Question 1

Assume that a tax is levied on a good and the government uses the revenue to clean up lethal toxic waste that would cause irreparable harm to a large number of people. In this case there would be:
A) a decrease in consumer surplus to consumers of the taxed good
B) a decrease in producer surplus to producers of the taxed good
C) a probable increase in the total economic welfare of society
D) all of the above would occur

Accepted Answer

A tax on a good typically results in a decrease in consumer surplus because consumers end up paying more for less quantity. Similarly, producer surplus decreases because producers receive less for their goods due to the tax. However, if the tax revenue is used for a beneficial purpose like cleaning up lethal toxic waste, it can lead to an increase in the total economic welfare of society by preventing harm to a large number of people. Therefore, all of the mentioned effects would occur.

Question 2

Graph 8-2
 
-According to Graph 8-2, the amount of deadweight loss in this market resulting from the levying of the tax is:
A) $1500
B) $1125
C) $375
D) $750

Accepted Answer

The answer of Graph 8-2
 
-According to Graph 8-2, the...

Question 3

'Assume that the demand for entertainment is more elastic than the demand for petrol'.
According to this statement, the tax levied on entertainment will cause the loss of consumer surplus to be:
A) zero
B) relatively large
C) relatively small
D) either small or large (depending on the elasticity of supply)

Accepted Answer

If the demand for entertainment is more elastic than the demand for petrol, it means that consumers are more sensitive to changes in the price of entertainment than they are to changes in the price of petrol. Therefore, a tax levied on entertainment will cause a relatively large loss of consumer surplus, as consumers are more likely to reduce their consumption of entertainment in response to the tax.

Question 4

'Assume that the supply of forest products is relatively inelastic and the supply of coffee is relatively elastic'. According to this statement, a tax levied on coffee will cause the loss of producer surplus to be:
A) relatively large
B) relatively small
C) zero
D) either small or large, depending on the elasticity of demand

Accepted Answer

When supply is relatively elastic, producers are more sensitive to changes in price and may have to bear more of the tax burden themselves. On the other hand, when supply is relatively inelastic, producers are less sensitive to changes in price and may be able to pass on the burden of the tax to consumers in the form of higher prices. Therefore, because the supply of coffee is relatively elastic, a tax levied on coffee will result in a greater loss of producer surplus compared to a tax on forest products, which have a relatively inelastic supply.

Question 5

'Assume that the demand for entertainment is more elastic than the demand for petrol'.
According to this statement, compared to the decline in purchases from a similar percentage tax on petrol, we would expect that a tax on entertainment will cause the quantity of entertainment purchased to decline:
A) more
B) less
C) the same
D) neither more nor less

Accepted Answer

Since the demand for entertainment is more elastic than the demand for petrol, a tax on entertainment will have a greater effect on the quantity of entertainment purchased than a similar tax on petrol. Therefore, we would expect the quantity of entertainment purchased to decline more than the quantity of petrol purchased.

Question 6

The amount of deadweight loss from taxes depends on:
A) the price elasticity of demand and supply
B) how much of the tax revenue the government plans to spend
C) the product the government is planning to tax
D) all of the above are correct

Accepted Answer

The deadweight loss from taxes depends on the price elasticity of demand and supply. The more elastic the demand and supply are, the greater the deadweight loss will be. The other options (B and C) may affect the overall impact of the tax, but they do not directly determine the deadweight loss.

Question 7

'Assume that the demand for entertainment is more elastic than the demand for petrol'.
According to this statement, a tax levied on petrol will cause the loss of consumer surplus to be:
A) zero (because raising the price of gasoline has no effect on the amount purchased)
B) relatively large
C) relatively small
D) either small or large (depending on the elasticity of supply)

Accepted Answer

Since the demand for petrol is less elastic (inelastic), consumers are less responsive to price changes. Therefore, a tax on petrol, which raises the price, will result in a relatively small loss of consumer surplus because consumers will continue to buy petrol despite the price increase.

Question 8

The marginal tax rate on labour income for many workers in Australia is almost:
A) 30 per cent
B) 40 per cent
C) 50 per cent
D) 60 per cent

Accepted Answer

The marginal tax rate on labour income for many workers in Australia is almost 50 per cent. This is because the highest marginal tax rate for individuals earning over $180,001 per year in Australia is 45 per cent. In addition, there is also a Medicare levy of 2 per cent for all individuals, which brings the total marginal tax rate to almost 50 per cent.

