978-1305971509 Chapter 8 Solutions Manual

SOLUTIONS TO TEXT PROBLEMS:

Quick Quizzes

1. Figure 1 shows the supply and demand curves for cookies, with equilibrium

Figure 1

2. The deadweight loss of a tax is greater the greater is the elasticity of demand.

3. If the government doubles the tax on gasoline, the revenue from the gasoline tax

135

in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise

on a password-protected website or school-approved learning management system for classroom use.

C. Is deadweight loss the only thing to consider when designing a tax system?

No. This can generate a lively discussion. There are a variety of equity or

fairness concerns. The taxes on children and on food would be regressive.

Each of the taxes would tax certain households at much higher rates than

other households with similar incomes.

Chapter 8 /Application: The Costs of Taxation ❖ 136

Chapter Quick Quiz

1. a

Questions for Review

1. When the sale of a good is taxed, both consumer surplus and producer surplus

2. Figure 2 illustrates the deadweight loss and tax revenue from a tax on the sale of

a good. Without a tax, the equilibrium quantity would be Q1, the equilibrium price

Figure 2

3. The greater the elasticities of demand and supply, the greater the deadweight

4. Experts disagree about whether labor taxes have small or large deadweight

in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise

on a password-protected website or school-approved learning management system for classroom use.

Chapter 8 /Application: The Costs of Taxation ❖ 137

5. The deadweight loss of a tax rises more than proportionally as the tax rises. Tax

Problems and Applications

1. a. Figure 3 illustrates the market for pizza. The equilibrium price is P1, the

equilibrium quantity is Q1, consumer surplus is area A + B + C, and producer

b. With a $1 tax on each pizza sold, the price paid by buyers, PB, is now higher

than the price received by sellers, PS, where PB = PS + $1. The quantity

c. If the tax were removed and consumers and producers voluntarily transferred

B + D to the government to make up for the lost tax revenue, then everyone

in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise

on a password-protected website or school-approved learning management system for classroom use.

Chapter 8 /Application: The Costs of Taxation ❖ 138

2. a. The statement, “A tax that has no deadweight loss cannot raise any revenue

b. The statement, “A tax that raises no revenue for the government cannot have

3. a. With very elastic supply and very inelastic demand, the burden of the tax on

Figure 4 Figure 5

b. With very inelastic supply and very elastic demand, the burden of the tax on

4. a. The deadweight loss from a tax on heating oil is likely to be greater in the Jfth

b. The tax revenue is likely to be higher in the Jrst year after it is imposed than

in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise

on a password-protected website or school-approved learning management system for classroom use.

Chapter 8 /Application: The Costs of Taxation ❖ 139

5. Because the demand for food is inelastic, a tax on food is a good way to raise

6. a. This tax has such a high rate that it is not likely to raise much revenue.

b. Senator Moynihan’s goal was probably to ban the use of hollow-tipped bullets.

7. a. Figure 6 illustrates the market for socks and the e’ects of the tax. Without a

b. Unless supply is perfectly elastic or demand is perfectly inelastic, the price

Figure 6

c. The price paid by consumers rises, unless demand is perfectly elastic or

in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise

on a password-protected website or school-approved learning management system for classroom use.

Chapter 8 /Application: The Costs of Taxation ❖ 140

8. Figure 7 illustrates the e’ects of the $2 subsidy on a good. Without the subsidy,

Before

Subsidy

After Subsidy Change

Consumer

Figure 7

in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise

on a password-protected website or school-approved learning management system for classroom use.

Chapter 8 /Application: The Costs of Taxation ❖ 141

9. a. Figure 8 shows the e’ect of a $10 tax on hotel rooms. The tax revenue is

Figure 8 Figure 9

b. Figure 9 shows the e’ect of a $20 tax on hotel rooms. The tax revenue is

When the tax is doubled, the tax revenue rises by less than double, while the

10. a. Setting quantity supplied equal to quantity demanded gives 2P = 300 – P.

b. Now P is the price received by sellers and P +T is the price paid by buyers.

c. Because tax revenue is equal to T x Q and Q = 200 – 2T/3, tax revenue equals

in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise

on a password-protected website or school-approved learning management system for classroom use.

Chapter 8 /Application: The Costs of Taxation ❖ 142

Figure 10 Figure 11

d. As Figure 11 shows, the area of the triangle (laid on its side) that represents

Figure 12

e. A tax of $200 per unit is a bad policy, because tax revenue is declining at that

in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise

on a password-protected website or school-approved learning management system for classroom use.