Chapter 8/Application: The Costs of Taxation ❖ 21
93. Refer to Figure 8-2. The loss of producer surplus associated with some sellers dropping out of the market as
a result of the tax is
a.
$0.
b.
$1.
c.
$2.
d.
$3.
94. Refer to Figure 8-2. The loss of producer surplus for those sellers of the good who continue to sell it after the
tax is imposed is
a.
$0.
b.
$1.
c.
$2.
d.
$3.
Figure 8-3
The vertical distance between points A and C represents a tax in the market.
Demand
Supply
Q2
B
Q1
P1 C
P2
D
P3
A
P4
Quantity
Price
95. Refer to Figure 8-3. The equilibrium price before the tax is imposed is
a.
P1.
b.
P2.
c.
P3.
d.
P4.
22 ❖ Chapter 8/Application: The Costs of Taxation
96. Refer to Figure 8-3. The price that buyers effectively pay after the tax is imposed is
a.
P1.
b.
P2.
c.
P3.
d.
P4.
97. Refer to Figure 8-3. The price that sellers effectively receive after the tax is imposed is
a.
P1.
b.
P2.
c.
P3.
d.
P4.
98. Refer to Figure 8-3. The per unit burden of the tax on buyers is
a.
P3 – P1.
b.
P3 – P2.
c.
P2 – P1.
d.
P4 – P3.
99. Refer to Figure 8-3. The per-unit burden of the tax on sellers is
a.
P3 – P1.
b.
P3 – P2.
c.
P2 – P1.
d.
P4 – P3.
100. Refer to Figure 8-3. The amount of the tax on each unit of the good is
a.
P3 – P1.
b.
P3 – P2.
c.
P2 – P1.
d.
P4 – P3.
101. Refer to Figure 8-3. The amount of tax revenue received by the government is equal to the area
a.
P3ACP1.
b.
ABC.
c.
P2DAP3.
d.
P1CDP2.
Chapter 8/Application: The Costs of Taxation ❖ 23
102. Refer to Figure 8-3. The amount of deadweight loss associated with the tax is equal to
a.
P3ACP1.
b.
ABC.
c.
P2ADP3.
d.
P1DCP2.
103. Refer to Figure 8-3. The loss in consumer surplus caused by the tax is measured by the area
a.
P1P3AC.
b.
P3ABP2.
c.
P1P3ABC.
d.
ABC.
104. Refer to Figure 8-3. The loss in producer surplus caused by the tax is measured by the area
a.
ABC.
b.
P1P3ABC.
c.
P1P2BC.
d.
P1C0.
105. Refer to Figure 8-3. Which of the following equations is valid for the tax revenue that the tax provides to the
government?
a.
Tax revenue = (P2 – P1)xQ1
b.
Tax revenue = (P3 – P1)xQ1
c.
Tax revenue = (P3 – P2)xQ1
d.
Tax revenue = (P3 – P1)x(Q2 – Q1)
106. Refer to Figure 8-3. Which of the following equations is valid for the deadweight loss of the tax?
a.
Deadweight loss = (1/2)(P2 – P1)(Q2 + Q1)
b.
Deadweight loss = (1/2)(P3 – P1)(Q2 + Q1)
c.
Deadweight loss = (1/2)(P3 – P2)(Q2 – Q1)
d.
Deadweight loss = (1/2)(P3 – P1)(Q2 – Q1)
24 ❖ Chapter 8/Application: The Costs of Taxation
Figure 8-4
The vertical distance between points A and B represents a tax in the market.
A
B
Demand
Supply
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 Quantity
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Price
107. Refer to Figure 8-4. The equilibrium price before the tax is imposed is
a.
$12, and the equilibrium quantity is 70.
b.
$8, and the equilibrium quantity is 100.
c.
$5, and the equilibrium quantity is 70.
d.
$5, and the equilibrium quantity is 100.
108. Refer to Figure 8-4. The price that buyers effectively pay after the tax is imposed is
a.
