CHAPTER 5: Market Outcomes and Tax Incidence
MULTIPLE CHOICE
1. Consumer surplus is defined as the
a. difference between the willingness to pay for a good and the willingness to sell it.
b. total revenue earned from producing and selling some good.
c. difference between the willingness to pay for a good and the price paid to get it.
d. quantity of units that consumers want to buy at the market price.
e. difference between the price the seller receives and the willingness to sell it.
2. Consumer surplus is the difference between
a. supply and demand.
b. the price the producer receives and the willingness to sell a good.
c. the willingness to pay for a good and the willingness to sell a good.
d. the willingness to pay for a good and the amount that is paid to get it.
e. the price paid for a good and the amount of the good produced.
3. The difference between the willingness to pay for a good and the amount that is paid to get it is
also known as
a. consumer expenditure. d. producer profit.
b. surplus spending. e. consumer surplus.
c. consumer benefit.
4. All else held constant, an increase in the price of a good would necessarily
a. increase social welfare. d. increase consumer surplus.
b. decrease producer surplus. e. increase the supply of the good.
c. decrease consumer surplus.
5. Holding all else constant, when the price of a good increases
a. consumer surplus increases.
b. producer surplus decreases.
c. both producer surplus and consumer surplus increase.
d. both consumer surplus and producer surplus decrease.
e. consumer surplus decreases.
6. Holding all else constant, when the price of a good decreases
a. producer surplus increases.
b. consumer surplus increases.
c. both consumer surplus and producer surplus increase.
d. consumer surplus decreases.
e. both consumer surplus and producer surplus decrease.
7. Priscilla is willing to pay $65 for a new pair of shoes. Pandora is willing to pay $50 for the same
shoes. The shoes have a price of $45. What is the total consumer surplus for Priscilla and Pandora?
a. $15 d. $25
b. $20 e. $35
c. $5
8. Jung is willing to pay $85 for a new jacket that sells for $70. Eddie is willing to pay $65 for that
same jacket. What is the total consumer surplus for Jung and Eddie?
a. $30 d. $25
b. $15 e. $155
c. $20
9. Consider the market for socks. The current price of a pair of plain white socks is $5.00. Two
consumers, Igor and Samir, are willing to pay $7.25 and $8.00, respectively, for a pair of plain
white socks. Two sock manufacturers are willing to sell plain white socks for as little as $4.00 and
$4.15 per pair. How much is total consumer surplus in this market?
a. $2.25 d. $5.25
b. $3.00 e. $15.25
c. $0.75
10. In the figure, which region represents the consumer surplus?
a. area A d. area D
b. area B e. area E
c. area C
11. In the figure, which area represents the producer surplus?
a. area A d. area D
b. area B e. area E
c. area C
12. In the figure, which combination of areas represents the social welfare?
a. A + D d. A + B
b. B + C e. C + D
c. D + E
13. Another name for a consumer’s willingness to pay is the
a. limiting cost. d. reservation price.
b. expense cap. e. maximum outlay.
c. hidden budget.
14. For a given good, a consumer’s willingness to pay is, by definition, the
a. same as the seller’s willingness to sell.
b. amount of cash the consumer has on hand for purchase of the good.
c. amount the consumer offers at the start of a negotiation.
d. intensity of the consumer’s desire for the good.
e. maximum price the consumer would pay for the good.
15. Producer surplus is the difference between
a. supply and demand.
b. the price the producer receives and the willingness to sell a good.
c. the willingness to pay for a good and the willingness to sell a good.
d. the willingness to pay for a good and the amount that is paid to get it.
e. the price paid for a good and the amount of the good produced.
16. Producer surplus is defined as the
a. difference between the willingness to pay for a good and the willingness to sell it.
b. difference between the price the seller receives and the willingness to sell it.
c. difference between the willingness to pay for a good and the price paid to get it.
d. quantity of units that consumers want to buy at the market price.
e. total revenue earned from producing and selling some good.
17. The difference between the willingness to sell a good and the price a producer receives is also
known as
a. producer profit. d. tax revenue.
b. producer surplus. e. producer benefit.
c. consumer waste.
