Chapter 8 Application: The Costs of Taxation
Test A
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A tax levied on the buyers of a product shifts the a. demand curve upward or to the right. b. demand curve downward or to the left. c. supply curve upward or to the left. d. supply curve downward or to the right. ANSWER b. demand curve downward or to the left. !"#E $ %E"1 & SE'!()N 1 )*+E'!(,E 1 RAN&)$ "
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When a tax is levied on a good a. buyers are worse off but sellers are not. b. sellers are worse off but buyers are not. c. neither buyers nor sellers are worse off. d. both buyers and sellers are worse off. ANSWER d. both buyers and sellers are worse off. !"#E $ %E"1 & SE'!()N 1 )*+E'!(,E 1 RAN&)$ "
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When a tax on a good is enacted/ a. sellers always bear the full burden of the tax. b. buyers always bear the full burden of the tax. c. buyers and sellers share the burden of the tax regardless of which party it is levied on. d. sellers bear the full burden if the tax is levied on them/ but buyers bear the full burden if the tax is levied on them. ANSWER c. buyers and sellers share the burden of the tax regardless of which party it is levied on. !"#E $ %E"1 ' SE'!()N 1 )*+E'!(,E 1 RAN&)$ "
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A tax placed on a good a. causes the price of the good to fall. b. causes the si1e of the mar2et for the good to shrin2. c. affects buyers of the good/ but not sellers. d. is usually borne entirely by the seller of the good. ANSWER b. causes the si1e of the mar2et for the good to shrin2. !"#E $ %E"1 ' SE'!()N 1 )*+E'!(,E 1 RAN&)$ "
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When a tax is levied on a good a. the mar2et price falls because demand declines. b. the mar2et price falls because supply falls. c. the mar2et price rises because demand falls. d. a wedge is placed between the price buyers pay and the price sellers receive. ANSWER d. a wedge is placed between the price buyers pay and the price sellers receive. !"#E $ %E"1 ' SE'!()N 1 )*+E'!(,E 1 RAN&)$ "
'opyright 4 5arcourt/ (nc.
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60 'hapter 67Application !he 'osts of !axation
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!he benefit received by the sellers of a good in a mar2et is measured by a. producer surplus. b. consumer surplus. c. the amount it costs producers to produce the good. d. the amount buyers pay for the good in excess of the amount the good is actually worth. ANSWER a. producer surplus. !"#E $ %E"1 & SE'!()N 1 )*+E'!(,E 1 RAN&)$ "
According to the graph/ the e:uilibrium mar2et price before the tax is imposed is a. #.. b. #-. c. #1. d. impossible to determine. ANSWER c. #1. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $ RAN&)$ "
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According to the graph/ the price buyers pay after the tax is a. #.. b. #-. c. #1. d. impossible to determine. ANSWER a. #.. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $ RAN&)$ "
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According to the graph/ the price sellers receive after the tax is a. #.. b. #-. c. #1. d. impossible to determine. ANSWER b. #-. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $ RAN&)$ "
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'hapter 67Application !he 'osts of !axation 63
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According to the graph/ consumer surplus before the tax was levied is represented by area a. A. b. <. c. A ? * ? '. d. & ? E ? <. ANSWER c. A ? * ? '. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $ RAN&)$ "
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According to the graph/ before the tax the producer surplus is represented by area a. A. b. <. c. A ? * ? '. d. & ? E ? <. ANSWER d. & ? E ? <. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $ RAN&)$ "
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According to the graph/ the tax caused a reduction in consumer surplus represented by area a. A. b. <. c. * ? '. d. & ? E. ANSWER c. * ? '. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $ RAN&)$ "
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According to the graph/ the tax caused a reduction in producer surplus represented by area a. A. b. <. c. * ? '. d. & ? E. ANSWER d. & ? E. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $ RAN&)$ "
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According to the graph/ the benefits to the government @total tax revenueA are represented by area a. A ? *. b. ' ? E. c. * ? &. d. & ? <. ANSWER c. * ? &. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $ RAN&)$ "
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According to the graph/ the total surplus @consumer/ producer/ and governmentA with the tax is represented by area a. ' ? E. b. A ? * ? '. c. & ? E ? <. d. A ? * ? & ? <. ANSWER d. A ? * ? & ? <. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $ RAN&)$ "
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68 'hapter 67Application !he 'osts of !axation
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According to the graph/ the loss in total welfare resulting from the levying of the tax is represented by area a. ' ? E. b. A ? * ? '. c. & ? E ? <. d. A ? * ? & ? <. ANSWER a. ' ? E. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $ RAN&)$ "
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&eadweight loss is the a. decline in government revenue when taxes are reduced in a mar2et. b. reduction in total surplus that results from a tax. c. reduction in consumer surplus when a tax is placed on buyers. d. loss of profit to businesses when a tax is imposed. ANSWER b. reduction in total surplus that results from a tax. !"#E $ %E"1 & SE'!()N 1 )*+E'!(,E 1 RAN&)$ "
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!he greater the elasticities of demand and supply the a. smaller the deadweight loss from a tax. b. greater the deadweight loss from a tax. c. less intrusive a tax will be on a mar2et. d. more e:uitable the distribution of a tax between buyers and sellers. ANSWER b. greater the deadweight loss from a tax. !"#E $ %E"1 & SE'!()N - )*+E'!(,E - RAN&)$ "
