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Exam 8: Applications: The Costs of Taxation

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Question 21

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The more inelastic are demand and supply, the greater is the deadweight loss of a tax.

A) True
B) False

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Question 22

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The deadweight loss from a tax per unit of good 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.

E) A) and D)
F) All of the above

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Question 23

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​Figure 8-12 -Refer to Figure 8-12. Suppose that Market A is characterized by Demand 1 and Supply 1, and Market B is characterized by Demand 1 and Supply 2. If an identical tax is imposed on each market, the tax will create a larger deadweight loss in which market? Explain.

Figure 8-10 ​ ​ -Refer to Figure 8-10. Suppose the government places a $3 tax per unit on this good. How much is the deadweight loss from this tax?

Figure 8-10 ​ ​ -Refer to Figure 8-10. Suppose the government places a $3 tax per unit on this good. How many units of this good will be bought and sold after the tax is imposed?

Figure 8-9 ​ ​ -Refer to Figure 8-9. How much is consumer surplus at the market equilibrium?

Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade.

Economists use the government's tax revenue to measure the public benefit from a tax.

The result of the large tax cuts in the first Reagan Administration demonstrated very convincingly that Arthur Laffer was correct when he asserted that cuts in tax rates would increase tax revenue.

Figure 8-9 ​ ​ -Refer to Figure 8-9. Suppose the government places a $4 tax per unit on this good. How much is producer surplus after the tax is imposed?

Total surplus in a market does not change when the government imposes a tax on that market because the loss of consumer surplus and producer surplus is equal to the gain of government revenue.

Figure 8-2 The vertical distance between points C and D represents a tax in the market. ​ ​ ​ ​ ​ -Refer to Figure 8-2. The imposition of the tax causes the quantity sold to

Figure 8-9 ​ ​ -Refer to Figure 8-9. Suppose the government places a $4 tax per unit on this good. How much is consumer surplus after the tax is imposed?

Figure 8-1 -Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by I + Y represents the

In terms of gains from trade, why is it true that taxes cause deadweight losses?

When the government imposes taxes on buyers and sellers of a good, society loses some of the benefits of market efficiency.

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?

The Social Security tax is a tax on

A tax on a good causes the size of the market to shrink.

Suppose that instead of a supply-demand diagram, you are given the following information: Q_s = 100 + 3P Q_d = 400 - 2P From this information compute equilibrium price and quantity. Now suppose that a tax is placed on buyers so that Q_d = 400 - 2(P + T). If T = 15, solve for the new equilibrium price and quantity. (Note: P is the price received by sellers and P + T is the price paid by buyers.) Compare these answers for equilibrium price and quantity with your first answers. What does this show you?