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Exam 8: Application: The Costs of Taxation

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Question 31

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The greater the elasticities of demand and supply the:

A) smaller the deadweight loss from a tax
B) less intrusive a tax will be on a market
C) greater the deadweight loss from a tax
D) more equitable the distribution of a tax between buyers and sellers

E) A) and B)
F) A) and C)

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Question 32

Multiple Choice

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Graph 8-3 -According to Graph 8-3, the amount of deadweight loss in this market resulting from the levying of the tax is:

A) $800
B) $400
C) $200
D) $100

E) C) and D)
F) None of the above

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Question 33

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Assume that Jane cleans Joe's house weekly for $80. Joe would be willing to pay as much as $100 weekly to have his house cleaned. Jane's opportunity cost is $70. -According to the information provided, if Jane cleans Joe's house, the producer surplus is:

As the size of a tax decreases:

The deadweight economic loss from taxes:

If the size of a tax doubles, the deadweight loss rises by a factor of six.

Graph 8-2 This graph shows supply and demand in a free market. -According to Graph 8-2, when the market is in equilibrium, producer surplus is represented by area:

'Assume that the supply of forest products is relatively inelastic and the supply of coffee is relatively elastic'. According to this statement, suppose both forest products and coffee have the same percentage tax applied to them, the fall in quantity supplied of forest products will be:

When a tax is levied on a good buyers are worse off but not sellers.

One result of a tax on a good is that the equilibrium quantity sold tends to rise.

Suppose the demand curve becomes more elastic, but nothing else changes, this implies that the deadweight loss from a given tax will be smaller.

Using the graph below for cases of microwave popcorn, calculate: a. equilibrium price. b. equilibrium quantity. c. consumer surplus. d. producer surplus. Now suppose that the government imposes a fat tax $2 tax per case on the sellers of microwave popcorn. Show this on the graph and calculate each of the following after the tax is imposed: e. price paid by buyers f. price received by sellers g. consumer surplus h. producer surplus i. government revenue j. deadweight loss

A tax on a good:

If a tax did not induce buyers or sellers to change their behaviour, it would not cause a deadweight loss.

What happens to the trade revenue when a tax is imposed? Explain.

One of the important economic costs of imposing taxes on a market is the deadweight loss.

Supply-side economics can be a winning strategy in many computer games.

The demand for bread is less elastic than the demand for donuts; hence, ceteris paribus, a tax on bread will create a larger deadweight loss than will the same tax on donuts.

Because taxes distort incentives, they cause markets to allocate resources inefficiently.

Taxes may cause deadweight losses because: