Review Questions -- Chapter 8

1. Which of the following quantities decrease in response to a tax on a good?

a. the equilibrium quantity in the market for the good, the effective price of the good
paid by buyers, and consumer surplus
b. the equilibrium quantity in the market for the good, producer surplus, and the well-
being of buyers of the good
c. the effective price received by sellers of the good, the wedge between the effective
price paid by buyers and the effective price received by sellers, and consumer
surplus
d. None of the above is necessarily correct unless we know whether the tax is levied
on buyers or on sellers.

ANSWER: b

2. A deadweight loss is a consequence of a tax on a good because the tax

a. induces the government to increase its expenditures.
b. induces buyers to consume less, and sellers to produce less.
c. increases the equilibrium price in the market.
d. imposes a loss on buyers that is greater than the loss to sellers.

ANSWER: b

3. In the market for widgets, the supply curve is the typical upward-sloping straight
line, and the demand curve is the typical downward-sloping straight line. The
equilibrium quantity in the market for widgets is 200 per month when there is no
tax. Then a tax of $5 per widget is imposed. As a result, the government is able to
raise $800 per month in tax revenue. We can conclude that the equilibrium quantity
of widgets has fallen by
a. 40 per month.
b. 50 per month.
c. 75 per month.
d. 100 per month.
ANSWER: a

Figure 8-1
4. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area
measured by J+K+L+M represents
a. total surplus after the tax.
b. total surplus before the tax.
c. deadweight loss from the tax.
d. tax revenue.

ANSWER: a

5. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The
deadweight loss due to the tax is measured by the area
a. J+K+L+M.
b. J+K+L+M+N.
c. I+Y.
d. I+Y+B.

ANSWER: c

6. Refer to Figure 8-1. Suppose the government imposes a tax of P' - P''' on consumers.
Total spending by consumers is measured by the area
a. I+Y.
b. K+L+M+N.
c. L+M+Y.
d. I+J+K+L+M+Y.

ANSWER: b

7. Suppose a tax of $1 per unit is imposed on a good. The more elastic the supply of
the good, other things equal, the
a. smaller is the response of quantity supplied to the tax.
b. larger is the tax burden on sellers relative to the tax burden on buyers.
c. larger is the deadweight loss of the tax.
d. All of the above are correct.

ANSWER: c

Table 8-1
Market Characteristic
A Demand is very elastic.
B Demand is very inelastic.
C Supply is very elastic.
D Supply is very inelastic.
8. Refer to Table 8-1. Suppose the government is considering levying a tax in one or
more of the markets described in the table. Which of the markets will allow the
government to minimize the deadweight loss(es) from the tax?
a. market A only
b. markets A and C only
c. markets B and D only
d. market C only

ANSWER: c

9. Refer to Table 8-1. Suppose the government is considering levying a tax in one or
more of the markets described in the table. Which of the markets will maximize the
deadweight loss(es) from the tax?
a. market B only
b. markets A and C only
c. markets B and D only
d. market D only

ANSWER: b

10. The demand for chicken wings is more elastic than the demand for razor blades.
Suppose the government levies an equivalent tax on chicken wings and razor blades.
The deadweight loss would be larger in the market for
a. chicken wings than in the market for razor blades because the quantity of chicken
wings would fall by more than the quantity of razor blades.
b. chicken wings than in the market for razor blades because the quantity of razor
blades would fall by more than the quantity of chicken wings.
c. razor blades than in the market for chicken wings because the quantity of chicken
wings would fall by more than the quantity of razor blades.
d. razor blades than in the market for chicken wings because the quantity of razor
blades would fall by more than the quantity of chicken wings.

ANSWER: a

11. Assume the supply curve for diapers is a typical, upward-sloping straight line,
and the demand curve for diapers is a typical, downward-sloping straight line.
Suppose the equilibrium quantity in the market for diapers is 1,000 per month when
there is no tax. Then a tax of $0.50 per diaper is imposed. The effective price paid
by buyers increases from $1.50 to $1.90 and the effective price received by sellers
falls from $1.50 to $1.40. The government’s tax revenue amounts to $475 per
month. Which of the following statements is correct?
a. After the tax is imposed, the equilibrium quantity of diapers is 900 per month.
b. The demand for diapers is more elastic than the supply of diapers.
c. The deadweight loss of the tax is $12.50.
d. The tax causes a decrease in consumer surplus of $380.

ANSWER: c
Figure 8-2:
The vertical distance between points A and B represents the original tax.

12. Refer to Figure 8-2. If the government changed the per-unit tax from $5.00 to
$2.50, then the price paid by buyers would be $7.50, the price received by sellers
would be $5, and the quantity sold in the market would be 1.5 units. Compared to
the original tax rate, this lower tax rate would
a. increase government revenue and increase the deadweight loss from the tax.
b. increase government revenue and decrease the deadweight loss from the tax.
c. decrease government revenue and increase the deadweight loss from the tax.
d. decrease government revenue and decrease the deadweight loss from the tax.

ANSWER: d

13. Refer to Figure 8-2. 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 not correct?
a. Compared to the original tax, the larger tax will increase tax revenue.
b. Compared to the original tax, the smaller tax will decrease deadweight loss.
c. Compared to the original tax, the smaller tax will decrease tax revenue.
d. Compared to the original tax, the larger tax will increase deadweight loss.

ANSWER: a