Question 1

When a tax is imposed on a good or service, the
A)revenue gained by the government is the excess burden.
B)deadweight loss that arises from a tax is the excess burden.
C)share of the tax paid by the buyer is the excess burden.
D)share of the tax paid by the seller is the excess burden.
E)amount the government collects as tax revenue is the deadweight loss from the tax.

Accepted Answer

The deadweight loss that arises from a tax is the excess burden. This is because taxes create a distortion in the market by altering the price and quantity demanded and supplied. The deadweight loss represents the loss of welfare that occurs due to the reduction in mutually beneficial transactions as a result of the tax.

Question 2

If a $1 sales tax is imposed on the sale of a CD, and neither the demand nor the supply is perfectly elastic or perfectly inelastic, then the price of a CD paid by consumers will
A)increase by $1 and fewer CDs will be bought.
B)increase by less than $1 and fewer CDs will be bought.
C)not change and the same number of CDs will be bought.
D)increase by $1 and the same number of CDs will be bought.
E)increase by more than $1 and fewer CDs will be bought.

Accepted Answer

When a $1 sales tax is imposed, the price paid by consumers will increase by less than $1 because some of the tax will be absorbed by the producers. The quantity demanded will decrease because the increase in price will make CDs relatively more expensive compared to other goods, and consumers will substitute away from CDs. However, the decrease in quantity demanded will not be as much as if the demand were perfectly elastic, meaning that consumers are not willing to completely give up buying CDs despite the price increase. Therefore, the answer is B.

Question 3

Suppose the elasticity of demand for Mexican food is 3.00 and the elasticity of supply is 1.20. If the government imposes a sales tax on Mexican food, which of the following occurs?
I. Less Mexican food is purchased by buyers.
Ii. Less Mexican food is produced by sellers.
Iii. The government receives the excess burden as revenue.
Iv. Both the consumer and the producer surplus decrease.
A)i and ii
B)iii only
C)i, ii, and iv
D)iv only
E)i, ii, iii, and iv

Accepted Answer

The imposition of a sales tax on Mexican food will lead to an increase in its price, which will result in a decrease in the quantity demanded by buyers (i) and a decrease in the quantity supplied by sellers (ii). Both consumer and producer surplus will decrease (iv) as a result of the tax. Additionally, since the elasticity of demand is higher than the elasticity of supply, the burden of the tax will be disproportionately borne by buyers, which leads to a decrease in total surplus. The revenue generated by the tax will be received by the government, but it is not considered as an excess burden. Therefore, the statement iii is incorrect.

Question 4

The deadweight loss from a tax
A)is the tax revenue the government collects when people die.
B)is the split of a tax between the amount paid and the amount collected.
C)equals the amount collected as revenue from the tax.
D)is called the excess burden of the tax.
E)equals the amount collected as revenue from the tax plus the excess burden of the tax.

Accepted Answer

The deadweight loss from a tax is called the excess burden of the tax. It is the loss of economic efficiency that occurs when the production and consumption of a good or service is reduced due to the tax, resulting in a loss of potential welfare that could have been gained from the traded goods or services. It is not the tax revenue collected.

Question 5

-The above figure shows the supply curves in four different markets. If each of the markets has an identical downward sloping demand curve and the same tax is levied on suppliers, which market would produce the largest amount of deadweight loss?
A)A
B)B
C)C
D)D
E)A and D

Accepted Answer

The answer of 
-The above figure shows the supply curves...

Question 6

Neither the supply of nor demand for a good is perfectly elastic or perfectly inelastic. So, imposing a tax on the good results in a ________ in the price paid by buyers and ________ in the equilibrium quantity.
A)rise; an increase
B)rise; a decrease
C)fall; an increase
D)fall; a decrease
E)a rise; no change

Accepted Answer

When both supply and demand are not perfectly elastic or inelastic, the imposition of a tax on the good will result in a rise in the price paid by buyers and a decrease in the equilibrium quantity. This is because the burden of the tax is shared by both buyers and sellers, leading to a higher price for buyers and a lower quantity demanded by them, while the sellers receive a lower effective price and reduce the quantity supplied. This leads to a decrease in the equilibrium quantity traded. Therefore, option B is the correct answer.

Question 7

-The above figure shows the supply curves in four different markets. If each of the markets has an identical downward sloping demand curve and the same tax is levied on suppliers, which market would produce the smallest amount of deadweight loss?
A)A
B)B
C)C
D)D
E)A and D

Accepted Answer

The answer of 
-The above figure shows the supply curves...

