Q: What is the formula for calculating the deadweight loss from a tax?

$$\text{Deadweight Loss} = \frac{1}{2} \times (Q^* - Q_t) \times t$$

Question 1

Suppose the government imposes a price floor of $$8.00 per bushel in the wheat market, where the equilibrium price is 6.50 $$per bushel and 2.0 billion bushels are traded. What is the most likely immediate effect of this price floor?

Accepted Answer

A surplus of wheat, as quantity supplied exceeds quantity demanded at the price floor.

Question 2

If a binding rent ceiling is set at $$1,500 per month in a city where the equilibrium rent is 2$$,500, what will be the likely outcome in the apartment market?

Accepted Answer

A shortage of apartments, as quantity demanded exceeds quantity supplied.

Question 3

Which area on a supply and demand graph represents the deadweight loss caused by a binding price floor?

Accepted Answer

The area between the supply and demand curves, from the quantity traded with the price floor to the equilibrium quantity.

Question 4

A $$1.00-per-pack tax is imposed on cigarettes. Before the tax, the equilibrium price is 6.00 $$and 4 billion packs are sold. After the tax, the price consumers pay is $6.90 and the quantity sold is 3.7 billion packs. What is the price received by producers after the tax?

Accepted Answer

$5.90

Question 5

Which of the following best describes the concept of tax incidence?

Accepted Answer

The actual division of the burden of a tax between buyers and sellers in a market.

Question 6

If the demand curve for a good is steeper (more inelastic) than the supply curve, who bears the greater burden of a per-unit tax?

Accepted Answer

Buyers bear the greater burden.

Question 7

Suppose the government imposes a $$2 per-unit tax on a good. The supply and demand equations are P = 13 - 1.75Q$ and Q = 4P - 4$. What is the new equilibrium quantity after the tax?

Accepted Answer

$$Q = 2.5$$

Question 8

Which of the following is a normative statement regarding price controls?

Accepted Answer

Price controls are bad for the economy.

Question 9

A city imposes rent control, leading to a shortage of apartments. Which of the following is a likely unintended consequence?

Accepted Answer

The emergence of black markets for apartments.

Question 10

What is the formula for calculating the deadweight loss from a tax?

Accepted Answer

$$	ext{Deadweight Loss} = \frac{1}{2} 	imes (Q^* - Q_t) 	imes t$$

Question 11

If a 10-cents-per-gallon tax is imposed on gasoline and the price consumers pay rises by 8 cents while the price sellers receive falls by 2 cents, what does this indicate about the relative elasticities of supply and demand?

Accepted Answer

Supply is more elastic than demand.

Question 12

Which of the following best describes the effect of a binding price ceiling on producer surplus?

Accepted Answer

Producer surplus decreases as producers receive lower prices and sell fewer units.

Question 13

What is the main reason deadweight loss occurs when a price floor or price ceiling is imposed?

Accepted Answer

Because the quantity traded is less than the equilibrium quantity, reducing total surplus.

Question 14

Which of the following is an example of a binding price floor?

Accepted Answer

A minimum wage set above the equilibrium wage.

Question 15

After a per-unit tax is imposed, which area on the supply and demand graph represents the tax revenue collected by the government?

Accepted Answer

The rectangle with height equal to the tax and width equal to the quantity sold after the tax.

Question 16

Suppose a price ceiling is set below the equilibrium price. Which of the following will NOT occur?

Accepted Answer

The market clearing at the equilibrium price.

Question 17

Which of the following statements about the efficiency of taxes is correct?

Accepted Answer

A tax is efficient if it raises a large amount of revenue with a small deadweight loss.

Question 18

If the government imposes a price floor and producers do not realize they cannot sell all they produce, what is the likely result?

Accepted Answer

A surplus, as producers will produce more than can be sold.

Question 19

Which of the following is NOT a possible result of government-imposed price controls?

Accepted Answer

The market always becomes more efficient.

Government Intervention: Price Controls and Taxes in Microeconomics

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