Chapter 8/Application: The Costs of Taxation ❖ 41
184. 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. After the tax, what is likely to happen in the market for personal training?
a.
Diana and Charles will agree to a new price somewhere between $85 and $100.
b.
Diana and Charles will agree to a new price somewhere between $70 and $110.
c.
Diana will no longer offer personal training services to Charles 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 Diana will pay the $10 tax.
185. 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.
186. Suppose Ashley needs a dog sitter so that she can travel to her sister’s wedding. Ashley values dog sitting for
the weekend at $200. Cami is willing to dog sit for Ashley so long as she receives at least $175. Ashley and
Cami 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 Ashley would pay for dog sitting
b.
the $30 tax
c.
the lost benefit to Ashley and Cami because after the tax, Cami will not dog sit for Ashley
d.
the lost benefit to Ashley of being unable to hire a dog sitter because Ashley is the one who would
pay the tax
187. Suppose Ashley needs a dog sitter so that she can travel to her sister’s wedding. Ashley values dog sitting for
the weekend at $200. Cami is willing to dog sit for Ashley so long as she receives at least $175. Ashley and
Cami agree on a price of $185. Suppose the government imposes a tax of $30 on dog sitting. The tax has
made Ashley and Cami worse off by a total of
a.
$30.
b.
$25.
c.
$10.
d.
$5.
42 ❖ Chapter 8/Application: The Costs of Taxation
188. Suppose Ashley needs a dog sitter so that she can travel to her sister’s wedding. Ashley values dog sitting for
the weekend at $200. Cami is willing to dog sit for Ashley so long as she receives at least $150. Ashley and
Cami agree on a price of $175. Suppose the government imposes a tax of $10 on dog sitting. The tax has
made Ashley and Cami worse off by a total of
a.
$50.
b.
$40.
c.
$20.
Figure 8-9
The vertical distance between points A and C represent a tax in the market.
Demand
Supply
D
A
C
B
10 20 30 40 50 60 70 80 90 100110 Quantity
100
200
300
400
500
600
700
800
900
1000 Price
189. 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.
190. 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.
d.
$10.
Chapter 8/Application: The Costs of Taxation ❖ 43
191. 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.
192. 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.
193. 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.
194. 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.
195. 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.
196. Refer to Figure 8-9. The per-unit burden of the tax on buyers is
a.
$20.
b.
$200.
c.
$300.
d.
$500.
44 ❖ Chapter 8/Application: The Costs of Taxation
197. Refer to Figure 8-9. The per-unit burden of the tax on sellers is
a.
$20.
b.
$200.
c.
$300.
d.
$500.
198. Refer to Figure 8-9. The amount of tax revenue received by the government is
a.
$4,000.
b.
$6,000.
c.
$10,000.
d.
$24,000.
199. Refer to Figure 8-9. The consumer surplus without the tax is
a.
$2,000.
b.
$5,000.
c.
$8,000.
d.
$16,000.
200. Refer to Figure 8-9. The consumer surplus with the tax is
a.
$2,000.
b.
$4,000.
c.
$6,000.
d.
$8,000.
201. Refer to Figure 8-9. The loss of consumer surplus as a result of the tax is
a.
$2,000.
b.
$4,000.
c.
$6,000.
d.
$8,000.
202. Refer to Figure 8-9. The producer surplus without the tax is
a.
$3,000.
b.
$8,000.
c.
$12,000.
d.
$24,000.
Chapter 8/Application: The Costs of Taxation ❖ 45
203. Refer to Figure 8-9. The producer surplus with the tax is
a.
$3,000.
b.
$6,000.
c.
$9,000.
d.
$12,000.
204. Refer to Figure 8-9. The loss of producer surplus as a result of the tax is
a.
$3,000.
b.
$6,000.
c.
$9,000.
d.
$12,000.
205. Refer to Figure 8-9. The total surplus without the tax is
a.
$8,000.
b.
$12,000.
c.
