1. In designing a tax system, policymakers have two objectives that are often conflicting. They are
a.
maximizing revenue and minimizing costs to taxpayers.
b.
efficiency and minimizing costs to taxpayers.
c.
efficiency and equity.
d.
maximizing revenue and reducing the national debt.
2. One tax system is less efficient than another if it
a.
places a lower tax burden on lower-income families than on higher-income families.
b.
places a higher tax burden on lower-income families than on higher-income families.
c.
raises the same amount of revenue at a higher cost to taxpayers.
d.
raises less revenue at a lower cost to taxpayers.
3. Which of the following is not a cost of taxes to taxpayers?
a.
b.
c.
d.
4. In addition to tax payments, the two other primary costs that a tax system inevitably imposes on taxpayers are
a.
deadweight losses and administrative burdens.
b.
deadweight losses and frustration with the political system.
c.
administrative burdens and tax-preparation costs.
d.
administrative burdens and the risk of punishment for failure to comply with tax laws.
5. Country A’s tax system is more efficient than Country B’s tax system if
a.
Country A collects less tax revenue than Country B, and the cost to taxpayers is the same in both countries.
b.
Country A collects more tax revenue than Country B, even though the cost to taxpayers is greater in Country
A than in Country B.
c.
the same amount of revenue is raised in both countries, but the cost to taxpayers is smaller in Country A than
in Country B.
d.
the same amount of revenue is raised in both countries, but the taxes are collected in a shorter amount of time
in Country A than in Country B.
6. Suppose the country of Mankiwland has a new king, King Gregory. For the purpose of efficiency King Gregory’s chief
economic advisor would encourage him to design his country’s tax system to minimize
(i)
deadweight losses from taxes.
(ii)
administrative burdens from taxes.
(iii)
the tax payments themselves.
(iv)
government expenditures to correct for market failures.
a.
(i) only
b.
(i) and (ii) only
c.
(iii) and (iv) only
d.
(i), (ii), (iii), and (iv)
7. A tax system with little deadweight loss and a small administrative burden would be described as
a.
equitable.
b.
communistic.
c.
capitalistic.
d.
efficient.
8. An efficient tax system is one that imposes small
a.
deadweight losses and administrative burdens.
b.
marginal rates and deadweight losses.
c.
administrative burdens and transfers of money.
d.
marginal rates and transfers of money.
9. An efficient tax system is one that
(i)
maximizes tax revenues.
(ii)
minimizes deadweight losses from taxes.
(iii)
minimizes administrative burdens from taxes.
(iv)
promotes equity across taxpayers.
a.
(i) only
b.
(ii) and (iii) only
c.
(i), (ii), and (iii) only
d.
(i), (ii), (iii), and (iv)
10. Which of the following is a characteristic of a more efficient tax system?
a.
The system minimizes deadweight loss.
b.
The system raises the same amount of revenue at a lower cost.
c.
The system minimizes administrative burdens.
d.
All of the above are correct.
11. Part of the deadweight loss from taxing labor earnings is that people
a.
will work more.
b.
will be reluctant to hire accountants to file their tax returns.
c.
with low tax liabilities will universally be worse off than under some other tax policy.
d.
will work less.
12. 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.
13. 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.
14. 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.
15. 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.
16. 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.
17. 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.
18. 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.
19. An optimal tax is one that minimizes the
a.
external benefit.
b.
total deadweight loss from the tax.
c.
income taxes.
d.
horizontal equity.
20. 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.
21. 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.
22. 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.
23. 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.
24. 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.
25. 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.
26. 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.
27. 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.
28. 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.
29. 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.
30. 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.
31. 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.
32. 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.
$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.
33. 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
34. 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.
35. 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.
36. 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.
37. 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.
38. 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.
39. 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
40. 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
41. 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
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. 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.
43. 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
44. 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
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. 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.
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.
46. Refer to Scenario 12–2. What is total consumer surplus for Bob and Lisa?
a.
$0
b.
$2
c.
$5
d.
$7
47. 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
48. 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
49. 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
50. 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.
51. 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.
$12
52. Refer to Scenario 12-3. How much total consumer surplus do Regina and Roger collectively receive from consuming
cheesecake?
a.
