Chpt 8 Taxation

Multiple Choice
Identify the choice that best completes the statement or answers the question.
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1. To fully understand how taxes affect economic well-being, we must compare the
a. consumer surplus to the producer surplus.
b. price paid by buyers to the price received by sellers.
c. reduced welfare of buyers and sellers to the revenue raised by the government.
d. consumer surplus to the deadweight loss.

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2. If a tax shifts the supply curve upward (or to the left), we can infer that the tax was levied on
a. buyers of the good.
b. sellers of the good.
c. both buyers and sellers of the good.
d. We cannot infer anything because the shift described is not consistent with a tax.

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3. Suppose a tax is imposed on the buyers of fast-food French fries. The burden of the tax will
a. fall entirely on the buyers of fast-food French fries.
b. fall entirely on the sellers of fast-food French fries.
c. be shared equally by the buyers and sellers of fast-food French fries.
d. be shared by the buyers and sellers of fast-food French fries but not necessarily equally.

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4. One result of a tax, regardless of whether the tax is placed on the buyers or the sellers, is that the
a. size of the market is unchanged.
b. price the seller effectively receives is higher.
c. supply curve for the good shifts upward by the amount of the tax.
d. tax reduces the welfare of both buyers and sellers.

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5. When the price of a good is measured in dollars, then the size of the deadweight loss that results from taxing
that good is measured in
a. units of the good that is being taxed.
b. units of a related good that is not being taxed.
c. dollars.
d. percentage change.

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6. Relative to a situation in which gasoline is not taxed, the imposition of a tax on gasoline causes the quantity
of gasoline demanded to
a. decrease and the quantity of gasoline supplied to decrease.
b. decrease and the quantity of gasoline supplied to increase.
c. increase and the quantity of gasoline supplied to decrease.
d. increase and the quantity of gasoline supplied to increase.

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7. Deadweight loss is the

a. decline in total surplus that results from a tax.
b. decline in government revenue when taxes are reduced in a market.
c. decline in consumer surplus when a tax is placed on buyers.
d. loss of profits to business firms when a tax is imposed.
Figure 8-1
1

Price

P'

Supply

J
K

P''
P'''

B
N

Demand
Quantity

____

8. Refer to Figure 8-1. Suppose the government imposes a tax of P - P. The area measured by M represents
a. consumer surplus after the tax.
b. consumer surplus before the tax.
c. producer surplus after the tax.
d. producer surplus before the tax.
Figure 8-2
The vertical distance between points A and B represents a tax in the market.
Price
12
11

Supply

10
A

9
8
7
6
5
4

3
2
1

Demand
0.5

____

1.5

2.5

3.5

4.5

Quantity

9. 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
2

The vertical distance between points A and C represents a tax in the market.
P4

Price

Supply
A

P3

P2

P1

Demand
Q1

Q2

Quantity

____ 10. 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.
Figure 8-5
Suppose that the government imposes a tax of P3 - P1.
P4

Price

Supply
A

P3

P2

P1

Demand
Q2

Q1

Quantity

____ 11. 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.
____ 12. Refer to Figure 8-5. The tax causes a reduction in producer surplus that is represented by area
a. A.
b. C+H.
3

c. D+H.
d. F.
Figure 8-6
The vertical distance between points A and B represents a tax in the market.
Price
22
20
18

Supply

16
14
12
10
8
6

Demand

100 200 300 400 500 600 700 800 900 1000

Quantity

____ 13. 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
Figure 8-7
The vertical distance between points A and B represents a tax in the market.
24

Price

Supply

22
20
18
A

16
14
12
10
8

6
4
2

Demand
5

10

15

20

25

30

35

40

45

50

55

60

Quantity

____ 14. 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.
____ 15. 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.
____ 16. 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.
____ 17. 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.
____ 18. 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.
____ 19. Which of the following statements correctly describes the relationship between the size of the deadweight loss
and the amount of tax revenue as the size of a tax increases from a small tax to a medium tax and finally to a
large tax?
a. Both the size of the deadweight loss and tax revenue increase.
b. The size of the deadweight loss increases, but the tax revenue decreases.
c. The size of the deadweight loss increases, but the tax revenue first increases, then
decreases.
d. Both the size of the deadweight loss and tax revenue decrease.
____ 20. Assume that for good X the supply curve for a good is a typical, upward-sloping straight line, and the demand
curve is a typical downward-sloping straight line. If the good is taxed, and the tax is doubled, the
a. base of the triangle that represents the deadweight loss quadruples.
b. height of the triangle that represents the deadweight loss doubles.
c. deadweight loss of the tax doubles.
d. All of the above are correct.
____ 21. Henry George argued that the government should raise
a. all of its revenue from a tax on land.
5

b. all of its revenue from taxes on labor.