$12.
b.
between $8 and $12.
c.
between $5 and $8.
d.
$5.
109. Refer to Figure 8-4. The price that sellers effectively receive after the tax is imposed is
a.
$12.
b.
between $8 and $12.
c.
between $5 and $8.
d.
$5.
Chapter 8/Application: The Costs of Taxation ❖ 25
110. Refer to Figure 8-4. The per-unit burden of the tax on buyers is
a.
$3.
b.
$4.
c.
$5.
d.
$8.
111. Refer to Figure 8-4. The per-unit burden of the tax on sellers is
a.
$7.
b.
$5.
c.
$4.
d.
$3.
112. Refer to Figure 8-4. The amount of the tax on each unit of the good is
a.
$5.
b.
$7.
c.
$8.
d.
$12.
113. Refer to Figure 8-4. The amount of tax revenue received by the government is equal to
a.
$350.
b.
$490.
c.
$700.
d.
$840.
114. Refer to Figure 8-4. The amount of deadweight loss as a result of the tax is
a.
$105.
b.
$210.
c.
$490.
d.
$600.
115. Refer to Figure 8-4. The tax results in a loss of consumer surplus that amounts to
a.
$120.
b.
$340.
c.
$450.
d.
$510.
26 ❖ Chapter 8/Application: The Costs of Taxation
116. Refer to Figure 8-4. The tax results in a loss of producer surplus that amounts to
a.
$45.
b.
$90.
c.
$210.
d.
$255.
Figure 8-5
Suppose that the government imposes a tax of P3 – P1.
Demand
Supply
Q1Q2
P1
P2
P3
A
B
D
F
G
C
H
I
P4
Quantity
Price
117. Refer to Figure 8-5. The equilibrium price before the tax is imposed is
a.
P1.
b.
P2.
c.
P3.
d.
P4.
118. Refer to Figure 8-5. The price that buyers effectively pay after the tax is imposed is
a.
P1.
b.
P2.
c.
P3.
d.
P4.
119. Refer to Figure 8-5. The price that sellers effectively receive after the tax is imposed is
a.
P1.
b.
P2.
c.
P3.
d.
P4.
Chapter 8/Application: The Costs of Taxation ❖ 27
120. Refer to Figure 8-5. The tax is levied on
a.
buyers only.
b.
sellers only.
c.
both buyers and sellers.
d.
This is impossible to determine from the figure.
121. Refer to Figure 8-5. Consumer surplus before the tax was levied is represented by area
a.
A.
b.
A+B+C.
c.
D+H+F.
d.
F.
122. Refer to Figure 8-5. Producer surplus before the tax was levied is represented by area
a.
A.
b.
A+B+C.
c.
D+H+F.
d.
F.
123. Refer to Figure 8-5. After the tax is levied, consumer surplus is represented by area
a.
A.
b.
A+B+C.
c.
D+H+F.
d.
F.
124. Refer to Figure 8-5. After the tax is levied, producer surplus is represented by area
a.
A.
b.
A+B+C.
c.
D+H+F.
d.
F.
125. Refer to Figure 8-5. The tax causes a reduction in consumer surplus that is represented by area
a.
A.
b.
B+C.
c.
C+H.
d.
F.
28 ❖ Chapter 8/Application: The Costs of Taxation
126. Refer to Figure 8-5. The tax causes a reduction in producer surplus that is represented by area
a.
A.
b.
C+H.
c.
D+H.
d.
F.
127. Refer to Figure 8-5. The benefit to the government is measured by
a.
tax revenue and is represented by area A+B.
b.
tax revenue and is represented by area B+D.
c.
the net gain in total surplus and is represented by area B+D.
d.
the net gain in total surplus and is represented by area C+H.
128. Refer to Figure 8-5. The total surplus with the tax is represented by area
a.
C+H.
b.
A+B+C.
c.
D+H+F.
d.
A+B+D+F.
129. Refer to Figure 8-5. The loss in total welfare that results from the tax is represented by area
a.