$3
b.
$6
c.
$9
d.
$13
53. Refer to Scenario 12-3. Assume that the government places a $4 tax on each slice of cheesecake and that the new
equilibrium price is $9. What is Regina’s consumer surplus from cheesecake?
a.
zero
b.
$2
c.
$3
d.
$6
54. Refer to Scenario 12-3. Assume that the government places a $4 tax on each slice of cheesecake and that the new
equilibrium price is $9. What is the deadweight loss of the tax?
a.
$3
b.
$6
c.
$8
d.
$9
55. Refer to Scenario 12-3. Assume that the government places a $4 tax on each slice of cheesecake and that the new
equilibrium price is $9. How much tax revenue will be generated from sales to Regina and Roger?
a.
zero
b.
$4
c.
$8
d.
$12
56. Refer to Scenario 12-3. Assume that the government places a $2 tax on each slice of cheesecake and that the new
equilibrium price is $7. What is the deadweight loss of the tax?
a.
zero
b.
$3
c.
$6
d.
$8
57. Refer to Scenario 12-3. Assume that the government places a $4 tax on each slice of cheesecake and that the new
equilibrium price is $9. Which of the following statements is correct?
a.
Roger will bear the full burden of the deadweight loss.
b.
Regina will bear the full burden of the deadweight loss.
c.
Both Regina and Roger will share the burden of the deadweight loss.
d.
There will be no deadweight loss.
Table 12-1
Weekend Ski Trip
Value to Anna
$150
Value to Brian
$90
Value to Clem
$75
Value to Dave
$50
58. Refer to Table 12-1. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual unit cost
of providing a weekend of skiing. What is the value of the surplus that accrues to all four skiers from their weekend trip?
a.
$75
b.
$105
c.
$185
d.
$215
59. Refer to Table 12-1. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual unit cost
of providing a weekend of skiing. How much consumer surplus accrues to Anna and Clem individually?
a.
$125 and $20 respectively
b.
$105 and $30 respectively
c.
$85 and $40 respectively
d.
$65 and $50 respectively
60. Refer to Table 12-1. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual unit cost
of providing a weekend of skiing. Suppose the government imposes a tax of $12 on skiing, which raises the price of a
weekend ski pass to $57. What is the value of the surplus that accrues to all four skiers from their weekend trip?
a.
$41.
b.
$95.
c.
$144.
d.
$185.
61. Refer to Table 12-1. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual unit cost
of providing a weekend of skiing. Suppose the government imposes a tax of $12 on skiing, which raises the price of a
weekend ski pass to $57. How much tax revenue is collected from these four skiers?
a.
$0.
b.
$12.
c.
$36.
d.
$48.
62. Refer to Table 12-1. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual unit cost
of providing a weekend of skiing. Suppose the government imposes a tax of $12 on skiing, which raises the price of a
weekend ski pass to $57. The deadweight loss associated with the tax is
a.
$5.
b.
$12.
c.
$36.
d.
$41.
Table 12-2
Hot Fudge
Brownie Delight
Value to Ricky
$9.00
Value to Lucy
$5.00
63. Refer to Table 12-2. Suppose that the government imposes a $2 tax on delights, causing the price to increase from
$4.00 to $6.00. Total consumer surplus
a.
falls by less than the tax revenue generated.
b.
falls by more than the tax revenue generated.
c.
falls by the same amount as the tax revenue generated.
d.
will not fall since Jennifer will no longer be in the market.
64. Refer to Table 12-2. Suppose that the government imposes a $2 tax on delights, causing the price to increase from
$4.00 to $6.00. Deadweight loss arises because
a.
Lucy will pay more tax as a percentage of her value of delights than Ricky.
b.
Ricky must pay the $2.00 tax from his consumer surplus.
c.
Ricky will have to pay a higher price for delights.
d.
Lucy will leave the market.
65. Refer to Table 12–2. Suppose that the government imposes a $2 tax on delights, causing the price to increase from
$4.00 to $6.00. Total consumer surplus will fall from
a.
$6 to $3.
b.
$7 to $4.
c.
$6 to $2.
d.
$5 to $3.