$20,000.
d.
$40,000.
206. Refer to Figure 8-9. The total surplus with the tax is
a.
$2,000.
b.
$3,000.
c.
$15,000.
d.
$20,000.
207. Refer to Figure 8-9. The amount of amount of deadweight loss as a result of the tax is
a.
$4,000.
b.
$5,000.
c.
$6,000.
d.
$10,000.
46 ❖ Chapter 8/Application: The Costs of Taxation
Figure 8-10
P0
Demand
0
Supply
Q2 Q4 Q5Q1 Q3
P1
P2
P3
P4
P5
P6
P7
P8
P9
Quantity
Price
208. Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market
after the tax to Q2. The price that buyers pay is
a.
P0.
b.
P2.
c.
P5.
d.
P8.
209. Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market
after the tax to Q2. The price that sellers receive is
a.
P0.
b.
P2.
c.
P5.
d.
P8.
210. Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market
after the tax to Q2. The size of the tax is
a.
P0-P2.
b.
P2-P8.
c.
P2-P5.
d.
P5-P8.
Chapter 8/Application: The Costs of Taxation ❖ 47
211. Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market
after the tax to Q2. The tax revenue is
a.
(P0-P2) x Q2.
b.
(P2-P8) x Q2.
c.
(P2-P5) x Q5.
d.
(P5-P8) x Q5.
212. Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market
after the tax to Q2. Without the tax, the consumer surplus is
a.
(P0-P2) x Q2.
b.
x (P0-P2) x Q2.
c.
(P0-P5) x Q5.
d.
x (P0-P5) x Q5.
213. Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market
after the tax to Q2. With the tax, the consumer surplus is
a.
(P0-P2) x Q2.
b.
x (P0-P2) x Q2.
c.
(P0-P5) x Q5.
d.
x (P0-P5) x Q5.
214. Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market
after the tax to Q2. Without the tax, the producer surplus is
a.
(P5-0) x Q5.
b.
x (P5-0) x Q5.
c.
(P8-0) x Q2.
d.
x (P8-0) x Q2.
215. Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market
after the tax to Q2. With the tax, the producer surplus is
a.
(P5-0) x Q5.
b.
x (P5-0) x Q5.
c.
(P8-0) x Q2.
d.
x (P8-0) x Q2.
48 ❖ Chapter 8/Application: The Costs of Taxation
216. Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market
after the tax to Q2. Without the tax, the total surplus is
a.
[ x (P0-P5) x Q5] + [ x (P5-0) x Q5].
b.
[ x (P0-P2) x Q2] +[(P2-P8) x Q2] + [ x (P8-0) x Q2].
c.
(P2-P8) x Q2.
d.
x (P2-P8) x (Q5-Q2).
217. Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market
after the tax to Q2. With the tax, the total surplus is
a.
[ x (P0-P5) x Q5] + [ x (P5-0) x Q5].
b.
[ x (P0-P2) x Q2] +[(P2-P8) x Q2] + [ x (P8-0) x Q2].
c.
(P2-P8) x Q2.
d.
x (P2-P8) x (Q5-Q2).
218. Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market
after the tax to Q2. The deadweight loss of the tax is
a.
[ x (P0-P5) x Q5] + [ x (P5-0) x Q5].
b.
[ x (P0-P2) x Q2] +[(P2-P8) x Q2] + [ x (P8-0) x Q2].
c.
(P2-P8) x Q2.
d.
x (P2-P8) x (Q5-Q2).
Chapter 8/Application: The Costs of Taxation ❖ 49
Figure 8-11
Demand
Supply
Q Q
P
P
P
1 2
1
2
3
A
B
C
Quantity
Price
219. Refer to Figure 8-11. The size of the tax is represented by the
a.
length of the line segment connecting points A and B.
b.
length of the line segment connecting points A and C.
c.
length of the line segment connecting points B and C.
d.
area of the triangle bounded by the points A, B, and C.