A+B+D+F.
b.
A+B+C.
c.
D+H+F.
d.
C+H.
Chapter 8/Application: The Costs of Taxation ❖ 29
Figure 8-6
The vertical distance between points A and B represents a tax in the market.
100 200 300 400 500 600 700 800 900 1000 Quantity
2
4
6
8
10
12
14
16
18
20
22
Price
130. Refer to Figure 8-6. Without a tax, the equilibrium price and quantity are
a.
$16 and 300.
b.
$10 and 600.
c.
$10 and 300.
d.
$6 and 300.
131. Refer to Figure 8-6. Without a tax, consumer surplus in this market is
a.
$1,500.
b.
$2,400.
c.
$3,000.
d.
$3,600.
132. Refer to Figure 8-6. Without a tax, producer surplus in this market is
a.
$1,500.
b.
$2,400.
c.
$3,000.
d.
$3,600.
30 ❖ Chapter 8/Application: The Costs of Taxation
133. Refer to Figure 8-6. Without a tax, total surplus in this market is
a.
$3,000.
b.
$4,800.
c.
$6,000.
d.
$7,200.
134. Refer to Figure 8-6. When the tax is imposed in this market, the price buyers effectively pay is
a.
$4.
b.
$6.
c.
$10.
d.
$16.
135. Refer to Figure 8-6. When the tax is imposed in this market, buyers effectively pay what amount of the $10
tax?
a.
$0
b.
$4
c.
$6
d.
$10
136. Refer to Figure 8-6. When the tax is imposed in this market, sellers effectively pay what amount of the $10
tax?
a.
$0
b.
$4
c.
$6
d.
$10
137. Refer to Figure 8-6. When the tax is imposed in this market, the price sellers effectively receive is
a.
$4.
b.
$6.
c.
$10.
d.
$16.
138. Refer to Figure 8-6. When the tax is imposed in this market, consumer surplus is
a.
$600.
b.
$900.
c.
$1,500.
d.
$3,000.
Chapter 8/Application: The Costs of Taxation ❖ 31
139. Refer to Figure 8-6. When the tax is imposed in this market, producer surplus is
a.
$450.
b.
$600.
c.
$900.
d.
$1,500.
140. Refer to Figure 8-6. When the tax is placed on this good, the quantity sold
a.
is 600, and buyers effectively pay $10.
b.
is 300, and buyers effectively pay $10.
c.
is 600, and buyers effectively pay $16.
d.
is 300, and buyers effectively pay $16.
141. Refer to Figure 8-6. When the government imposes the tax in this market, tax revenue is
a.
$600.
b.
$900.
c.
$1,500.
d.
$3,000.
142. Refer to Figure 8-6. The amount of the tax on each unit of the good is
a.
$6.
b.
$8.
c.
$10.
d.
$12.
143. Refer to Figure 8-6. Total surplus with the tax in place is
a.
$1,500.
b.
$3,600.
c.
$4,500.
d.
$6,000.
144. Refer to Figure 8-6. What happens to consumer surplus when the tax is imposed in this market?
a.
Consumer surplus falls by $3,600.
b.
Consumer surplus falls by $2,700.
c.
Consumer surplus falls by $1,800.
d.
Consumer surplus falls by $900.
32 ❖ Chapter 8/Application: The Costs of Taxation
145. Refer to Figure 8-6. What happens to producer surplus when the tax is imposed in this market?
a.
Producer surplus falls by $600.
b.
Producer surplus falls by $900.
c.
Producer surplus falls by $1,800.
d.
Producer surplus falls by $2,100.
146. Refer to Figure 8-6. What happens to total surplus in this market when the tax is imposed?
a.
Total surplus increases by $1,500.
b.
Total surplus increases by $3,000.
c.
Total surplus decreases by $1,500.
d.
Total surplus decreases by $,3000.
147. Refer to Figure 8-6. The tax results in a deadweight loss that amounts to
a.
$600.
b.
$900.
c.