Question 8

Tax incidence refers to
A)how government taxes are spent by the government.
B)the incidences of tax revolts by the taxpayers.
C)the amount of a tax minus its burden.
D)the division of the burden of a tax between the buyer and the seller.
E)tax revenue minus excess burden.

Accepted Answer

Tax incidence refers to the division of the burden of a tax between the buyer and the seller. It refers to who ultimately bears the economic cost of a tax, whether it is the consumers, the producers, or both.

Question 9

-The demand for apple pies is perfectly elastic. If the government taxes apple pies at $1 a pie, then ________.
A)the seller pays the entire tax
B)the buyer pays the entire tax
C)the seller and the buyer split the tax evenly
D)the seller and the buyer split the tax but the seller pays more
E)who pays the tax depends on whether the government imposes the tax on pie buyers or on pie sellers

Accepted Answer

The answer of 
-The demand for apple pies is perfectly...

Question 10

-The above figure shows the demand curves in four different markets. If each of the markets has an identical upward sloping supply curve and the same tax is levied on suppliers, which market would produce the smallest amount of deadweight loss?
A)A
B)B
C)C
D)D
E)C and D

Accepted Answer

The answer of 
-The above figure shows the demand curves...

Question 11

-The above figure shows the demand curves in four different markets. If each of the markets has an identical upward sloping supply curve and the same tax is levied on suppliers, which market would produce the largest amount of deadweight loss?
A)A
B)B
C)C
D)D
E)C and D

Accepted Answer

The answer of 
-The above figure shows the demand curves...

Question 12

Neither the supply of nor demand for a good is perfectly elastic or perfectly inelastic. So, imposing a tax on the good results in a ________ in the price received and kept by sellers and a ________ in the price paid by buyers.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall
E)no change; rise

Accepted Answer

Imposing a tax on a good typically results in a fall in the price received by sellers, as part of the price now goes to the government in the form of tax. For buyers, the price paid rises because the tax often gets passed on to them, increasing the overall cost of the good.

Question 13

The buyer will pay the entire tax levied on a good when the demand for the good is ________ or when the supply of the good is ________.
A)perfectly elastic; perfectly inelastic
B)perfectly elastic; perfectly elastic
C)perfectly inelastic; perfectly inelastic
D)perfectly inelastic; perfectly elastic
E)unit elastic; unit elastic

Accepted Answer

When the demand for a good is perfectly inelastic, the buyers are willing to pay any price for the good and therefore will bear the entire tax burden. Similarly, when the supply of a good is perfectly elastic, the sellers are willing to supply any quantity at a given price, and the tax burden will be fully passed on to the buyers. These scenarios are reflected in choice D.

Question 14

-The graph shows the market for textbooks. If the government introduces a tax of $20 a textbook, then the price paid by buyers ________.
A)increases by $20
B)increases to $80 a textbook
C)decreases to $60 a textbook
D)is $70 a textbook
E)does not change because the demand for textbooks is perfectly elastic

Accepted Answer

The answer of 
-The graph shows the market for textbooks....

Question 15

-At harvest time the supply of wheat is perfectly inelastic. If the government taxes wheat at $1 a bushel, then
A)the seller pays the entire tax.
B)the buyer pays the entire tax.
C)the seller and the buyer split the tax evenly.
D)the seller and the buyer split the tax but the seller pays more.
E)no one pays the tax because the wheat must be harvested or it will go to waste.

Accepted Answer

The answer of 
-At harvest time the supply of wheat...

Question 16

The excess burden of a tax refers to the fact that
A)the benefits from a tax exceed the tax revenue.
B)the deadweight loss from a tax exceeds the remaining consumer surplus.
C)marginal cost is greater than marginal benefit after the tax.
D)a tax creates a deadweight loss.
E)taxes are split between buyers and sellers.

Accepted Answer

The excess burden of a tax refers to the deadweight loss that is created when a tax is imposed. Deadweight loss is the loss of economic efficiency that occurs when the allocation of resources is not Pareto efficient. This means that the cost of the tax exceeds the benefits, resulting in a loss of economic welfare for society as a whole.

Question 17

To determine who bears the greater share of a tax, we compare the
A)number of buyers to the number of sellers.
B)elasticity of supply to the elasticity of demand.
C)size of the tax to the price of the good.
D)government tax revenue to the revenue collected by the suppliers.
E)pre-tax quantity to the post-tax quantity.

