Application: The Costs of Taxation
Multiple Choice – Section 00: Introduction
1. 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.
2. 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.
1992 Application: The Costs of Taxation
3. 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
4. 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.
Application: The Costs of Taxation 1993
5. 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.
6. 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.
1994 Application: The Costs of Taxation
7. 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.
8. Which of the following tools help us evaluate how taxes affect economic well-being?
(i) consumer surplus
(ii) producer surplus
(iii) tax revenue
(iv) deadweight loss
a. (i) and (ii) only
b. (i), (ii), and (iii) only
c. (iii) and (iv) only
d. (i), (ii), (iii), and (iv)
Application: The Costs of Taxation 1995
Multiple Choice – Section 01: The Deadweight Loss of Taxation
1. 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.
2. 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.
1996 Application: The Costs of Taxation
3. 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.
4. A tax affects
a. buyers only.
b. sellers only.
c. buyers and sellers only.
d. buyers, sellers, and the government.
5. 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.
Application: The Costs of Taxation 1997
6. 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.
7. When a good is taxed,
a. both buyers and sellers of the good are made worse off.
b. only buyers are made worse off, because they ultimately bear the burden of the tax.
c. only sellers are made worse off, because they ultimately bear the burden of the tax.
d. neither buyers nor sellers are made worse off, since tax revenue is used to provide goods and
services that would otherwise not be provided in a market economy.
8. To measure the gains and losses from a tax on a good, economists use the tools of
a. macroeconomics.
b. welfare economics.
c. international-trade theory.
d. circular–flow analysis.
1998 Application: The Costs of Taxation
9. When a tax is imposed on a good, the
a. supply curve for the good always shifts.
b. demand curve for the good always shifts.
c. amount of the good that buyers are willing to buy at each price always remains unchanged.
d. equilibrium quantity of the good always decreases.
10. A tax levied on the sellers of a good shifts the
a. supply curve upward (or to the left).
b. supply curve downward (or to the right).
c. demand curve upward (or to the right).
d. demand curve downward (or to the left).
11. A tax levied on the buyers of a good shifts the
a. supply curve upward (or to the left).
b. supply curve downward (or to the right).
c. demand curve downward (or to the left).
d. demand curve upward (or to the right).
Application: The Costs of Taxation 1999
12. If a tax shifts the supply curve upward (or to the left), we can infer that the tax was levied on
a. buyers of the good.
b. sellers of the good.
c. both buyers and sellers of the good.
d. We cannot infer anything because the shift described is not consistent with a tax.
13. If a tax shifts the supply curve downward (or to the right), we can infer that the tax was levied on
a. buyers of the good.
b. sellers of the good.
c. both buyers and sellers of the good.
d. We cannot infer anything because the shift described is not consistent with a tax.
14. If a tax shifts the demand curve downward (or to the left), we can infer that the tax was levied on
a. buyers of the good.
b. sellers of the good.
c. both buyers and sellers of the good.
d. We cannot infer anything because the shift described is not consistent with a tax.
2000 Application: The Costs of Taxation
15. If a tax shifts the demand curve upward (or to the right), we can infer that the tax was levied on
a. buyers of the good.
b. sellers of the good.
c. both buyers and sellers of the good.
d. We cannot infer anything because the shift described is not consistent with a tax.
16. When a tax is imposed on the buyers of a good, the demand curve shifts
a. downward by the amount of the tax.
b. upward by the amount of the tax.
c. downward by less than the amount of the tax.
d. upward by more than the amount of the tax.
17. When a tax is imposed on the sellers of a good, the
a. demand curve shifts downward by less than the amount of the tax.
b. demand curve shifts downward by the amount of the tax.
c. supply curve shifts upward by less than the amount of the tax.
d. supply curve shifts upward by the amount of the tax.
Application: The Costs of Taxation 2001
18. A tax placed on buyers of tuxedoes shifts the
a. demand curve for tuxedoes downward, decreasing the price received by sellers of tuxedoes
and causing the quantity of tuxedoes to increase.
b. demand curve for tuxedoes downward, decreasing the price received by sellers of tuxedoes
and causing the quantity of tuxedoes to decrease.
c. supply curve for tuxedoes upward, decreasing the effective price paid by buyers of tuxedoes
and causing the quantity of tuxedoes to increase.
d. supply curve for tuxedoes upward, increasing the effective price paid by buyers of tuxedoes
and causing the quantity of tuxedoes to decrease.
19. Suppose a tax is imposed on the sellers of fast-food French fries. The burden of the tax will
a. fall entirely on the buyers of fast-food French fries.
b. fall entirely on the sellers of fast-food French fries.
c. be shared equally by the buyers and sellers of fast-food French fries.
d. be shared by the buyers and sellers of fast-food French fries but not necessarily equally.