220. Refer to Figure 8-11. The length of the line segment connecting points A and B represents
a.
the difference between the price paid by buyers after the tax is imposed and the price received by
sellers after the tax is imposed.
b.
the size of the tax.
c.
the “tax wedge.”
d.
All of the above are correct.
221. Refer to Figure 8-11. The deadweight loss of the tax is represented by the
a.
length of the line segment connecting points A and B.
b.
length of the line segment connecting points A and C.
c.
length of the line segment connecting points B and C.
d.
area of the triangle bounded by the points A, B, and C.
50 ❖ Chapter 8/Application: The Costs of Taxation
222. Refer to Figure 8-11. The price labeled as P1 on the vertical axis represents the price
a.
received by sellers before the tax is imposed.
b.
received by sellers after the tax is imposed.
c.
paid by buyers before the tax is imposed.
d.
paid by buyers after the tax is imposed.
223. Refer to Figure 8-11. The price labeled as P2 on the vertical axis represents the
a.
difference between the price paid by buyers after the tax is imposed and the price paid by buyers
before the tax is imposed.
b.
difference between the price received by sellers before the tax is imposed and the price received by
sellers after the tax is imposed.
c.
price of the good before the tax is imposed.
d.
price of the good after the tax is imposed.
224. Refer to Figure 8-11. The price labeled as P3 on the vertical axis represents the price
a.
received by sellers before the tax is imposed.
b.
received by sellers after the tax is imposed.
c.
paid by buyers before the tax is imposed.
d.
paid by buyers after the tax is imposed.
225. Refer to Figure 8-11. Neither a shift of the demand curve nor a shift of the supply curve is shown on the fig-
ure. However, we know that, when the tax is imposed,
a.
the demand curve will shift.
b.
the supply curve will shift.
c.
either the demand curve or the supply curve will shift.
d.
None of the above are correct; the tax causes neither the demand curve nor the supply curve to
shift.
226. Refer to Figure 8-11. The tax revenue that the government collects equals
a.
.
b.
.
c.
.
d.
.
Chapter 8/Application: The Costs of Taxation ❖ 51
227. Refer to Figure 8-11. Suppose Q1 = 4; Q2 = 7; P1 = $6; P2 = $8; and P3 = $10. Then the deadweight loss of
the tax is
a.
$6.
b.
$8.
c.
$9.
d.
$12.
228. Refer to Figure 8-11. Suppose Q1 = 4; Q2 = 7; P1 = $6; P2 = $8; and P3 = $10. Then, when the tax is im-
posed,
a.
consumer surplus decreases by $13.
b.
producer surplus decreases by $13.
c.
the deadweight loss amounts to $6.
d.
the amount of the good that is sold remains unchanged.
229. Refer to Figure 8-11. Suppose Q1 = 4; Q2 = 7; P1 = $6; P2 = $8; and P3 = $10. Then, when the tax is im-
posed,
a.
the government collects $28 in tax revenue.
b.
producer surplus decreases by $13.
c.
consumer surplus decreases by $11.
d.
the deadweight loss amounts to $9.
230. Refer to Figure 8-11. Suppose Q1 = 4; Q2 = 7; P1 = $6; P2 = $8; and P3 = $10. Then, when the tax is im-
posed,
a.
consumer surplus decreases by $11.
b.
producer surplus decreases by $11.
c.
the deadweight loss amounts to $6.
d.
All of the above are correct.
THE DETERMINANTS OF THE DEADWEIGHT LOSS
1. The price elasticities of supply and demand affect
a.
both the size of the deadweight loss from a tax and the tax incidence.
b.
the size of the deadweight loss from a tax but not the tax incidence.
c.
the tax incidence but not the size of the deadweight loss from a tax.
d.
neither the size of the deadweight loss from a tax nor the tax incidence.
52 ❖ Chapter 8/Application: The Costs of Taxation
2. The size of the deadweight loss generated from a tax is affected by the
a.
elasticities of both supply and demand.
b.
elasticity of demand only.
c.
elasticity of supply only.
d.
total revenue collected by the government.