18. All else held constant, a decrease in the price of a good would necessarily
a. increase social welfare. d. increase demand for the good.
b. decrease producer surplus. e. increase producer surplus.
c. decrease consumer surplus.
19. When the price of a good increases and all else is held constant
a. both consumer surplus and producer surplus decrease.
b. both consumer surplus and producer surplus increase.
c. consumer surplus decreases.
d. producer surplus decreases.
e. producer surplus increases.
20. When the price of a good decreases and all else is held constant
a. producer surplus increases.
b. both consumer surplus and producer surplus decrease.
c. both consumer surplus and producer surplus increase.
d. producer surplus decreases.
e. consumer surplus decreases.
21. LDT Products, Inc., designs and sells flannel jackets. The company is willing to sell a men’s
flannel jacket for as little as $45. Its main competitor is MK Outriggers, which is willing to sell the
same men’s flannel jacket for as little as $40. The current market price of that type of jacket is $57.
What is the total producer surplus for the two firms?
a. $95 d. $29
b. $12 e. $5
c. $17
22. Sammy’s Bakery and Presley’s Sweetshop both sell cupcakes. The market price of one chocolate
cupcake is $2.50. Sammy’s is willing to sell a cupcake for as little as $1.65; Presley’s is willing to
sell a cupcake for as little as $1.75. What is the total producer surplus for the two firms?
a. $0.75 d. $2.50
b. $1.60 e. $3.40
c. $0.85
23. Consider the market for socks. The current price of a pair of plain white socks is $5.00. Two
consumers, Igor and Samir, are willing to pay $7.25 and $8.00, respectively, for a pair of plain
white socks. Two sock manufacturers are willing to sell plain white socks for as little as $4.00 and
$4.15 per pair. What is the total producer surplus in this market?
a. $0.15 d. $1.00
b. $8.15 e. $1.85
c. $0.85
24. For a given good, a seller’s willingness to sell is, by definition, the
a. minimum price the seller would accept for the good.
b. amount of cash the seller needs to cover cash flow requirements.
c. amount the seller asks for at the start of a negotiation.
d. intensity of the seller’s personal attachment to the good.
e. same as the consumer’s willingness to pay.
25. When looking at a supply and demand graph, you would find consumer surplus
a. above the demand curve and below the supply curve.
b. below the demand curve and above market price.
c. to the right of equilibrium quantity and above market price.
d. above the demand curve and above the supply curve.
e. below market price and above the supply curve.
26. When looking at a graph, the area under the demand curve and above market price is defined as
a. tax revenue. d. producer surplus.
b. spending surplus. e. consumer surplus.
c. consumer benefit.
27. What happens to the amount of consumer surplus and producer surplus when the supply of scarves
suddenly declines (shifts left)?
a. Producer surplus declines and consumer surplus is unchanged.
b. Consumer surplus declines and producer surplus is unchanged.
c. Consumer surplus declines and producer surplus declines.
d. Consumer surplus is unchanged and producer surplus is unchanged.
e. Producer surplus increases and consumer surplus increases.
28. When looking at a supply and demand graph, you would find producer surplus
a. above the demand curve and below the supply curve.
b. below the demand curve and above market price.
c. to the right of equilibrium quantity and above market price.
d. above the demand curve and above the supply curve.
e. below market price and above the supply curve.
29. When looking at a graph, the area above the supply curve and below market price is defined as
a. consumer surplus. d. business profit.
b. producer surplus. e. tax revenue.
c. producer benefit.
30. Producer surplus is depicted by the area
a. above market price and below the supply curve.
b. between the supply curve and the demand curve.
c. below market price and above the supply curve.
d. above market price and below the demand curve.
e. above the demand curve and below the supply curve.
31. Social welfare (i.e., the sum of producer and consumer surplus) is maximized when
a. the government taxes most goods and services.
b. very few consumers and producers exist within a market.
c. the market reaches its equilibrium price and quantity.
d. supply and demand are perfectly inelastic.
e. the government imposes price controls.
