Question 1

The graph that represents the amount of deadweight loss (measured on the vertical axis) as a function of the size of the tax (measured on the horizontal axis) looks like
A)a U.
B)an upside-down U.
C)a horizontal straight line.
D)an upward-sloping curve.

Accepted Answer

The answer of The graph that represents the amount of...

Question 2

With linear demand and supply curves in a market, suppose a tax of $0.20 per unit on a good creates a deadweight loss of $40. If the tax is increased to $0.50 per unit, the deadweight loss from the new tax will be
A)$200.
B)$250.
C)$475.
D)$625.

Accepted Answer

The answer of With linear demand and supply curves in...

Question 3

The Laffer curve relates
A)the tax rate to tax revenue raised by the tax.
B)the tax rate to the deadweight loss of the tax.
C)the price elasticity of supply to the deadweight loss of the tax.
D)government welfare payments to the birth rate.

Accepted Answer

The Laffer curve shows the relationship between tax rates and tax revenue. As tax rates increase, tax revenue initially increases but eventually reaches a point where further increases in tax rates lead to a decrease in tax revenue due to disincentives to work, invest, and consume. This occurs because higher tax rates make it less attractive for taxpayers to engage in economic activity, leading to a decline in economic growth and a subsequent decrease in tax revenue.

Question 4

In which of the following instances would the deadweight loss of the tax on airline tickets increase by a factor of 9?
A)The tax on airline tickets increases from $20 per ticket to $60 per ticket.
B)The tax on airline tickets increases from $20 per ticket to $90 per ticket.
C)The tax on airline tickets increases from $15 per ticket to $60 per ticket.
D)The tax on airline tickets increases from $15 per ticket to $135 per ticket.

Accepted Answer

The answer of In which of the following instances would...

Question 5

Ronald Reagan believed that reducing income tax rates would
A)do little, if anything, to encourage hard work.
B)result in large increases in deadweight losses.
C)raise economic well-being and perhaps even tax revenue.
D)lower economic well-being, even though tax revenue could possibly increase.

Accepted Answer

Ronald Reagan subscribed to supply-side economics, which holds that lower tax rates provide incentives for people to work, save, and invest more, leading to higher economic growth and prosperity. This theory suggests that lower tax rates may generate more tax revenue for the government by increasing the size of the economic pie. While there may be some deadweight losses associated with taxation, Reagan believed that the benefits of lower tax rates outweighed the costs. Therefore, Reagan's view was that reducing income tax rates would raise economic well-being and perhaps even tax revenue.

Question 6

Assume that for good X the supply curve for a good is a typical, upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. If the good is taxed, and the tax is tripled, the
A)base of the triangle that represents the deadweight loss triples.
B)height of the triangle that represents the deadweight loss triples.
C)deadweight loss of the tax increases by a factor of nine.
D)All of the above are correct.

Accepted Answer

The answer of Assume that for good X the supply...

Question 7

Supply-side economics is a term associated with the views of
A)Ronald Reagan and Arthur Laffer.
B)Karl Marx.
C)Bill Clinton and Greg Mankiw.
D)Milton Friedman.

Accepted Answer

Supply-side economics is closely associated with the policies of Ronald Reagan and the economic ideas of Arthur Laffer, who developed the Laffer Curve to illustrate the relationship between tax rates and government revenue.

Question 8

Which of the following events always would increase the size of the deadweight loss that arises from the tax on gasoline?
A)The demand for gasoline becomes more inelastic.
B)The slope of the supply curve for gasoline becomes steeper.
C)The amount of the tax per gallon of gasoline increases.
D)All of the above are correct.

Accepted Answer

Increasing the tax per gallon of gasoline will increase the deadweight loss as it leads to a larger discrepancy between the price consumers pay and the price producers receive, reducing the quantity traded and increasing inefficiencies in the market. A and B are incorrect as they could potentially decrease or increase the deadweight loss depending on the magnitude of the change in demand elasticity or supply slope.

Question 9

Which of the following scenarios is consistent with the Laffer curve?
A)The tax rate is 1 percent, and tax revenue is very low.
B)The tax rate is 1 percent, and tax revenue is very high.
C)The tax rate is 99 percent, and tax revenue is very high.
D)The tax rate is moderate (between very high and very low), and tax revenue is very low.

