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Exam 8: Application: The Costs of Taxation

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Question 21

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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

A) $60.
B) $120.
C) $160.
D) $200.

E) B) and C)
F) A) and D)

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Question 22

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When a tax is levied on a good,

A) neither buyers nor sellers are made worse off.
B) only sellers are made worse off.
C) only buyers are made worse off.
D) both buyers and sellers are made worse off.

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

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Question 23

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Which of the following events always would increase the size of the deadweight loss that arises from the tax on gasoline?

Figure 8-18 -Refer to Figure 8-18. Suppose the government imposes a $1 tax in each of the four markets represented by supply curves S1, S2, S3, and S4. The deadweight will be the smallest in the market represented by

Figure 8-6 The vertical distance between points A and B represents a tax in the market. -Refer to Figure 8-6. When the tax is imposed in this market, consumer surplus is

Figure 8-3 The vertical distance between points A and C represents a tax in the market. -Refer to Figure 8-3. The per-unit burden of the tax on sellers is

The benefit that government receives from a tax is measured by

Figure 8-26 -Refer to Figure 8-26. Suppose the government places a $3 tax per unit on this good. How much is consumer surplus after the tax is imposed?

Suppose that policymakers are considering placing a tax on either of two markets. In Market A, the tax will have a significant effect on the price consumers pay, but it will not affect equilibrium quantity very much. In Market B, the same tax will have only a small effect on the price consumers pay, but it will have a large effect on the equilibrium quantity. Other factors are held constant. In which market will the tax have a larger deadweight loss?

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?

Suppose that the market for large, 64-ounce soft drinks in the town of Pudgyville is characterized by a typical, downward-sloping, linear demand curve and a typical, upward-sloping, linear supply curve. The market is initially in equilibrium with 1,000 soft drinks sold per day. The newly-elected Mayor of Pudgyville wants to tax 64-ounce soft drinks. She is considering either a $0.10 tax or a $0.30 tax. Her chief economic advisor estimates that the number of soft drinks sold after a $0.10 tax will be 900 and after a $0.30 tax will be 500. Which tax is better?

Consider a good to which a per-unit tax applies. The size of the deadweight that results from the tax is smaller, the

Figure 8-11 -Refer to Figure 8-11. The price labeled as P1 on the vertical axis represents the price

When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is relatively inelastic.

Figure 8-10 -Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market after the tax to Q2. With the tax, the consumer surplus is

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

Figure 8-5 Suppose that the government imposes a tax of P3 - P1. -Refer to Figure 8-5. Producer surplus before the tax was levied is represented by area

Total surplus is always equal to the sum of consumer surplus and producer surplus.

Figure 8-2 The vertical distance between points A and B represents a tax in the market. -Refer to Figure 8-2. Total surplus without the tax is

Figure 8-19 The vertical distance between points A and B represents the original tax. -Refer to Figure 8-19. The original tax can be represented by the vertical distance AB. Suppose the government is deciding whether to lower the tax to CD or raise it to FG. Which of the following statements is correct?