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Exam 8: Applications: The Costs of Taxation

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Question 101

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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. -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.

E) None of the above
F) A) and C)

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Question 102

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Suppose the government imposes a tax on cheese. The deadweight loss from this tax will likely be greater in the

A) first year after it is imposed than in the eighth year after it is imposed because demand and supply will be more elastic in the first year than in the eighth year.
B) first year after it is imposed than in the eighth year after it is imposed because demand and supply will be less elastic in the first year than in the eighth year.
C) eighth year after it is imposed than in the first year after it is imposed because demand and supply will be more elastic in the first year than in the eighth year.
D) eighth year after it is imposed than in the first year after it is imposed because demand and supply will be less elastic in the first year than in the eighth year.

E) A) and B)
F) None of the above

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Question 103

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If the size of a tax increases, tax 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 price received by sellers to

Use the following graph shown to fill in the table that follows. $\begin{array} { | l | l | l | l | } \hline & \text { WITHOUT TAX } & \text { WITH TAX } & \text { CHANGE } \\\hline \text { Consumer surplus } & & & \\\hline \text { Producer surplus } & & & \\\hline \text { Tax revenue } & & & \\\hline \text { Total surplus } & & & \\\hline\end{array}$

Scenario 8-3 ​ Suppose the market demand and market supply curves are given by the equations: ​ Q^D = 200 - P -Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve becomes: Q^D = 200 - (P + T) How much tax revenue will be collected after this tax is imposed?

Suppose the demand curve and the supply curve in a market are both linear, and suppose the price elasticity of supply is 0.5. Will the deadweight loss from a $3 tax per unit be larger if the price elasticity of demand is 0.3 or if the price elasticity of demand is 0.7?

If a tax did not induce buyers or sellers to change their behavior, it would not cause a deadweight loss.

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

The Laffer curve is the curve showing how tax revenue varies as the size of the tax varies.

Taxes affect market participants by increasing the price paid by the buyer and received by the seller.

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

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. -Refer to Scenario 8-1. If Ernesto cleans Erin's house for $90, Ernesto's producer surplus is

What happens to the total surplus in a market when the government imposes a tax?

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

Figure 8-9 ​ ​ -Refer to Figure 8-9. Suppose the government places a $4 tax per unit on this good. What price will sellers receive for the good after the tax is imposed?

The decrease in total surplus that results from a market distortion, such as a tax, is called a

The demand for bread is less elastic than the demand for donuts; hence, a tax on bread will create a larger deadweight loss than will the same tax on donuts, other things equal.

Figure 8-2 The vertical distance between points C and D represents a tax in the market. ​ ​ ​ ​ ​ -Refer to Figure 8-2. The per-unit burden of the tax on buyers is

Suppose a tax is imposed on each new hearing aid that is sold. The supply curve is a typical upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. As a result of the tax, the equilibrium quantity of hearing aids decreases from 10,000 to 9,000, and the deadweight loss of the tax is $60,000. We can conclude that the tax on each hearing aid is