c. most of its revenue from consumption taxes.
d. tax revenue from multiple and diverse taxes.
____ 22. Today's property tax
a. taxes only raw land.
b. is exactly the same as Henry George's single-tax proposal.
c. taxes land and the improvements to land.
d. has no deadweight loss since the amount of revenue going to the government equals the
reduction in the landowners surplus.
____ 23. Which of the following statements is correct?
a. According to the evidence from major industrial countries, there is no significant
relationship between tax rates and the average number of hours worked per week.
b. In the early 1970s, the average French worker worked more hours per week than the
average American worker; by the mid-1990s, the reverse was true.
c. Between the early 1970s and the mid-1990s, labor taxes in France decreased while labor
taxes in the United States increased.
d. All of the above are correct.
____ 24. The higher a country's tax rates, the more likely that country will be
a. at the top of the Laffer curve.
b. on the positively sloped part of the Laffer curve.
c. on the negatively sloped part of the Laffer curve.
d. experiencing small deadweight losses.
____ 25. When a country is on the downward-sloping side of the Laffer curves, a cut in the tax rate will
a. decrease tax revenue and decrease the deadweight loss.
b. decrease tax revenue and increase the deadweight loss.
c. increase tax revenue and decrease the deadweight loss.
d. increase tax revenue and increase the deadweight loss.

Chpt 8 Taxation
Answer Section
MULTIPLE CHOICE
1. ANS:
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13. ANS:
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14. ANS:
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TOP:
15. ANS:

C
PTS: 1
DIF: 2
Analytic
LOC: Supply and demand
Interpretive
B
PTS: 1
DIF: 2
Analytic
LOC: Supply and demand
Interpretive
D
PTS: 1
DIF: 2
Analytic
LOC: Supply and demand
Interpretive
D
PTS: 1
DIF: 2
Analytic
LOC: Supply and demand
Interpretive
C
PTS: 1
DIF: 3
Analytic
LOC: Supply and demand
Analytical
A
PTS: 1
DIF: 2
Analytic
LOC: Supply and demand
Interpretive
A
PTS: 1
DIF: 1
Analytic
LOC: Supply and demand
Definitional
C
PTS: 1
DIF: 2
Analytic
LOC: Supply and demand
Analytical
C
PTS: 1
DIF: 3
Analytic
LOC: Supply and demand
Applicative
A
PTS: 1
DIF: 2
Analytic
LOC: Supply and demand
Applicative
B
PTS: 1
DIF: 2
Analytic
LOC: Supply and demand
Interpretive
C
PTS: 1
DIF: 2
Analytic
LOC: Supply and demand
Applicative
C
PTS: 1
DIF: 2
Analytic
LOC: Supply and demand
Applicative
C
PTS: 1
DIF: 3
Analytic
LOC: Supply and demand
Consumer surplus | Producer surplus | Total surplus
B
PTS: 1
DIF: 3
7

REF: 8-0
TOP: Taxes | Economic welfare
REF: 8-1
TOP: Taxes
REF: 8-1
TOP: Tax incidence
REF: 8-1
TOP: Taxes | Welfare
REF: 8-1
TOP: Deadweight loss
REF: 8-1
TOP: Taxes
REF: 8-1
TOP: Deadweight loss
REF: 8-1
TOP: Producer surplus
REF: 8-1
TOP: Producer surplus
REF: 8-1
TOP: Tax revenue
REF: 8-1
TOP: Consumer surplus
REF: 8-1
TOP: Producer surplus
REF: 8-1
TOP: Tax burden
REF: 8-1
MSC: Applicative
REF: 8-1

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25.

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Analytic
LOC: Supply and demand
Consumer surplus | Producer surplus | Deadweight loss
MSC: Applicative
D
PTS: 1
DIF: 3
REF: 8-2
Analytic
LOC: Elasticity
TOP: Elasticity | Tax | Deadweight loss
Analytical
B
PTS: 1
DIF: 2
REF: 8-2
Analytic
LOC: Elasticity
TOP: Deadweight loss | Elasticity
Interpretive
D
PTS: 1
DIF: 1
REF: 8-2
Analytic
LOC: Elasticity
TOP: Labor
MSC: Interpretive
C
PTS: 1
DIF: 2
REF: 8-3
Analytic
LOC: Elasticity
TOP: Elasticity | Tax revenue
Applicative
B
PTS: 1
DIF: 2
REF: 8-3
Analytic
LOC: Supply and demand
TOP: Deadweight loss
Applicative
A
PTS: 1
DIF: 1
REF: 8-3
Analytic
LOC: Supply and demand
TOP: Land tax
Definitional
C
PTS: 1
DIF: 2
REF: 8-3
Analytic
LOC: Elasticity
TOP: Land tax
MSC: Definitional
B
PTS: 1
DIF: 2
REF: 8-3
Analytic
LOC: Supply and demand
TOP: Taxes | Labor
Interpretive
C
PTS: 1
DIF: 2
REF: 8-3
Analytic
LOC: Supply and demand
TOP: Laffer curve
Interpretive
C
PTS: 1
DIF: 2
REF: 8-3
Analytic
LOC: Supply and demand
TOP: Laffer curve
Applicative