32. Social welfare is measured as the sum of
a. tax revenue and deadweight loss.
b. deadweight loss and consumer surplus.
c. producer surplus and tax revenue.
d. consumer surplus and tax revenue.
e. consumer surplus and producer surplus.
33. Consumer surplus plus producer surplus equals
a. deadweight loss. d. tax revenue.
b. economic profit. e. market distortions.
c. social welfare.
34. Consider the market for socks. The current price of a pair of plain white socks is $5.00. Two
consumers, Jeff and Samir, are willing to pay $7.25 and $8.00, respectively, for a pair of plain
white socks. Two sock manufacturers are willing to sell plain white socks for as little as $4.00 and
$4.15 per pair. What is the total producer and consumer surplus (i.e., social welfare) in this
market?
a. $7.10 d. $23.40
b. $5.25 e. $4.50
c. $1.85
35. A market has reached an efficient outcome when
a. producers are able to produce and sell as much as they like.
b. total surplus is minimized.
c. producer surplus is greater than consumer surplus.
d. consumers are able to purchase as much as they like.
e. total surplus is maximized.
36. The price-quantity combination found where the supply and demand curves intersect is a unique
combination that is efficient because
a. producers can sell as much as they want.
b. total surplus is maximized.
c. tax revenue is sufficient to pay for government services.
d. consumers can buy as much as they want.
e. new products are being introduced.
37. Another name for social welfare is
a. total surplus. d. common benefit.
b. combined equity. e. net per-capita gain.
c. collective good.
38. Which of the following statements is concerned with efficiency rather than equity?
a. It is not fair to tax the income earned by the wealthy at higher rates than the poor.
b. Excise taxes on tobacco products affect low-income families the most and should be reduced.
c. Our income tax system should be more progressive than it is now.
d. Taxes cause distortions in markets and reduce social welfare.
e. The best type of income tax is a flat tax because it treats everyone the same.
39. Which of the following statements is concerned with efficiency rather than equity?
a. Sales taxes on food are regressive and should be eliminated.
b. Income taxes should be raised on low-income families so that everyone pays.
c. The United States should implement a wealth tax on upper-income households.
d. Excise taxes tend to raise prices for consumers.
e. The overall tax system in the United States should be much more progressive.
40. Questions about the equity of a tax are concerned mostly with
a. efficiency. d. deadweight loss.
b. tax revenue. e. elasticity.
c. fairness.
41. Which of the following statements is concerned with equity rather than efficiency?
a. Almost all taxes create some amount of deadweight loss.
b. Excise taxes tend to raise prices for consumers and reduce sales for firms.
c. Tax rates on the wealthy are too low and should be raised.
d. The incidence of a tax does not depend on who actually pays it.
e. Taxes generate revenues that governments spend on services.
42. Which of the following statements is concerned with equity rather than efficiency?
a. Imposing a tax on a good reduces the incentive to buy that good.
b. The burden of a new sales tax typically increases prices.
c. Deadweight loss is the lost social welfare from a tax.
d. Tax rates on middle-class households are too high and should be reduced.
e. Taxes cause producers and consumers to lose surplus.
43. “When a good is divided up, it is important that none of the good go to waste.” This statement
emphasizes
a. fairness. d. equity.
b. zero surplus. e. equal welfare.
c. efficiency.
44. “When a good is divided up, it is important that everyone get an equal share.” This statement
emphasizes
a. maximum surplus. d. equity.
b. efficiency. e. total welfare.
c. aggregation.
45. A tax on apples would cause consumers to suffer because
a. consumer surplus would increase.
b. the price of apples would increase and fewer apples would be purchased.
c. revenues for apple growers would decrease.
d. the government would collect revenue from the tax.
e. producer surplus would decrease.
