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38. 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 result 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.
39. 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 result 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.
40. 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.
41. 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.
42. 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.
43. 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.
44. 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.
45. 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.
46. 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.
47. Taxes on labor have the effect of encouraging
a.
workers to work more hours.
b.
the elderly to postpone retirement.
c.
second earners within a family to take a job.
d.
unscrupulous people to take part in the underground economy.
48. Concerning the labor market and taxes on labor, economists disagree about
a.
the size of the tax on labor.
b.
the size of the deadweight loss of the tax on labor.
c.
whether or not a tax on labor places a wedge between the wage that firms pay and the wage that workers
receive.
d.
All of the above are correct.
49. The Social Security tax is a tax on
a.
capital.
b.
labor.
c.
land.
d.
savings.
50. If the labor supply curve is nearly vertical, a tax on labor
a.
has a large deadweight loss.
b.
raises a small amount of tax revenue.
c.
has little impact on the amount of work that workers are willing to do.
d.
results in a large tax burden on the firms that hire labor.
51. If the labor supply curve is very elastic, a tax on labor
a.
has a large deadweight loss.
b.
raises enough tax revenue to offset the loss in welfare.
c.
has a relatively small impact on the number of hours that workers choose to work.
d.
results in a large tax burden on the firms that hire labor.
52. The marginal tax rate on labor income for many workers in the United States is almost
a.
30 percent.
b.
40 percent.
c.
50 percent.
d.
65 percent.
53. The less freedom young mothers have to work outside the home, the
a.
more elastic the supply of labor will be.
b.
less elastic the supply of labor will be.
c.
more horizontal the labor supply curve will be.
d.
larger is the decrease in employment that will result from a tax on labor.
54. The less freedom people are given to choose the date of their retirement, the
a.
more elastic is the supply of labor.
b.
less elastic is the supply of labor.
c.
flatter is the labor supply curve.
d.
smaller is the decrease in employment that will result from a tax on labor.
55. Taxes on labor encourage all of the following except
a.
older workers to take early retirement from the labor force.
b.
mothers to stay at home rather than work in the labor force.
c.
workers to work overtime.
d.
people to be paid “under the table.”
56. Taxes on labor encourage which of the following?
a.
labor demand to be more inelastic
b.
mothers to stay at home rather than work in the labor force
c.
workers to work overtime
d.
fathers to take on second jobs
57. As more people become self-employed, which allows them to determine how many hours they work per week, we
would expect the deadweight loss from the Social Security tax to
a.
increase, and the revenue generated from the tax to increase.
b.
increase, and the revenue generated from the tax to decrease.
c.
decrease, and the revenue generated from the tax to increase.
d.
decrease, and the revenue generated from the tax to decrease.
58. Which of the following is not correct?
a.
Economists who argue that labor taxes are highly distorting believe that labor supply is fairly elastic.
b.
Economists who argue that labor taxes are not highly distorting believe that labor supply is fairly inelastic.
c.
Economists who argue that labor supply is fairly inelastic cite elderly workers who adjust the date they retire
as an example.
d.
Economists who argue that labor supply is fairly elastic cite workers who adjust the hours of overtime that
they work as an example.
Figure 8-15
59. Refer to Figure 8-15. Panel (a) and Panel (b) each illustrate a $4 tax placed on a market. In comparison to Panel (a),
Panel (b) illustrates which of the following statements?
a.
When demand is relatively inelastic, the deadweight loss of a tax is smaller than when demand is relatively
elastic.
b.
When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is relatively
inelastic.
c.
When supply is relatively inelastic, the deadweight loss of a tax is smaller than when supply is relatively
elastic.
d.
When supply is relatively elastic, the deadweight loss of a tax is larger than when supply is relatively inelastic.
60. Refer to Figure 8-15. Panel (a) and Panel (b) each illustrate a $4 tax placed on a market. In comparison to Panel (b),
Panel (a) illustrates which of the following statements?
a.
When demand is relatively inelastic, the deadweight loss of a tax is smaller than when demand is relatively
elastic.
b.
When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is relatively
inelastic.
c.
When supply is relatively inelastic, the deadweight loss of a tax is smaller than when supply is relatively
elastic.
d.
When supply is relatively elastic, the deadweight loss of a tax is larger than when supply is relatively inelastic.
Figure 8-16
61. Refer to Figure 8-16. Panel (a) and Panel (b) each illustrate a $2 tax placed on a market. In comparison to Panel (b),
Panel (a) illustrates which of the following statements?
a.
When demand is relatively inelastic, the deadweight loss of a tax is smaller than when demand is relatively
elastic.
b.
When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is relatively
inelastic.
c.
When supply is relatively inelastic, the deadweight loss of a tax is smaller than when supply is relatively
elastic.
d.
When supply is relatively elastic, the deadweight loss of a tax is larger than when supply is relatively inelastic.
62. Refer to Figure 8-16. Panel (a) and Panel (b) each illustrate a $2 tax placed on a market. In comparison to Panel (a),
Panel (b) illustrates which of the following statements?
a.
When demand is relatively inelastic, the deadweight loss of a tax is smaller than when demand is relatively
elastic.
b.
When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is relatively
inelastic.
c.
When supply is relatively inelastic, the deadweight loss of a tax is smaller than when supply is relatively
elastic.
d.
When supply is relatively elastic, the deadweight loss of a tax is larger than when supply is relatively inelastic.
Figure 8-17
63. Refer to Figure 8-17. Suppose the government imposes a $1 tax in each of the four markets represented by demand
curves D1, D2, D3, and D4. The deadweight will be the smallest in the market represented by
a.
D1.
b.
D2.
c.
D3.
d.
D4.
64. Refer to Figure 8-17. Suppose the government imposes a $1 tax in each of the four markets represented by demand
curves D1, D2, D3, and D4. The deadweight will be the largest in the market represented by
a.
D1.
b.
D2.
c.
D3.
d.
D4.
Figure 8-18
65. Refer to Figure 8-18. Suppose the government imposes a $1 tax in each of the four markets represented by supply
curves S1, S2, S3, and S4. The deadweight will be the smallest in the market represented by
a.
S1.
b.
S2.
c.
S3.
d.
S4.
66. Refer to Figure 8-18. Suppose the government imposes a $1 tax in each of the four markets represented by supply
curves S1, S2, S3, and S4. The deadweight will be the largest in the market represented by
a.
S1.
b.
S2.
c.
S3.
d.
S4.