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Economists generally agree that the most important tax in the B.S. economy is the tax on a. labor. b. consumption. c. personal property. d. income. ANSWER a. labor. !"#E $ %E"1 & SE'!()N - )*+E'!(,E - RAN&)$ "
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(f the supply of land is fixed/ a tax on land would be paid a. only by wor2ers. b. entirely by the landowners. c. entirely by the renters or users of the land. d. partly by landowners and partly by land users. ANSWER b. entirely by the landowners. !"#E $ %E"1 ' SE'!()N - )*+E'!(,E - RAN&)$ "
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As the si1e of a tax increases a. the deadweight loss from the tax remains constant. b. the deadweight loss from the tax declines. c. the deadweight loss from the tax increases. d. no one 2nows how the deadweight loss changes because no tax has ever been reduced. ANSWER c. the deadweight loss from the tax increases. !"#E $ %E"1 ' SE'!()N . )*+E'!(,E . RAN&)$ "
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)ne sideCeffect of the tax cuts made during Ronald ReaganDs terms as president was a. increased tax revenues. b. large budget deficits. c. small budget surpluses. d. decreased government spending. ANSWER b. large budget deficits. !"#E $ %E"1 & SE'!()N . )*+E'!(,E . RAN&)$ "
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'hapter 67Application !he 'osts of !axation 69
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!he views held by Arthur Eaffer and Ronald Reagan that cuts in tax rates would encourage people to increase the :uantity of labor they supplied became 2nown as a. Eaffer economics. b. welfare economics. c. microeconomics. d. supplyCside economics. ANSWER d. supplyCside economics. !"#E $ %E"1 ' SE'!()N . )*+E'!(,E . RAN&)$ "
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!he higher a countryDs tax rates the more li2ely that country will be a. above the Eaffer curve. b. on the top of the Eaffer curve. c. on the negativelyCsloped part of the Eaffer curve. d. on the positivelyCsloped part of the Eaffer curve. ANSWER c. on the negativelyCsloped part of the Eaffer curve. !"#E $ %E"1 & SE'!()N . )*+E'!(,E 0 RAN&)$ "
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A maFor political problem with collecting taxes to finance government spending is that a. taxes ma2e taxpayers worse off since government spending benefits no one. b. the people who pay the taxes are often not the same people who benefit from the government spending of tax funds. c. taxes ma2e taxpayers worse off since government spending benefits only those on welfare. d. taxes reduce economic welfare more than the expenditure of tax funds benefits society. ANSWER b. the people who pay the taxes are often not the same people who benefit from the government spending of tax funds. !"#E $ %E"1 & SE'!()N . )*+E'!(,E 0 RAN&)$ "
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ANSWER b. demand curve downward or to the left. !"#E $ %E"1 & SE'!()N 1 )*+E'!(,E 1 RAN&)$ "
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ANSWER d. both buyers and sellers are worse off. !"#E $ %E"1 & SE'!()N 1 )*+E'!(,E 1 RAN&)$ "
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ANSWER c. buyers and sellers share the burden of the tax regardless of which party it is levied on. !"#E $ %E"1 ' SE'!()N 1 )*+E'!(,E 1 RAN&)$ "
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ANSWER b. causes the si1e of the mar2et for the good to shrin2. !"#E $ %E"1 ' SE'!()N 1 )*+E'!(,E 1 RAN&)$ "
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ANSWER d. a wedge is placed between the price buyers pay and the price sellers receive. !"#E $ %E"1 ' SE'!()N 1 )*+E'!(,E 1 RAN&)$ "
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ANSWER a. producer surplus. !"#E $ %E"1 & SE'!()N 1 )*+E'!(,E 1 RAN&)$ "
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ANSWER c. #1. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $
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RAN&)$ "
ANSWER a. #.. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $
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RAN&)$ "
ANSWER b. #-. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $
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RAN&)$ "
ANSWER c. A ? * ? '. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $ RAN&)$ "
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ANSWER d. & ? E ? <. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $ RAN&)$ "
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ANSWER c. * ? '. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $
1.
RAN&)$ "
ANSWER d. & ? E. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $
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RAN&)$ "
ANSWER c. * ? &. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $ RAN&)$ "
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ANSWER d. A ? * ? & ? <.
!"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $
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RAN&)$ "
ANSWER a. ' ? E. !"#E $ %E"1 ; SE'!()N 1 )*+E'!(,E 1 ;RA#5 <)R$A! $
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RAN&)$ "
ANSWER b. reduction in total surplus that results from a tax. !"#E $ %E"1 & SE'!()N 1 )*+E'!(,E 1 RAN&)$ "
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ANSWER b. greater the deadweight loss of a tax. !"#E $ %E"1 & SE'!()N - )*+E'!(,E - RAN&)$ "
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ANSWER a. labor. !"#E $ %E"1 & SE'!()N - )*+E'!(,E - RAN&)$ "
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ANSWER b. entirely by the landowners. !"#E $ %E"1 ' SE'!()N - )*+E'!(,E - RAN&)$ "
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ANSWER c. the deadweight loss from the tax increases. !"#E $ %E"1 ' SE'!()N . )*+E'!(,E . RAN&)$ "
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ANSWER b. large budget deficits. !"#E $ %E"1 & SE'!()N . )*+E'!(,E . RAN&)$ "
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ANSWER d. supplyCside economics. !"#E $ %E"1 ' SE'!()N . )*+E'!(,E . RAN&)$ "
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ANSWER c. on the negativelyCsloped part of the Eaffer curve. !"#E $ %E"1 & SE'!()N . )*+E'!(,E 0 RAN&)$ "
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ANSWER b. the people who pay the taxes are often not the same people who benefit from the government spending of tax funds. !"#E $ %E"1 & SE'!()N . )*+E'!(,E 0 RAN&)$ "'hapter 6