46. Which areas represent consumer surplus before the tax is imposed?
a. A + B + F d. B + C
b. A e. F + G
c. C + G + E
47. Which areas represent consumer surplus after the tax is imposed?
a. A d. F + G
b. A + B e. B + C + F
c. A + B + F
48. Which areas represent the amount of consumer surplus lost due to the tax?
a. A + F d. A + B + F
b. B + C e. B + F
c. A
49. Which areas represent producer surplus before the tax is imposed?
a. F + G d. B + C + F + G
b. E + C + G e. E
c. A + B + C + E
50. Which areas represent producer surplus after the tax is imposed?
a. E + C + G d. F + G
b. E + C e. E
c. E + G
51. Which areas represent the amount of producer surplus lost due to the tax?
a. G d. C + G
b. A + B + C + E e. B + F
c. C
52. What is the total amount of producer and consumer surplus (i.e., social welfare) in this market
before the tax is imposed?
a. A + B + C + E + F + G d. F + G
b. A + C e. B + C + F + G
c. A + B + C + E
53. What is the total amount of producer and consumer surplus (i.e., social welfare) in this market after
the tax is imposed?
a. A + B + C + E + F + G d. F + G
b. A + E e. B + C + F + G
c. A + B + C + E
54. Which areas represent the total lost consumer and producer surplus (i.e., social welfare) as a result
of the tax?
a. A + B + C + E + F + G d. F + G
b. A + C e. B + C + F + G
c. A + B + C + E
55. Which areas represent the total cost to society, in terms of lost social welfare, created as a result of
the tax?
a. B + C + F + G d. A + B + C + E
b. A + B + F e. F + G
c. C + E + G
56. Which areas represent the revenue collected from this tax?
a. A + B + F d. E
b. B + C e. A + E
c. F + G
57. Which party is responsible for paying this tax out of pocket?
a. consumers
b. producers
c. both consumers and producers
d. some consumers and some producers, but not all consumers and producers
e. some consumers and no producers
58. What is the amount of the tax, as measured along the y axis?
a. PC + PS d. PC − Pe
b. Pe − PS e. Pe + PS
c. PC − PS
59. Which areas represent the total tax revenue created as a result of the tax?
a. A + C d. A + E + F + G
b. A + E e. A + B + C + D + E + F + G
c. B + C
60. Which areas represent the deadweight loss created as a result of the tax?
a. A + B + C + E + F + G d. F + G
b. A + C e. B + C + F + G
c. A + B + C + E
61. A tax on consumers would cause the ________ curve(s) to shift to the ________.
a. demand; right d. supply and demand; right
b. supply; left e. demand; left
c. supply and demand; left
62. A tax on apples would cause apple growers to suffer because
a. consumer surplus would decrease.
b. the government would collect revenue from the tax.
c. consumers would pay higher prices.
d. producer surplus would increase.
e. revenues and profits from growing apples would decrease.
63. In most cases, taxes reduce economic efficiency because
a. they lower prices for consumers and cause firms to suffer.
b. they increase firms’ profits at the expense of consumers.
c. taxes are perceived as unfair by some taxpayers.
d. the government often spends tax revenues on programs that some voters don’t like.
e. they reduce consumer surplus and producer surplus.
64. It is said that taxes drive a wedge between prices. This statement is true because taxes cause
a. both consumer and producer prices to increase.
b. the consumer price to increase but leave producer prices unchanged.
c. both consumer and producer prices to decrease.
d. the consumer price to decrease and the producer price to increase.
e. the consumer price to increase and the producer price to decrease.
65. The difference between the price consumers pay and the price sellers receive after a tax is imposed
is equal to the
a. loss of social welfare from the tax. d. revenue from the tax.
b. dollar amount of the tax. e. lost profit from the tax.
c. deadweight loss from the tax.
66. When a tax is imposed on some good, what tends to happen to consumer prices and producer
prices?
a. Consumer prices decrease and producer prices increase.
b. Consumer prices increase and producer prices decrease.
c. Consumer prices increase and producer prices increase.
d. Consumer prices decrease and producer prices decrease.
e. Consumer prices and producer prices converge at the same point.
67. After a tax is imposed, the price paid by consumers ________ and the price received by producers
________.
a. increases; increases d. decreases; decreases
b. increases; decreases e. is unaffected; is unaffected
c. decreases; increases
68. A tax on apples would cause the price paid by consumers to ________ and the price received by
producers to ________.
a. increase; increase d. decrease; decrease
b. increase; decrease e. increase, then decrease; increase
c. decrease; increase, then decrease
69. Excise taxes are taxes that are
a. applied to all goods and activities.
b. usually applied to inferior goods.
c. usually applied to income and capital gains.
d. never applied to goods or activities.
e. applied to a particular good or activity.
