Questions:
Practice Problems
1) What is meant by the "deadweight loss" caused by a tax?
a) the shortage that results
b) the surplus that results
c) the transfer of wealth from taxpayers to the government in the form of tax revenue
d) the inefficiency that results from the loss of potentially beneficial transactions
2) The economic incidence of a tax is the:
a) amount of the revenue the government collects.
b) deadweight loss arising from imposition of the tax.
c) per-unit amount of an excise tax.
d) measure of who really bears the burden of the tax.
3) Under what circumstances does the burden of an excise tax fall mainly on producers?
a) when the supply is relatively inelastic and demand is fairly elastic
b) when the supply is relatively elastic and demand is fairly inelastic
c) when consumers do not have many substitutes for the good
d) when it is easy for suppliers to expand production of the good
4) When the price elasticity of demand exceeds the price elasticity of supply, the burden of an excise tax falls:
a) mainly on consumers.
b) mainly on producers.
c) equally on consumers and producers.
d) entirely on consumers.
5) In 1990 the U.S. government imposed a special sales tax on yachts with a price of at least $100,000. The tax was repealed in 1993 since it generated far less revenue than expected and led to significant job losses in the yacht building industry. The sales tax was unsuccessful because:
a) the supply and the demand for yachts were relatively elastic.
b) the supply and the demand for yachts were relatively inelastic.
c) the tax rate was too low.
d) yachts are a necessity.
6) The amount of the deadweight loss resulting from an excise tax is:
a) the amount of revenue collected from the tax.
b) independent of the elasticity of demand for the taxed good.
c) the difference between the government revenue from an excise tax and the reduction in total surplus resulting from imposition of the tax.
d) the difference between the amount of consumer surplus and the amount of producer surplus remaining after imposition of the tax.
7) Which of the following statements is true?
a) The amount of deadweight loss from an excise tax will increase as the demand becomes more inelastic.
b) The amount of deadweight loss resulting from an excise tax will increase as the demand becomes more elastic.
c) An excise tax does not create a deadweight loss if the taxed good is a necessity.
d) An excise tax does not create a deadweight loss if the taxed good is a luxury.
8) Some proponents of an excise tax on cigarettes argue that it will discourage smoking. Others argue that it will collect revenue for the government. Given the economic model of supply and demand, which of the following is true?
a) The more elasticity there is in the supply of, and demand for cigarettes, the more revenue will be collected from the tax.
b) The less elasticity there is in the supply of and demand for cigarettes, the more revenue will be collected from the tax.
c) A tax that discourages smoking will not cause a deadweight loss.
d) The more the tax discourages smoking, the more revenue it will collect for the government.
9) Do the people who are legally required to pay a tax always bear the burden of the tax? Briefly explain.
a) No. Those who are legally required to send a tax payment to the government never bear the burden of the tax.
b) No. Consumers always hear the burden of the tax
c) Yes. Those who are legally required to send a tax payment to the government hear the burden of the tax.
d) No. Producers always bear the burden of the tax.
e) No. Whoever hears the burden of the tax is not affected by who legally is required to pay the tax to the government
10) Refer to Figure 1: The size of the per unit tax is:
a) $1.00
b) $2.00
c) $0.75
d) Can not be determined
11) Refer to Figure 1: After the tax, the price paid by consumers is:
a) $2.50
b) $3.00
c) $2.25
d) Can not be determined
12) Refer to Figure 1: After the tax, the price received by suppliers is:
a) $2.50
b) $3.00
c) $2.25
d) Can not be determined
13) Refer to Figure 1: The economic burden of the tax falls mainly on:
a) Consumers
b) Suppliers
c) Completely on suppliers since they pay the tax
d) Completely on consumers since they can't stop buying gasoline.
14) Refer to Figure 1: The economic burden of the tax in this case tells us that:
a) Demand is more elastic than supply
b) Demand is more inelastic than supply
c) Demand and supply have the same elasticity
d) Demand is perfectly inelastic