Application: The Costs of Taxation 2071
158. Refer to Figure 8-8. The tax causes consumer surplus to decrease by the area
a. A.
b. B+C.
c. A+B+C.
d. A+B+C+D+F.
159. Refer to Figure 8-8. After the tax goes into effect, consumer surplus is the area
a. A.
b. B+C.
c. A+B+C.
d. A+B+D+J+K.
160. Refer to Figure 8-8. The tax causes producer surplus to decrease by the area
a. D+F.
b. D+F+G.
c. D+F+J.
d. D+F+G+H.
2072 Application: The Costs of Taxation
161. Refer to Figure 8-8. After the tax goes into effect, producer surplus is the area
a. D+F+G+H+J.
b. D+F+G+H.
c. D+F+J.
d. J.
162. Refer to Figure 8-8. The government collects tax revenue that is the area
a. L.
b. B+D.
c. C+F.
d. F+G+L.
Application: The Costs of Taxation 2073
163. Refer to Figure 8-8. The decrease in consumer and producer surpluses that is not offset by tax
revenue is the area
a. C.
b. F.
c. G.
d. C+F.
164. Refer to Figure 8-8. The deadweight loss of the tax is the area
a. B+D.
b. C+F.
c. A+C+F+J.
d. B+C+D+F.
2074 Application: The Costs of Taxation
165. Refer to Figure 8-8. One effect of the tax is to
a. reduce consumer surplus from $180 to $72.
b. reduce producer surplus from $96 to $24.
c. create a deadweight loss of $72.
d. All of the above are correct.
166. Refer to Figure 8-8. One effect of the tax is to
a. reduce consumer surplus by $108.
b. reduce producer surplus by $72.
c. create a deadweight loss of $60.
d. All of the above are correct.
Application: The Costs of Taxation 2075
Scenario 8-1
Erin would be willing to pay as much as $100 per week to have her house cleaned. Ernesto’s
opportunity cost of cleaning Erin’s house is $70 per week.
167. Refer to Scenario 8-1. If Erin pays Ernesto $90 to clean her house, Erin’s consumer surplus is
a. $80.
b. $30.
c. $20.
d. $10.
168. Refer to Scenario 8-1. If Ernesto cleans Erin’s house for $90, Ernesto’s producer surplus is
a. $80.
b. $30.
c. $20.
d. $10.
2076 Application: The Costs of Taxation
169. Refer to Scenario 8-1. Assume Erin is required to pay a tax of $40 when she hires someone to
clean her house for a week. Which of the following is correct?
a. Erin will now clean her own house.
b. Ernesto will continue to clean Erin’s house, but his producer surplus will decline.
c. Total economic welfare (consumer surplus plus producer surplus plus tax revenue) will
increase.
d. Erin will continue to hire Ernesto to clean her house, but her consumer surplus will decline.
170. Refer to Scenario 8-1. Assume Erin is required to pay a tax of $5 when she hires someone to
clean her house. Which of the following is true?
a. Erin will continue to hire Ernesto to clean her house, but her consumer surplus will decline.
b. Ernesto will continue to clean Erin‘s house, and his producer surplus will increase.
c. Total economic welfare (consumer surplus plus producer surplus plus tax revenue) will
decrease.
d. All of the above are correct.
Application: The Costs of Taxation 2077
Scenario 8-2
Roland mows Karla‘s lawn for $25. Roland’s opportunity cost of mowing Karla’s lawn is $20,
and Karla’s willingness to pay Roland to mow her lawn is $28.
171. Refer to Scenario 8-2. If Karla hires Roland to mow her lawn, Karla’s consumer surplus is
a. $3.
b. $5.
c. $8.
d. $25.
172. Refer to Scenario 8-2. If Karla hires Roland to mow her lawn, Roland’s producer surplus is
a. $2.
b. $3.
c. $5.
d. $25.
2078 Application: The Costs of Taxation
173. Refer to Scenario 8-2. Assume Roland is required to pay a tax of $3 each time he mows a
lawn. Which of the following results is most likely?
a. Karla now will decide to mow her own lawn, and Roland will decide it is no longer in his
interest to mow Karla’s lawn.
b. Karla is willing to pay Roland to mow her lawn, but Roland will decline her offer.
c. Roland is willing to mow Karla’s lawn, but Karla will decide to mow her own lawn.
d. Roland and Karla still can engage in a mutually-agreeable trade.
