is $2.39 per gallon, and the equilibrium quantity of milk is 100 thousand
gallons per day with no tax on milk. Starting from this initial situation, which of the following
scenarios would result in the smallest deadweight loss?
a. The price elasticity of demand for milk is 0.3, the price elasticity of supply for milk is 0.7, and
the milk tax amounts to $0.40 per gallon.
b. The price elasticity of demand for milk is 0.2, the price elasticity of supply for milk is 0.5, and
the milk tax amounts to $0.30 per gallon.
c. The price elasticity of demand for milk is 0.2, the price elasticity of supply for milk is 0.7, and
the milk tax amounts to $0.30 per gallon.
d. The price elasticity of demand for milk is 0.1, the price elasticity of supply for milk is 0.5, and
the milk tax amounts to $0.20 per gallon.
Application: The Costs of Taxation 2137
38. Assume the price of gasoline is $2.00 per gallon, and the equilibrium quantity of gasoline is 10
million gallons per day with no tax on gasoline. Starting from this initial situation, which of the
following scenarios would result in the largest deadweight loss?
a. The price elasticity of demand for gasoline is 0.1; the price elasticity of supply for gasoline is
0.6; and the gasoline tax amounts to $0.20 per gallon.
b. The price elasticity of demand for gasoline is 0.1; the price elasticity of supply for gasoline is
0.4; and the gasoline tax amounts to $0.20 per gallon.
c. The price elasticity of demand for gasoline is 0.2; the price elasticity of supply for gasoline is
0.6; and the gasoline tax amounts to $0.30 per gallon.
d. There is insufficient information to make this determination.
39. Assume the price of gasoline is $2.40 per gallon, and the equilibrium quantity of gasoline is 12
million gallons per day with no tax on gasoline. Starting from this initial situation, which of the
following scenarios would result in the largest deadweight loss?
a. A 10 percent increase in the price of gasoline reduces the quantity of gasoline demanded by 2
percent and it increases the quantity of gasoline supplied by 5 percent; and the tax on gasoline
amounts to $0.40 per gallon.
b. A 10 percent increase in the price of gasoline reduces the quantity of gasoline demanded by 2
percent and it increases the quantity of gasoline supplied by 7 percent; and the tax on gasoline
amounts to $0.40 per gallon.
c. A 10 percent increase in the price of gasoline reduces the quantity of gasoline demanded by 1
percent and it increases the quantity of gasoline supplied by 8 percent; and the tax on gasoline
amounts to $0.35 per gallon.
d. There is insufficient information to make this determination.
2138 Application: The Costs of Taxation
40. Other things equal, the deadweight loss of a tax
a. decreases as the size of the tax increases.
b. increases as the size of the tax increases, but the increase in the deadweight loss is less rapid
than the increase in the size of the tax.
c. increases as the size of the tax increases, and the increase in the deadweight loss is more rapid
than the increase in the size of the tax.
d. increases as the price elasticities of demand and/or supply increase, but the deadweight loss
does not change as the size of the tax increases.
41. Economists generally agree that the most important tax in the U.S. economy is the
a. income tax.
b. tax on labor.
c. inheritance or death tax.
d. tax on corporate profits.
Application: The Costs of Taxation 2139
42. Economists generally agree that the most important tax in the U.S. economy is the
a. investment tax.
b. sales tax.
c. property tax.
d. labor tax.
43. Which of the following is a tax on labor?
a. Medicare tax
b. Social Security tax
c. federal income tax
d. All of the above are labor taxes.
44. Which of the following is a tax on labor?
a. Medicare tax
b. inheritance tax
c. sales tax
d. All of the above are labor taxes.
2140 Application: The Costs of Taxation
45. Labor taxes may distort labor markets greatly if
a. labor supply is highly inelastic.
b. many workers choose to work 40 hours per week regardless of their earnings.
c. the number of hours many part-time workers want to work is very sensitive to the wage rate.
d. “underground” workers do not respond to changes in the wages of legal jobs because they
prefer not to pay taxes.
46. Economists disagree on whether labor taxes cause small or large deadweight losses. This
disagreement arises primarily because economists hold different views about
a. the size of labor taxes.
b. the importance of labor taxes imposed by the federal government relative to the importance of
labor taxes imposed by the various states.
c. the elasticity of labor supply.
d. the elasticity of labor demand.