70. A tax that is applied to one specific good or service is a(n) ________ tax.
a. sales d. excise
b. general local option sales e. wealth
c. property
71. A tax on consumers of a good would shift the ________ curve down and cause the price paid by
consumers to ________.
a. supply; increase
b. demand; decrease, then return to its original level
c. supply; decrease
d. demand; increase
e. supply; increase, then return to its original level
72. If a tax causes the supply curve to shift, we know that the tax is paid out of pocket by
a. consumers.
b. producers.
c. the government.
d. both producers and consumers.
e. consumer, producers, and the government.
73. A tax on producers would cause the ________ curve(s) to shift to the ________.
a. demand; left d. supply; right
b. supply and demand; left e. supply and demand; right
c. supply; left
74. A tax on milk would likely cause an increase in the
a. price consumers pay for milk. d. revenues earned from selling milk.
b. price producers receive for milk. e. profits earned by selling milk.
c. amount of milk sold.
75. A tax on milk would likely cause a decrease in the
a. price consumers pay for milk. d. revenues from the milk tax.
b. price of products made from milk. e. deadweight loss from the milk tax.
c. amount of milk sold.
76. The incidence of a tax reflects
a. who pays the tax out of pocket.
b. how much tax revenue the tax generates.
c. who bears the burden of the tax.
d. how the tax revenue from the tax is spent.
e. government efficiency in providing goods and services.
77. When a tax is imposed on some good, what happens to the amount of the good bought and sold?
a. It increases.
b. It decreases.
c. It decreases, but only if the tax is imposed on producers.
d. It decreases, but only if the tax is imposed on consumers.
e. It increases, but only if the tax is imposed on consumers.
78. The incidence of a tax is unrelated to
a. how responsive producers are to the tax.
b. how responsive consumers are to the tax.
c. the elasticity of supply.
d. the elasticity of demand.
e. who pays the tax out of pocket.
79. When a tax is imposed on some good, what usually happens to consumer and producer surplus?
a. They both increase.
b. They both fall to zero.
c. They both decrease.
d. Consumer surplus increases and producer surplus decreases.
e. Consumer surplus decreases and producer surplus increases.
80. Excise taxes are popular sources of revenue for governments because
a. they have very high levels of deadweight loss.
b. they are easy to understand.
c. consumers are rarely aware that they are paying them.
d. they are very stable sources of revenue.
e. they require very little paperwork.
81. Taxes will almost always cause consumer prices to increase. How much they increase depends on
a. how often the government collects the tax.
b. the amount of the tax.
c. who pays the tax out of pocket.
d. who is legally obligated to pay the tax.
e. the elasticities of supply and demand.
82. Taxes almost always cause producer prices to decrease. How much they decrease depends on
a. the elasticities of supply and demand.
b. the amount of the tax.
c. who is legally obligated to pay the tax.
d. who pays the tax out of pocket.
e. how often the government collects the tax.
83. When a tax is imposed on some good, the lost consumer surplus and producer surplus both
typically end up as
a. additional revenues for firms.
b. lower prices for consumers.
c. more units of output bought and sold.
d. increased social welfare.
e. tax revenue and deadweight loss.
84. When a tax is imposed, consumer surplus and producer surplus are reallocated to
a. social welfare.
b. tax revenue and deadweight loss.
c. tax revenue.
d. deadweight loss.
e. government spending on public services.
85. For any type of tax the government imposes
a. supply plus demand equals market price.
b. tax revenue plus deadweight loss equals total lost social welfare.
c. tax revenue plus market price equals deadweight loss.
d. deadweight loss plus economic distortion equals tax revenue.
e. total lost social welfare plus tax revenue equals deadweight loss.