3. The size of a tax and the deadweight loss that results from the tax are
a.
positively related.
b.
negatively related.
c.
independent of each other.
d.
equal to each other.
4. Buyers of a product will bear the larger part of the tax burden, and sellers will bear a smaller part of the tax
burden, when the
a.
tax is placed on the sellers of the product.
b.
tax is placed on the buyers of the product.
c.
supply of the product is more elastic than the demand for the product.
d.
demand for the product is more elastic than the supply of the product.
5. Sellers of a product will bear the larger part of the tax burden, and buyers will bear a smaller part of the tax
burden, when the
a.
tax is placed on the sellers of the product.
b.
tax is placed on the buyers of the product.
c.
supply of the product is more elastic than the demand for the product.
d.
demand for the product is more elastic than the supply of the product.
6. When a tax is imposed on a good for which the supply is relatively elastic and the demand is relatively inelas-
tic,
a.
buyers of the good will bear most of the burden of the tax.
b.
sellers of the good will bear most of the burden of the tax.
c.
buyers and sellers will each bear 50 percent of the burden of the tax.
d.
both equilibrium price and quantity will increase.
Chapter 8/Application: The Costs of Taxation ❖ 53
7. When a tax is imposed on a good for which both demand and supply are very elastic,
a.
sellers effectively pay the majority of the tax.
b.
buyers effectively pay the majority of the tax.
c.
the tax burden is equally divided between buyers and sellers.
d.
None of the above is correct; further information would be required to determine how the burden of
the tax is distributed between buyers and sellers.
8. Which of the following statements is correct regarding the imposition of a tax on gasoline?
a.
The incidence of the tax depends upon whether the buyers or the sellers are required to remit tax
payments to the government.
b.
The incidence of the tax depends upon the price elasticities of demand and supply.
c.
The amount of tax revenue raised by the tax depends upon whether the buyers or the sellers are
required to remit tax payments to the government.
d.
The amount of tax revenue raised by the tax does not depend upon the amount of the tax per unit.
9. When a good is taxed, the burden of the tax
a.
falls more heavily on the side of the market that is more elastic.
b.
falls more heavily on the side of the market that is more inelastic.
c.
falls more heavily on the side of the market that is closer to unit elastic.
d.
is distributed independently of relative elasticities of supply and demand.
10. The deadweight loss from a tax of $5 per unit will be smallest in a market with
a.
inelastic supply and elastic demand.
b.
inelastic supply and inelastic demand.
c.
elastic supply and elastic demand.
d.
elastic supply and inelastic demand.
11. The deadweight loss from a tax of $8 per unit will be smallest in a market with
a.
elastic demand and elastic supply.
b.
elastic demand and inelastic supply.
c.
inelastic demand and elastic supply.
d.
inelastic demand and inelastic supply.
54 ❖ Chapter 8/Application: The Costs of Taxation
12. The deadweight loss from a $3 tax will be largest in a market with
a.
inelastic supply and elastic demand.
b.
inelastic supply and inelastic demand.
c.
elastic supply and elastic demand.
d.
elastic supply and inelastic demand.
13. Suppose a tax of $1 per unit is imposed on a good. The more elastic the supply of the good, other things equal,
the
a.
smaller is the response of quantity supplied to the tax.
b.
larger is the tax burden on sellers relative to the tax burden on buyers.
c.
larger is the deadweight loss of the tax.
d.
All of the above are correct.
14. Suppose a tax of $1 per unit is imposed on a good. The more elastic the demand for the good, other things
equal,
a.
the larger is the decrease in quantity demanded as a result of the tax.
b.
the smaller is the tax burden on buyers relative to the tax burden on sellers.
c.
the larger is the deadweight loss of the tax.
d.
All of the above are correct.
Table 8-1
Characteristic
Demand is very elastic.
Demand is very inelastic.