Accepted Answer

The answer of Which of the following scenarios is consistent...

Question 10

In which of the following instances would the deadweight loss of the tax on cartons of cigarettes increase by a factor of 9?
A)The tax on cartons of cigarettes increases from $10 to $11.11.
B)The tax on cartons of cigarettes increases from $10 to $20.
C)The tax on cartons of cigarettes increases from $10 to $30.
D)The tax on cartons of cigarettes increases from $10 to $90.

Accepted Answer

The answer of In which of the following instances would...

Question 11

Suppose that the market for large, 64-ounce soft drinks in the town of Pudgyville is characterized by a typical, downward-sloping, linear demand curve and a typical, upward-sloping, linear supply curve. The market is initially in equilibrium with 1,000 soft drinks sold per day. The newly-elected Mayor of Pudgyville wants to tax 64-ounce soft drinks. She is considering either a $0.10 tax or a $0.30 tax. Her chief economic advisor estimates that the number of soft drinks sold after a $0.10 tax will be 900 and after a $0.30 tax will be 500. Which tax is better?
A)The $0.10 tax is better because it raises more revenue and creates a lower deadweight loss than the $0.30 tax.
B)The $0.30 tax is better because it raises more revenue and creates a lower deadweight loss than the $0.10 tax.
C)It is not clear which tax is better because although the $0.30 tax raises more tax revenues, it creates a larger deadweight loss than the $0.10 tax.
D)It is not clear which tax is better because although the $0.10 tax raises more tax revenues, it creates a larger deadweight loss than the $0.30 tax.

Accepted Answer

Both taxes will increase the price of 64-ounce soft drinks and reduce the quantity demanded. However, the $0.30 tax will have a larger effect on reducing quantity demanded than the $0.10 tax. As a result, the $0.30 tax will create a larger deadweight loss, which represents a loss of consumer and producer surplus due to the inefficiency of the tax. Although the $0.30 tax raises more tax revenue, this is not enough to offset the larger deadweight loss. Therefore, the $0.10 tax is a better choice because it creates a lower deadweight loss than the $0.30 tax, even though it raises less tax revenue.

Question 12

Suppose the tax on gasoline is decreased from $0.60 per gallon to $0.40 per gallon. As a result,
A)tax revenue necessarily decreases.
B)the deadweight loss of the tax necessarily decreases.
C)the demand curve for gasoline necessarily becomes steeper.
D)the supply curve for gasoline necessarily becomes flatter.

Accepted Answer

When the tax on gasoline is decreased, the price for gasoline decreases as well, which increases the quantity demanded. This increase in demand results in a smaller deadweight loss of the tax. The decrease in tax revenue is not necessarily true as the increase in quantity demanded may compensate for the decrease in tax rate. The demand and supply curves for gasoline may shift, but it is not necessary for them to become steeper or flatter.

Question 13

According to Arthur Laffer, the graph that represents the amount of tax revenue (measured on the vertical axis) as a function of the size of the tax (measured on the horizontal axis) looks like
A)a U.
B)an upside-down U.
C)a horizontal straight line.
D)an upward-sloping line or curve.

Accepted Answer

This is known as the Laffer Curve, which shows that at some point increasing tax rates will actually decrease tax revenue, as taxpayers may reduce their work effort, shift to the underground economy, or engage in tax avoidance strategies. The curve is upward-sloping at low tax rates (indicating that increasing the tax rate will increase revenue), but eventually reaches a peak and then begins to slope downward. The point of maximum revenue is often referred to as the "revenue-maximizing rate."

Question 14

Which of the following events is consistent with an increase in the deadweight loss of the gasoline tax from $30 million to $120 million?
A)The tax on gasoline increases from $0.30 per gallon to $0.45 per gallon.
B)The tax on gasoline increases from $0.30 per gallon to $0.60 per gallon.
C)The tax on gasoline increases from $0.25 per gallon to $0.45 per gallon.
D)The tax on gasoline increases from $0.25 per gallon to $1.00 per gallon.

Accepted Answer

The answer of Which of the following events is consistent...

Question 15

The view held by Arthur Laffer and Ronald Reagan that cuts in tax rates would encourage people to increase the quantity of labor they supplied became known as
A)California economics.
B)welfare economics.
C)supply-side economics.
D)elasticity economics.