Application: The Costs of Taxation 2141
47. Taxes on labor have the effect of encouraging
a. workers to work more hours.
b. the elderly to postpone retirement.
c. second earners within a family to take a job.
d. unscrupulous people to take part in the underground economy.
48. Concerning the labor market and taxes on labor, economists disagree about
a. the size of the tax on labor.
b. the size of the deadweight loss of the tax on labor.
c. whether or not a tax on labor places a wedge between the wage that firms pay and the wage
that workers receive.
d. All of the above are correct.
2142 Application: The Costs of Taxation
49. The Social Security tax is a tax on
a. capital.
b. labor.
c. land.
d. savings.
50. 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 do.
d. results in a large tax burden on the firms that hire labor.
Application: The Costs of Taxation 2143
51. 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.
52. 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.
2144 Application: The Costs of Taxation
53. The less 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 horizontal the labor supply curve will be.
d. larger is the decrease in employment that will result from a tax on labor.
54. The less 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. flatter is the labor supply curve.
d. smaller is the decrease in employment that will result from a tax on labor.
Application: The Costs of Taxation 2145
55. 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.”
56. 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
2146 Application: The Costs of Taxation
57. 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.
58. Which of the following is not correct?
a. Economists who argue that labor taxes are highly distorting believe that labor supply is fairly
elastic.
b. Economists who argue that labor taxes are not highly distorting believe that labor supply is fairly
inelastic.
c. Economists who argue that labor supply is fairly inelastic cite elderly workers who adjust the
date they retire as an example.
d. Economists who argue that labor supply is fairly elastic cite workers who adjust the hours of
overtime that they work as an example.
Application: The Costs of Taxation 2147
Figure 8-15
59. Refer to Figure 8-15. Panel (a) and Panel (b) each illustrate a $4 tax placed on a market. In
comparison to Panel (a), Panel (b) illustrates which of the following statements?
a. When demand is relatively inelastic, the deadweight loss of a tax is smaller than when demand
is relatively elastic.
b. When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is
relatively inelastic.
c. When supply is relatively inelastic, the deadweight loss of a tax is smaller than when supply is
relatively elastic.
d. When supply is relatively elastic, the deadweight loss of a tax is larger than when supply is
relatively inelastic.
2148 Application: The Costs of Taxation
60. Refer to Figure 8-15. Panel (a) and Panel (b) each illustrate a $4 tax placed on a market. In
comparison to Panel (b), Panel (a) illustrates which of the following statements?
a. When demand is relatively inelastic, the deadweight loss of a tax is smaller than when demand
is relatively elastic.
b. When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is
relatively inelastic.
c. When supply is relatively inelastic, the deadweight loss of a tax is smaller than when supply is
relatively elastic.
d. When supply is relatively elastic, the deadweight loss of a tax is larger than when supply is
relatively inelastic.
Application: The Costs of Taxation 2149
Figure 8-16
61. Refer to Figure 8-16. Panel (a) and Panel (b) each illustrate a $2 tax placed on a market. In
comparison to Panel (b), Panel (a) illustrates which of the following statements?
a. When demand is relatively inelastic, the deadweight loss of a tax is smaller than when demand
is relatively elastic.
b. When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is
relatively inelastic.
c. When supply is relatively inelastic, the deadweight loss of a tax is smaller than when supply is
relatively elastic.
d. When supply is relatively elastic, the deadweight loss of a tax is larger than when supply is
relatively inelastic.
2150 Application: The Costs of Taxation
62. Refer to Figure 8-16. Panel (a) and Panel (b) each illustrate a $2 tax placed on a market. In
comparison to Panel (a), Panel (b) illustrates which of the following statements?
a. When demand is relatively inelastic, the deadweight loss of a tax is smaller than when demand
is relatively elastic.
b. When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is
relatively inelastic.
c. When supply is relatively inelastic, the deadweight loss of a tax is smaller than when supply is
relatively elastic.
d. When supply is relatively elastic, the deadweight loss of a tax is larger than when supply is
relatively inelastic.