$1,500.
d.
$1,800.
Chapter 8/Application: The Costs of Taxation ❖ 33
Figure 8-7
The vertical distance between points A and B represents a tax in the market.
Demand
Supply
B
A
510 15 20 25 30 35 40 45 50 55 60 Quantity
2
4
6
8
10
12
14
16
18
20
22
24
Price
148. Refer to Figure 8-7. Before the tax is imposed, the equilibrium price is
a.
$16, and the equilibrium quantity is 15.
b.
$12, and the equilibrium quantity is 15.
c.
$12, and the equilibrium quantity is 25.
d.
$8, and the equilibrium quantity is 15.
149. Refer to Figure 8-7. As a result of the tax, buyers effectively pay
a.
$16 for each unit of the good, and sellers effectively receive $12 for each unit of the good.
b.
$16 for each unit of the good, and sellers effectively receive $8 for each unit of the good.
c.
$12 for each unit of the good, and sellers effectively receive $8 for each unit of the good.
d.
$14 for each unit of the good, and sellers effectively receive $10 for each unit of the good.
150. Refer to Figure 8-7. Suppose a 22nd unit of the good were sold by a seller to a buyer. Which of the following
statements is correct?
a.
For the 22nd unit, the difference between the buyer’s value and the seller’s cost is less than the tax
per unit.
b.
For the 22nd unit, the difference between the buyer’s value and the seller’s cost is greater than the
tax per unit.
c.
For the 22nd unit, the difference between the buyer’s value and the seller’s cost is equal to the tax
per unit.
d.
It makes sense for the buyer to buy and for the seller to sell the 22nd unit, with or without the tax in
place.
34 ❖ Chapter 8/Application: The Costs of Taxation
151. Refer to Figure 8-7. Which of the following statements summarizes the incidence of the tax?
a.
For each unit of the good that is sold, buyers bear one-half of the tax burden, and sellers bear one–
half of the tax burden.
b.
For each unit of the good that is sold, buyers bear one-third of the tax burden, and sellers bear two–
thirds of the tax burden.
c.
For each unit of the good that is sold, buyers bear one-fourth of the tax burden, and sellers bear
three-fourths of the tax burden.
d.
For each unit of the good that is sold, buyers bear three-fourths of the tax burden, and sellers bear
one-fourth of the tax burden.
152. Refer to Figure 8-7. Which of the following statements is correct?
a.
Total surplus before the tax is imposed is $250.
b.
After the tax is imposed, consumer surplus is 45 percent of its pre-tax value.
c.
After the tax is imposed, producer surplus is 45 percent of its pre-tax value.
d.
All of the above are correct.
153. Refer to Figure 8-7. Which of the following statements is correct?
a.
Total surplus before the tax is imposed is $45.
b.
After the tax is imposed, consumer surplus is 25 percent of its pre-tax value.
c.
After the tax is imposed, producer surplus is 36 percent of its pre–tax value.
d.
All of the above are correct.
154. Refer to Figure 8-7. As a result of the tax,
a.
consumer surplus decreases from $150 to $60.
b.
producer surplus decreases from $125 to $45.
c.
the market experiences a deadweight loss of $45.
d.
All of the above are correct.
155. Refer to Figure 8-7. As a result of the tax, consumer surplus decreases by
a.
$65, producer surplus decreases by $85, tax revenue is $120, and deadweight loss is $30.
b.
$75, producer surplus decreases by $75, tax revenue is $120, and deadweight loss is $30.
c.
$80, producer surplus decreases by $80, tax revenue is $120, and deadweight loss is $40.
d.
$120, producer surplus decreases by $120, tax revenue is $200, and deadweight loss is $40.
Chapter 8/Application: The Costs of Taxation ❖ 35
156. Refer to Figure 8-7. Which of the following statements is correct?
a.
The loss of producer surplus that is associated with some sellers dropping out of the market as a
result of the tax is $30.
b.
The loss of consumer surplus for those buyers of the good who continue to buy it after the tax is
imposed is $60.
c.
