Question 1

Suppose the government imposes a per-unit tax on a good. Which of the following best describes the effect of this tax on the market equilibrium?

Accepted Answer

The price paid by buyers rises, the price received by sellers falls, and the quantity sold decreases.

Question 2

A $$200 per-unit tax is imposed on a market where, before the tax, the equilibrium price is 200 $$and the equilibrium quantity is 100 units. After the tax, the price paid by buyers is $$300, the price received by sellers is 100$$, and the quantity sold is 50 units. What is the deadweight loss (DWL) caused by the tax?

Accepted Answer

$5,000

Question 3

Which area on a supply and demand graph represents the deadweight loss from a tax?

Accepted Answer

The area representing the surplus lost by buyers and sellers that is not offset by tax revenue (typically labeled as C + E)

Question 4

If the government increases the size of a per-unit tax, what happens to the deadweight loss and tax revenue?

Accepted Answer

Deadweight loss increases, but tax revenue first increases and then decreases as the tax becomes very large.

Question 5

Given the following: The government imposes a tax $$T$$ per unit, and after the tax, $$Q$$ units are sold. What is the formula for tax revenue?

Accepted Answer

$$Tax\ Revenue = T 	imes Q$$

Question 6

Why does a tax cause a deadweight loss in a market?

Accepted Answer

Because it prevents some mutually beneficial trades from occurring, reducing total surplus.

Question 7

Suppose the demand for a good is highly elastic and the supply is inelastic. If a tax is imposed, what can you say about the size of the deadweight loss?

Accepted Answer

The deadweight loss will be large because elastic demand means quantity falls significantly.

Question 8

Which of the following statements about the Laffer curve is correct?

Accepted Answer

It shows that tax revenue first rises and then falls as the tax rate increases.

Question 9

If a government triples the sales tax rate from 5% to 15%, what is the most likely effect on tax revenue, according to the concepts in this chapter?

Accepted Answer

Tax revenue may increase by less than triple, stay the same, or even decrease, depending on the elasticity of supply and demand.

Question 10

Which of the following best explains why deadweight loss increases more than proportionally as the size of a tax increases?

Accepted Answer

Because the reduction in quantity traded increases, causing more mutually beneficial trades to be lost.

Question 11

A government is considering imposing a tax on a market with perfectly inelastic demand. What will be the deadweight loss from this tax?

Accepted Answer

Zero, because the quantity traded does not change.

Question 12

Which of the following is NOT a component of total surplus after a tax is imposed?

Accepted Answer

Deadweight loss

Question 13

Suppose a tax causes the quantity sold in a market to fall from $$Q_1 to$$ $$Q_2. $$What does the area between $$Q_1$$ and $$Q_2$$ under the supply and demand curves represent?

Accepted Answer

The deadweight loss caused by the tax

Question 14

If the supply of a good is perfectly elastic, what is the effect of a tax on deadweight loss?

Accepted Answer

Deadweight loss is maximized because quantity falls significantly.

Question 15

Which of the following best describes the relationship between the elasticity of supply and demand and the size of the deadweight loss from a tax?

Accepted Answer

The more elastic supply and demand are, the larger the deadweight loss.

Question 16

A tax is imposed on sellers, but the market outcome is the same as if it were imposed on buyers. Why?

Accepted Answer

Because the economic incidence depends on the relative elasticities of supply and demand, not on who is legally responsible for the tax.

Question 17

Which formula correctly calculates consumer surplus (CS) for a linear demand curve?

Accepted Answer

$$CS = \frac{1}{2} 	imes base 	imes height$$

Question 18

If a government wants to minimize the deadweight loss from a tax, it should impose taxes on goods with which characteristics?

Accepted Answer

Goods with inelastic supply and demand

Question 19

Which of the following best explains why the losses to buyers and sellers from a tax exceed the revenue raised by the government?

Accepted Answer

Because the tax prevents some mutually beneficial trades from occurring, creating a deadweight loss.

Question 20

Suppose the government imposes a tax on labor income with a marginal tax rate of 40%. What is the likely effect on deadweight loss?

Accepted Answer

Deadweight loss will be large, especially if labor supply is elastic.

The Costs of Taxation: Deadweight Loss, Tax Revenue, and Market Efficiency

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