Accepted Answer

The view held by Arthur Laffer and Ronald Reagan that cuts in tax rates would encourage people to increase the quantity of labor they supplied became known as supply-side economics.

Question 16

Assume that for good X the supply curve for a good is a typical, upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. If the good is taxed, and the tax is doubled, the
A)base of the triangle that represents the deadweight loss doubles.
B)height of the triangle that represents the deadweight loss doubles.
C)deadweight loss of the tax quadruples.
D)All of the above are correct.

Accepted Answer

The answer of Assume that for good X the supply...

Question 17

Suppose a tax of $0.10 per unit on a good creates a deadweight loss of $100. If the tax is increased to $0.25 per unit, the deadweight loss from the new tax would be
A)$200.
B)$250.
C)$475.
D)$625.

Accepted Answer

The answer of Suppose a tax of $0.10 per unit...

Question 18

Suppose a tax of $0.50 per unit on a good creates a deadweight loss of $100. If the tax is increased to $2.50 per unit, the deadweight loss from the new tax would be
A)$200.
B)$250.
C)$500.
D)$2,500.

Accepted Answer

The answer of Suppose a tax of $0.50 per unit...

Question 19

Assume that for good X the supply curve for a good is a typical, upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. If the good is taxed, and the tax is doubled, the
A)base of the triangle that represents the deadweight loss quadruples.
B)height of the triangle that represents the deadweight loss doubles.
C)deadweight loss of the tax doubles.
D)All of the above are correct.

Accepted Answer

The answer of Assume that for good X the supply...

Question 20

The higher a country's tax rates, the more likely that country will be
A)at the top of the Laffer curve.
B)on the positively sloped part of the Laffer curve.
C)on the negatively sloped part of the Laffer curve.
D)experiencing small deadweight losses.

Accepted Answer

The Laffer curve shows the relationship between tax rates and government revenue. At low tax rates, increasing tax rates will increase government revenue, but at some point, further increases in tax rates will lead to decreases in government revenue as people and businesses have less incentive to work and invest. This is known as the negatively sloped part of the Laffer curve. Therefore, if a country has high tax rates, it is more likely to be on the negatively sloped part of the Laffer curve, where further increases in tax rates will lead to lower government revenue due to decreases in economic activity.

Quiz 8: Application: The Costs of Taxation

The graph that represents the amount of deadweight loss (measured on the vertical axis) as a function of the size of the tax (measured on the horizontal axis) looks like

With linear demand and supply curves in a market, suppose a tax of $0.20 per unit on a good creates a deadweight loss of $40. If the tax is increased to $0.50 per unit, the deadweight loss from the new tax will be

The Laffer curve relates

In which of the following instances would the deadweight loss of the tax on airline tickets increase by a factor of 9?

Ronald Reagan believed that reducing income tax rates would

Assume that for good X the supply curve for a good is a typical, upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. If the good is taxed, and the tax is tripled, the

Supply-side economics is a term associated with the views of

Which of the following events always would increase the size of the deadweight loss that arises from the tax on gasoline?

Which of the following scenarios is consistent with the Laffer curve?

In which of the following instances would the deadweight loss of the tax on cartons of cigarettes increase by a factor of 9?

Suppose the tax on gasoline is decreased from $0.60 per gallon to $0.40 per gallon. As a result,

According to Arthur Laffer, the graph that represents the amount of tax revenue (measured on the vertical axis) as a function of the size of the tax (measured on the horizontal axis) looks like

Which of the following events is consistent with an increase in the deadweight loss of the gasoline tax from $30 million to $120 million?

The view held by Arthur Laffer and Ronald Reagan that cuts in tax rates would encourage people to increase the quantity of labor they supplied became known as

Assume that for good X the supply curve for a good is a typical, upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. If the good is taxed, and the tax is doubled, the

Suppose a tax of $0.10 per unit on a good creates a deadweight loss of $100. If the tax is increased to $0.25 per unit, the deadweight loss from the new tax would be

Suppose a tax of $0.50 per unit on a good creates a deadweight loss of $100. If the tax is increased to $2.50 per unit, the deadweight loss from the new tax would be

Assume that for good X the supply curve for a good is a typical, upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. If the good is taxed, and the tax is doubled, the

The higher a country's tax rates, the more likely that country will be