The loss of consumer surplus caused by this tax exceeds the loss of producer surplus caused by this
tax.
d.
This tax produces $200 in tax revenue for the government.
157. Refer to Figure 8-7. The deadweight loss associated with this tax amounts to
a.
$60, and this figure represents the amount by which tax revenue to the government exceeds the
combined loss of producer and consumer surpluses.
b.
$60, and this figure represents the surplus that is lost because the tax discourages mutually
advantageous trades between buyers and sellers.
c.
$40, and this figure represents the amount by which tax revenue to the government exceeds the
combined loss of producer and consumer surpluses.
d.
advantageous trades between buyers and sellers.
$40, and this figure represents the surplus that is lost because the tax discourages mutually
Figure 8-8
Suppose the government imposes a $10 per unit tax on a good.
Demand
Supply
A
B
D
J
K
C
F
L
GH
M
3 6 9 12 15 18 21 24 27 30 33 36 39 Quantity
2
4
6
8
10
12
14
16
18
20
22
24
Price
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.
36 ❖ Chapter 8/Application: The Costs of Taxation
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.
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.
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.
Chapter 8/Application: The Costs of Taxation ❖ 37
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.
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 $80 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 $80, Ernesto’s producer surplus is
a.
$80.
b.
$30.
c.
$20.
d.
$10.
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.
38 ❖ Chapter 8/Application: The Costs of Taxation
170. Refer to Scenario 8-1. Assume Erin is required to pay a tax of $15 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.
Scenario 8-2
Tom mows Stephanie’s lawn for $25. Tom’s opportunity cost of mowing Stephanie’s lawn is $20, and
Stephanie’s willingness to pay Tom to mow her lawn is $28.
171. Refer to Scenario 8-2. If Stephanie hires Tom to mow her lawn, Stephanie’s consumer surplus is
a.
$3.
b.
$5.
c.
$8.
d.
$25.
172. Refer to Scenario 8-2. If Stephanie hires Tom to mow her lawn, Tom’s producer surplus is
a.
$2.
b.
$3.
c.
$5.
d.
$25.
173. Refer to Scenario 8-2. Assume Tom is required to pay a tax of $3 each time he mows a lawn. Which of the
following results is most likely?
a.
Stephanie now will decide to mow her own lawn, and Tom will decide it is no longer in his interest
to mow Stephanie’s lawn.
b.
Stephanie is willing to pay Tom to mow her lawn, but Tom will decline her offer.
c.
Tom is willing to mow Stephanie’s lawn, but Stephanie will decide to mow her own lawn.
d.
Tom and Stephanie still can engage in a mutually-agreeable trade.
174. Refer to Scenario 8-2. Assume Tom is required to pay a tax of $10 each time he mows a lawn. Which of the
following results is most likely?
a.
Stephanie now will decide to mow her own lawn, and Tom will decide it is no longer in his interest
to mow Stephanie’s lawn.
b.
Stephanie still is willing to pay Tom to mow her lawn, but Tom will decline her offer.
c.
Tom still is willing to mow Stephanie’s lawn, but Stephanie will decide to mow her own lawn.
d.
Tom and Stephanie still can engage in a mutually-agreeable trade.
Chapter 8/Application: The Costs of Taxation ❖ 39
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 pro-
ducer surplus by $4,400. The deadweight loss of the tax is
a.
$200.
b.
$400.
c.
$600.
d.
$1,200.
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 de-
creased 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.
40 ❖ Chapter 8/Application: The Costs of Taxation
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. Andre walks Julia’s dog once a day for $50 per week. Julia values this service at $60 per week, while the op-
portunity cost of Andre’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
181. Andre walks Julia’s dog once a day for $50 per week. Julia values this service at $60 per week, while the op-
portunity cost of Andre’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
182. Andre walks Julia’s dog once a day for $50 per week. Julia values this service at $60 per week, while the op-
portunity cost of Andre’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
183. 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