2002 Application: The Costs of Taxation
20. It does not matter whether a tax is levied on the buyers or the sellers of a good because
a. sellers always bear the full 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 the buyers or
the sellers are required to pay the tax.
21. When motorcycles are taxed and sellers of motorcycles are required to pay the tax to the
government,
a. the quantity of motorcycles bought and sold in the market is reduced.
b. the price paid by buyers of motorcycles decreases.
c. the demand for motorcycles decreases.
d. there is a movement downward and to the right along the demand curve for motorcycles.
Application: The Costs of Taxation 2003
22. One result of a tax, regardless of whether the tax is placed on the buyers or the sellers, is that the
a. equilibrium quantity of the good is unchanged.
b. price the buyer effectively pays is lower.
c. supply curve for the good shifts upward by the amount of the tax.
d. tax reduces the welfare of both buyers and sellers.
23. When a tax is placed on the buyers of a product, a result is that buyers effectively pay
a. less than before the tax, and sellers effectively receive less than before the tax.
b. less than before the tax, and sellers effectively receive more than before the tax.
c. more than before the tax, and sellers effectively receive less than before the tax.
d. more than before the tax, and sellers effectively receive more than before the tax.
24. When a tax is levied on a good,
a. neither buyers nor sellers are made worse off.
b. only sellers are made worse off.
c. only buyers are made worse off.
d. both buyers and sellers are made worse off.
2004 Application: The Costs of Taxation
25. When a tax is levied on the buyers of a good, the
a. supply curve shifts upward by the amount of the tax.
b. quantity supplied increases for all conceivable prices of the good.
c. buyers of the good will send tax payments to the government.
d. demand curve shifts to the right by the horizontal distance of the tax.
26. When a tax is levied on the sellers of a good, the
a. supply curve shifts upward by the amount of the tax.
b. quantity demanded decreases for all conceivable prices of the good.
c. quantity supplied increases for all conceivable prices of the good.
d. None of the above is correct.
Application: The Costs of Taxation 2005
27. A $2 tax per gallon of paint placed on the buyers of paint will shift the demand curve
a. downward by exactly $2.
b. downward by less than $2.
c. upward by exactly $2.
d. upward by less than $2.
28. When a tax on a good is enacted,
a. buyers and sellers share the burden of the tax regardless of whether the tax is levied on buyers
or on sellers.
b. buyers always bear 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 tax is levied on them.
2006 Application: The Costs of Taxation
29. A tax placed on a good
a. causes the effective price to sellers to increase.
b. affects the welfare of buyers of the good but not the welfare of sellers.
c. causes the equilibrium quantity of the good to decrease.
d. creates a burden that is usually borne entirely by the sellers of the good.
30. When a tax is levied on buyers of a good,
a. government collects too little revenue to justify the tax if the equilibrium quantity of the good
decreases as a result of the tax.
b. there is an increase in the quantity of the good supplied.
c. a wedge is placed between the price buyers pay and the price sellers effectively receive.
d. the effective price to buyers decreases because the demand curve shifts leftward.
Application: The Costs of Taxation 2007
31. When a tax is levied on a good,
a. government collects revenues which might justify the loss in total welfare.
b. there is a decrease in the quantity of the good bought and sold in the market.
c. a wedge is placed between the price buyers pay and the price sellers effectively receive.
d. All of the above are correct.
32. When a tax is levied on a good,
a. government revenues exceed the loss in total welfare.
b. there is a decrease in the quantity of the good bought and sold in the market.
c. the price that sellers receive exceeds the price that buyers pay.
d. All of the above are correct.
33. The benefit to buyers of participating in a market is measured by
a. the price elasticity of demand.
b. consumer surplus.
c. the maximum amount that buyers are willing to pay for the good.
d. the equilibrium price.
2008 Application: The Costs of Taxation
Application: The Costs of Taxation 2009
34. The benefit to buyers of participating in a market is measured by
a. consumer surplus.
b. producer surplus.
c. total surplus.
d. deadweight loss.
35. The benefit to sellers of participating in a market is measured by the
a. amount of taxes collected on sales of the good.
b. producer surplus.
c. amount sellers receive for their product.
d. sellers’ willingness to sell.
2010 Application: The Costs of Taxation
36. The benefit that government receives from a tax is measured by
a. the change in the equilibrium quantity of the good.
b. the change in the equilibrium price of the good.
c. tax revenue.
d. total surplus.
37. The benefit that government receives from a tax is measured by
a. deadweight loss.
b. consumer surplus.
c. tax incidence.
d. tax revenue.