Supply is very elastic.
Supply is very inelastic.
15. Refer to Table 8-1. Suppose the government is considering levying a tax in one or more of the markets de-
scribed in the table. Which of the markets will allow the government to minimize the deadweight loss(es)
from the tax?
a.
market A only
b.
markets A and C only
c.
markets B and D only
d.
market C only
Chapter 8/Application: The Costs of Taxation ❖ 55
16. Refer to Table 8-1. Suppose the government is considering levying a tax in one or more of the markets de-
scribed in the table. Which of the markets will maximize the deadweight loss(es) from the tax?
a.
market B only
b.
markets A and C only
c.
markets B and D only
d.
market D only
Figure 8-12
Demand 1 Demand 2
Supply 1
Supply 2
Quantity
Price
17. Refer to Figure 8-12. Which of the following combinations will minimize the deadweight loss from a tax?
a.
supply 1 and demand 1
b.
supply 2 and demand 2
c.
supply 1 and demand 2
d.
supply 2 and demand 1
18. Refer to Figure 8-12. Which of the following combinations will maximize the deadweight loss from a tax?
a.
supply 1 and demand 1
b.
supply 2 and demand 2
c.
supply 1 and demand 2
d.
supply 2 and demand 1
19. Refer to Figure 8-12. Which of the following statements is correct?
a.
Supply 1 is more elastic than supply 2.
b.
Demand 2 is more elastic than demand 1.
c.
Demand 1 is more elastic than supply 1.
d.
All of the above are correct.
56 ❖ Chapter 8/Application: The Costs of Taxation
20. Refer to Figure 8-12. Which of the following statements is not correct?
a.
Supply 2 is more elastic than supply 1.
b.
Demand 2 is more elastic than demand 1.
c.
Supply 1 is more inelastic than supply 2.
d.
Demand 2 is more inelastic than supply 2.
21. Suppose that the government imposes a tax on dairy products. The deadweight loss from this tax will likely
be greater in the
a.
first year after it is imposed than in the fifth year after it is imposed because demand and supply
will be more elastic in the first year than in the fifth year.
b.
first year after it is imposed than in the fifth year after it is imposed because demand and supply
will be less elastic in the first year than in the fifth year.
c.
fifth year after it is imposed than in the first year after it is imposed because demand and supply
will be more elastic in the first year than in the fifth year.
d.
fifth year after it is imposed than in the first year after it is imposed because demand and supply
will be less elastic in the first year than in the fifth year.
22. The demand for potted plants is more elastic than the demand for wallpaper. Suppose the government levies
an equivalent tax on potted plants and wallpaper. The deadweight loss would be larger in the market for
a.
potted plants than in the market for wallpaper because the quantity of potted plants would fall by
more than the quantity of wallpaper.
b.
potted plants than in the market for wallpaper because the quantity of wallpaper would fall by more
than the quantity of potted plants.
c.
wallpaper than in the market for potted plants because the quantity of potted plants would fall by
more than the quantity of wallpaper.
d.
wallpaper than in the market for potted plants because the quantity of wallpaper would fall by more
than the quantity of potted plants.
23. 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.
Chapter 8/Application: The Costs of Taxation ❖ 57
24. 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.
25. 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.
26. 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.
27. 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 gov-
ernment’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 cigars is 900 per month.
b.
The demand for cigars is more elastic than the supply of cigars.
c.
The deadweight loss of the tax is $12.50.
d.
The tax causes a decrease in consumer surplus of $380.
58 ❖ Chapter 8/Application: The Costs of Taxation
28. 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 gov-
ernment’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.
29. 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.
30. 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.
31. 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.
Chapter 8/Application: The Costs of Taxation ❖ 59
32. 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.
33. 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 re-
sult 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.
34. 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 re-
sult 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.
35. 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.
60 ❖ Chapter 8/Application: The Costs of Taxation
36. 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.
37. 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.
38. 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.
39. 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.
40. 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.
41. 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.