174. Refer to Scenario 8-2. Assume Roland is required to pay a tax of $10 each time he mows a
lawn. Which of the following results is most likely?
a. Karla now will decide to mow her own lawn, and Roland will decide it is no longer in his
interest to mow Karla’s lawn.
b. Karla still is willing to pay Roland to mow her lawn, but Roland will decline her offer.
c. Roland still is willing to mow Karla’s lawn, but Karla will decide to mow her own lawn.
d. Roland and Karla still can engage in a mutually-agreeable trade.
Application: The Costs of Taxation 2079
175. Suppose a tax of $5 per unit is imposed on a good, and the tax causes the equilibrium quantity of
the good to decrease from 200 units to 100 units. The tax decreases consumer surplus by $450
and decreases producer surplus by $300. The deadweight loss from the tax is
a. $250.
b. $500.
c. $750.
d. $1,000.
176. Suppose a tax of $4 per unit is imposed on a good, and the tax causes the equilibrium quantity of
the good to decrease from 2,000 units to 1,700 units. The tax decreases consumer surplus by
$3,000 and decreases producer surplus by $4,400. The deadweight loss of the tax is
a. $200.
b. $400.
c. $600.
d. $1,200.
2080 Application: The Costs of Taxation
177. Suppose a tax of $3 per unit is imposed on a good. The supply curve is a typical upward–sloping
straight line, and the demand curve is a typical downward-sloping straight line. The tax decreases
consumer surplus by $3,900 and decreases producer surplus by $3,000. The tax generates tax
revenue of $6,000. The tax decreased the equilibrium quantity of the good from
a. 2,000 to 1,500.
b. 2,400 to 2,000.
c. 2,600 to 2,000.
d. 3,000 to 2,400.
178. Suppose a tax of $5 per unit is imposed on a good. The supply curve is a typical upward–sloping
straight line, and the demand curve is a typical downward-sloping straight line. The tax
decreases consumer surplus by $10,000 and decreases producer surplus by $15,000. The
deadweight loss of the tax is $2,500. The tax decreased the equilibrium quantity of the good from
a. 6,500 to 5,500.
b. 5,500 to 4,500.
c. 5,000 to 3,000.
d. 6,000 to 4,000.
Application: The Costs of Taxation 2081
179. A tax of $0.25 is imposed on each bag of potato chips that is sold. The tax decreases producer
surplus by $600 per day, generates tax revenue of $1,220 per day, and decreases the equilibrium
quantity of potato chips by 120 bags per day. The tax
a. decreases consumer surplus by $645 per day.
b. decreases the equilibrium quantity from 6,000 bags per day to 5,880 bags per day.
c. decreases total surplus from $3,000 to $1,800 per day.
d. creates a deadweight loss of $15 per day.
180. Suppose a tax is imposed on each new hearing aid that is sold. The supply curve is a typical
upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. As
a result of the tax, the equilibrium quantity of hearing aids decreases from 10,000 to 9,000, and
the deadweight loss of the tax is $60,000. We can conclude that the tax on each hearing aid is
a. $60.
b. $120.
c. $160.
d. $200.
2082 Application: The Costs of Taxation
181. Suppose a tax of $3 is imposed on each new garden hose that is sold, resulting in a deadweight
loss of $22,500. The supply curve is a typical upward-sloping straight line, and the demand curve
is a typical downward-sloping straight line. Before the tax was imposed, the equilibrium quantity
of garden hoses was 100,000. We can conclude that the equilibrium quantity of garden hoses
after the tax is imposed is
a. 75,000.
b. 85,000.
c. 90,000.
d. 95,000.
182. Tom walks Bethany’s dog once a day for $50 per week. Bethany values this service at $60 per
week, while the opportunity cost of Tom’s time is $30 per week. The government places a tax of
$35 per week on dog walkers. Before the tax, what is the total surplus?
a. $60
b. $50
c. $30
d. $25
Application: The Costs of Taxation 2083
183. Tom walks Bethany’s dog once a day for $50 per week. Bethany values this service at $60 per
week, while the opportunity cost of Tom’s time is $30 per week. The government places a tax of
$35 per week on dog walkers. After the tax, what is the loss in total surplus?
a. $50
b. $30
c. $25
d. $0
184. Tom walks Bethany’s dog once a day for $50 per week. Bethany values this service at $60 per
week, while the opportunity cost of Tom’s time is $30 per week. The government places a tax of
$35 per week on dog walkers. After the tax, what is the total surplus?