86. The revenue generated from a tax equals the
a. amount of the good sold times the original price of the good.
b. amount of the tax times the quantity sold after the tax is imposed.
c. total social welfare lost as a result of the tax.
d. deadweight loss from the tax.
e. total consumer and producer surplus before the tax.
87. The per-unit dollar amount of a tax times the quantity sold after the tax is imposed equals
a. consumer surplus. d. producer surplus.
b. deadweight loss. e. social welfare.
c. the tax revenue.
88. Assume that a $0.25/gallon tax on milk causes a loss of $250 million in consumer and producer
surplus and creates a deadweight loss of $45 million. From this information, we know that the tax
revenue from the tax is
a. $250 million. d. $295 million.
b. $45 million. e. $75 million.
c. $205 million.
89. In the long run, both supply and demand tend to become more elastic. This suggests that, in the
long run, the
a. deadweight loss from a tax will be less than it is in the short run.
b. deadweight loss will be zero.
c. government will likely reduce tax rates.
d. tax revenue will be lower than it is in the short run.
e. tax revenue will be higher than it is in the short run.
90. Deadweight loss is defined as
a. the cost to society created by distortions in the market.
b. how much revenue a tax generates.
c. who pays a tax out of pocket.
d. the dollar cost of a tax per unit of sale.
e. the benefit from additional government spending.
91. The cost to society created by distortions in the market as a result of a tax is also known as
a. social distortion. d. fiduciary imbalance.
b. fiscal externality. e. budget deficit.
c. deadweight loss.
92. If the government wants to raise taxes while generating the least amount of deadweight loss, it
should raise taxes on a good with a
a. very elastic demand. d. somewhat elastic demand.
b. very elastic supply. e. perfectly inelastic demand.
c. somewhat elastic supply.
93. The net cost to society from the imposition of a tax is also known as
a. tax revenue. d. deadweight loss.
b. consumer surplus. e. social welfare.
c. producer surplus.
94. The deadweight loss from a tax is likely to be less with a good that has
a. few complements. d. an elastic demand.
b. many substitutes. e. an elastic supply.
c. few substitutes.
95. A tax creates no deadweight loss only when either supply or demand is
a. somewhat elastic. d. increasing.
b. perfectly elastic. e. decreasing.
c. perfectly inelastic.
96. The deadweight loss from a tax is likely to be greater with a good that has
a. few complements. d. an inelastic demand.
b. many substitutes. e. an inelastic supply.
c. few substitutes.
97. Assume that a $0.10/pound tax on apples raises $100 million in revenue but causes a $125 million
loss of consumer and producer surplus. From this information, we know that the deadweight loss
from the tax is
a. $225 million. d. $25 million.
b. $100 million. e. $1.25 million.
c. $125 million.
98. In the long run, both supply and demand tend to become more elastic. This suggests that, in the
long run, the
a. revenue generated from the tax will increase.
b. deadweight loss from a tax will be less than it is in the short run.
c. deadweight loss from a tax will be zero.
d. deadweight loss from a tax will be greater than it is in the short run.
e. government will likely reduce tax rates.
99. The deadweight loss from a tax is equal to one half of
a. the tax revenue multiplied by consumer surplus.
b. producer surplus multiplied by consumer surplus.
c. the decrease in quantity sold multiplied by the tax revenue.
d. the amount of the tax multiplied by the decrease in quantity sold.
e. the amount of the tax multiplied by consumer surplus.
100. A tax on milk would likely cause a decrease in the price of
a. ice cream. d. nondairy creamer.
b. cheese. e. breakfast cereal.
c. soymilk.
101. Peanut butter and jelly are complements. If a tax is imposed on peanut butter, how will that affect
the market for jelly?
a. Demand for jelly will increase along with the price.
b. Demand for jelly will decrease along with the price.
c. The supply of jelly will increase and the price will decrease.
d. Both the supply and demand for jelly will increase along with the price.
e. The supply of jelly will decrease and the price will increase.
102. Gasoline and ethanol are substitute fuels. If the government increases taxes on gasoline, this will
cause a(n) ________ in deadweight loss in the market for gasoline and a(n) ________.
a. decrease; increase in the price of ethanol
b. increase; decrease in demand for ethanol