Accepted Answer

The elasticity of supply and demand determines how much the quantity supplied and demanded will change in response to a change in price (in this case, due to the imposition of a tax). The more inelastic side (less responsive to price changes) will bear a greater share of the tax burden. Therefore, we compare the elasticity of supply and demand to determine who bears the greater share of the tax.

Question 18

Suppose the demand for barley is perfectly elastic. The supply curve of barley is upward sloping. If a tax is imposed on barley,
A)barley sellers pay the entire tax.
B)barley buyers pay the entire tax.
C)the government pays the entire tax.
D)the tax is split evenly between barley buyers and sellers.
E)who pays the tax depends on whether the government imposes the tax on barley sellers or on barley buyers.

Accepted Answer

The answer of Suppose the demand for barley is perfectly...

Question 19

The deadweight loss of a tax
A)is the transfer of income from households to the government.
B)determines the incidence of a tax.
C)is part of the total burden of a tax.
D)is greater than the total burden of a tax.
E)equals the tax revenue collected by the government.

Accepted Answer

The deadweight loss of a tax is the reduction in economic efficiency that occurs when a tax is imposed, resulting in a loss of economic surplus. It is a part of the total burden of a tax, which includes both the deadweight loss and the tax revenue collected by the government. Option A is incorrect because it only refers to the tax revenue transfer. Option B is incorrect because it refers to the incidence rather than the deadweight loss. Option D is incorrect because the deadweight loss is a part of the total burden, not greater than it. Option E is incorrect because the deadweight loss is not equal to the tax revenue collected.

Question 20

The supply of oil is more elastic than the demand for oil. If oil is taxed $10 per barrel, how will the tax be divided between the buyer and seller?
A)The seller will pay more of the tax than the buyer pays.
B)The buyer will pay more of the tax than the seller pays.
C)The seller and buyer will split the tax evenly.
D)The seller will pay the entire tax.
E)The buyer will pay the entire tax.

Accepted Answer

Since the supply of oil is more elastic than the demand for oil, the burden of the tax will fall more heavily on the buyer than the seller. This is because the seller can more easily adjust their quantity supplied in response to a change in price (by decreasing the amount they supply), while the buyer is likely to continue demanding oil even at a higher price. Therefore, the buyer will end up paying more of the tax than the seller.

Quiz 7: Government Actions in Markets

When a tax is imposed on a good or service, the

If a $1 sales tax is imposed on the sale of a CD, and neither the demand nor the supply is perfectly elastic or perfectly inelastic, then the price of a CD paid by consumers will

The deadweight loss from a tax

-The above figure shows the supply curves in four different markets. If each of the markets has an identical downward sloping demand curve and the same tax is levied on suppliers, which market would produce the largest amount of deadweight loss?

Neither the supply of nor demand for a good is perfectly elastic or perfectly inelastic. So, imposing a tax on the good results in a in the price paid by buyers and in the equilibrium quantity.

-The above figure shows the supply curves in four different markets. If each of the markets has an identical downward sloping demand curve and the same tax is levied on suppliers, which market would produce the smallest amount of deadweight loss?

Tax incidence refers to

-The demand for apple pies is perfectly elastic. If the government taxes apple pies at $1 a pie, then ________.

-The above figure shows the demand curves in four different markets. If each of the markets has an identical upward sloping supply curve and the same tax is levied on suppliers, which market would produce the smallest amount of deadweight loss?

-The above figure shows the demand curves in four different markets. If each of the markets has an identical upward sloping supply curve and the same tax is levied on suppliers, which market would produce the largest amount of deadweight loss?

Neither the supply of nor demand for a good is perfectly elastic or perfectly inelastic. So, imposing a tax on the good results in a in the price received and kept by sellers and a in the price paid by buyers.

The buyer will pay the entire tax levied on a good when the demand for the good is or when the supply of the good is .

-The graph shows the market for textbooks. If the government introduces a tax of $20 a textbook, then the price paid by buyers ________.

-At harvest time the supply of wheat is perfectly inelastic. If the government taxes wheat at $1 a bushel, then

The excess burden of a tax refers to the fact that

To determine who bears the greater share of a tax, we compare the

Suppose the demand for barley is perfectly elastic. The supply curve of barley is upward sloping. If a tax is imposed on barley,

The deadweight loss of a tax

The supply of oil is more elastic than the demand for oil. If oil is taxed $10 per barrel, how will the tax be divided between the buyer and seller?