a. $50
b. $30
c. $25
d. $0
2084 Application: The Costs of Taxation
185. Diana is a personal trainer whose client Charles pays $80 per hour-long session. Charles values
this service at $100 per hour, while the opportunity cost of Diana’s time is $75 per hour. The
government places a tax of $10 per hour on personal trainers. Before the tax, what is the total
surplus?
a. $25
b. $20
c. $5
d. $0
186. Kate is a personal trainer whose client William pays $80 per hour-long session. William values
this service at $100 per hour, while the opportunity cost of Kate’s time is $75 per hour. The
government places a tax of $10 per hour on personal trainers. After the tax, what is likely to
happen in the market for personal training?
a. Kate and William will agree to a new price somewhere between $85 and $100.
b. Kate and William will agree to a new price somewhere between $70 and $110.
c. Kate will no longer offer personal training services to William because she must charge more
than $100 in order to cover her opportunity costs and pay the tax.
d. The price will remain at $80, and Kate will pay the $10 tax.
Application: The Costs of Taxation 2085
187. A tax
a. lowers the price buyers pay and raises the price sellers receive.
b. raises the price buyers pay and lowers the price sellers receive.
c. places a wedge between the price buyers pay and the price sellers receive.
d. Both b) and c) are correct.
188. Suppose Rebecca needs a dog sitter so that she can travel to her sister’s wedding. Rebecca
values dog sitting for the weekend at $200. Susan is willing to dog sit for Rebecca so long as
she receives at least $175. Rebecca and Susan agree on a price of $185. Suppose the government
imposes a tax of $30 on dog sitting. What is the deadweight loss of the tax?
a. the maximum value that Rebecca would pay for dog sitting
b. the $30 tax
c. the lost benefit to Rebecca and Susan because after the tax, Susan will not dog sit for
Rebecca
d. the lost benefit to Rebecca of being unable to hire a dog sitter because Rebecca is the one
who would pay the tax
2086 Application: The Costs of Taxation
189. Suppose Rebecca needs a dog sitter so that she can travel to her sister’s wedding. Rebecca
values dog sitting for the weekend at $200. Susan is willing to dog sit for Rebecca so long as
she receives at least $175. Rebecca and Susan agree on a price of $185. Suppose the government
imposes a tax of $30 on dog sitting. The tax has made Rebecca and Susan worse off by a total
of
a. $30.
b. $25.
c. $10.
d. $5.
190. Suppose Rebecca needs a dog sitter so that she can travel to her sister’s wedding. Rebecca
values dog sitting for the weekend at $200. Susan is willing to dog sit for Rebecca so long as
she receives at least $150. Rebecca and Susan agree on a price of $175. Suppose the government
imposes a tax of $10 on dog sitting. The tax has made Rebecca and Susan worse off by a total
of
a. $50.
b. $40.
c. $20.
d. $10.
Application: The Costs of Taxation 2087
Figure 8-9
The vertical distance between points A and C represents a tax in the market.
191. Refer to Figure 8-9. The equilibrium price and quantity before the imposition of the tax is
a. P=$800 and Q=20.
b. P=$600 and Q=20.
c. P=$300 and Q=20.
d. P=$600 and Q=40.
2088 Application: The Costs of Taxation
192. Refer to Figure 8-9. The imposition of the tax causes the quantity sold to
a. increase by 20 units.
b. increase by 500 units.
c. decrease by 20 units.
d. decrease by 500 units.
193. Refer to Figure 8-9. The imposition of the tax causes the price paid by buyers to increase by
a. $20.
b. $200.
c. $300.
d. $500.
194. Refer to Figure 8-9. The imposition of the tax causes the price paid by buyers to
a. increase from $600 to $800.
b. increase from $300 to $800.
c. decrease from $600 to $300.
d. remain unchanged at $600.
Application: The Costs of Taxation 2089
195. Refer to Figure 8-9. The imposition of the tax causes the price received by sellers to decrease
by
a. $20.
b. $200.
c. $300.
d. $500.
196. Refer to Figure 8-9. The imposition of the tax causes the price received by sellers to
a. increase from $600 to $800.
b. decrease from $800 to $300.
c. decrease from $600 to $300.
d. remain unchanged at $600.
2090 Application: The Costs of Taxation
197. Refer to Figure 8-9. The amount of the tax on each unit of the good is
a. $20.
b. $200.
c. $300.
d. $500.
198. Refer to Figure 8-9. The per-unit burden of the tax on buyers is
a. $20.
b. $200.
c. $300.
d. $500.