Question 9

Graph 8-2
 
-According to Graph 8-2, the benefits to the government (total tax revenue) is:
A) $1500
B) $750
C) $1125
D) $375

Accepted Answer

The answer of Graph 8-2
 
-According to Graph 8-2, the...

Question 10

According to the information provided, the total gain in welfare due to the transaction described here is:
A) $15 per week
B) $65 per week
C) $50 per week
D) $45 per week

Accepted Answer

The answer of According to the information provided, the total...

Question 11

Graph 8-2
 
-According to Graph 8-2, the total surplus (consumer, producer and government) with the tax is:
A) $2250
B) $1500
C) $1875
D) $1125

Accepted Answer

The total surplus is the sum of consumer surplus, producer surplus, and government revenue. From the graph, we can see that consumer surplus is $750, producer surplus is $1125, and government revenue is $375. Therefore, the total surplus is $750 + $1125 + $375 = $2250.

Question 12

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

Accepted Answer

When both demand and supply are elastic, a tax will result in a significant change in the quantity traded, and as a result, there will be a greater deadweight loss from the tax. In other words, the greater the elasticity, the more distortion the tax creates in the market, leading to a higher deadweight loss. So, option C is the correct answer.

Question 13

Graph 8-2
 
-According to Graph 8-2, the total surplus (consumer, producer and government) before the tax is:
A) $6000
B) $3000
C) $1500
D) $750

Accepted Answer

The answer of Graph 8-2
 
-According to Graph 8-2, the...

Question 14

Suppose the Government is looking to raise revenue by taxing a market and has hired you for advice on minimising the deadweight loss of taxation. In identifying which market to tax, you would advise the government to choose a market where:
A) supply is highly inelastic and demand is elastic
B) supply is highly elastic and demand is inelastic
C) any market where both supply or demand is highly inelastic
D) any market where both supply or demand is highly elastic

Accepted Answer

The answer of Suppose the Government is looking to raise...

Question 15

'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:
A) more than the fall in quantity supplied of coffee
B) less than the fall in quantity supplied of coffee
C) equal to the fall in quantity supplied of coffee
D) either more or less than the fall in quantity supplied of coffee, depending on the elasticity of demand

Accepted Answer

If the supply of forest products is relatively inelastic, it means that the quantity supplied will not change much even if there is a change in price. On the other hand, if the supply of coffee is relatively elastic, it means that the quantity supplied will change significantly in response to a change in price.

Assuming that both products are taxed equally, the price of both forest products and coffee will increase by the same percentage. However, since the supply of forest products is relatively inelastic, the increase in price will lead to a proportionally smaller decrease in quantity supplied compared to coffee, which has a relatively elastic supply.

Therefore, the fall in quantity supplied of forest products will be less than the fall in quantity supplied of coffee. Choice B is correct.

Question 16

According to the information provided, what will be Don's gain in consumer surplus as a result of the proposed transaction?
A) Don will gain $15 per week
B) Don will gain $45 per week
C) Don will gain $35 per week
D) Don will gain not consumer surplus

Accepted Answer

The answer of According to the information provided, what will...

Question 17

Suppose supply is perfectly inelastic, while demand is relatively elastic. A tax of $1.00 is levied on the purchasers of the good. Which of the following statements is correct?
A) the government will fail to raise any tax revenue
B) there will be a positive deadweight loss
C) there will be no deadweight loss
D) government revenue will be less than the deadweight loss of the tax.

Accepted Answer

When supply is perfectly inelastic, it means that the quantity supplied does not change in response to changes in price. Therefore, the entire burden of the tax will be borne by the buyers, and there will be no change in the quantity sold. Since demand is relatively elastic, it means that buyers are responsive to changes in price, and the tax will result in a higher price, but not a significant decrease in the quantity sold. Therefore, the tax incidence falls entirely on the buyers, and there is no deadweight loss. The government will raise tax revenue equal to the amount of the tax ($1.00).

Question 18

Graph 8-2
 
-According to Graph 8-2, the reduction in producer surplus caused by the tax is:
A) $750
B) $1125
C) $375
D) $1000

Accepted Answer

The answer of Graph 8-2
 
-According to Graph 8-2, the...

Question 19

Assume that the demand for salt is relatively inelastic and the demand for orange juice is relatively elastic. Compared to the deadweight loss from the same percentage tax on orange juice, the deadweight loss from imposing a tax on salt would be:
A) greater
B) lesser
C) neither greater nor lesser
D) either greater or lesser

Accepted Answer

The deadweight loss from imposing a tax on salt would be lesser than the deadweight loss from the same percentage tax on orange juice. This is because the demand for salt is relatively inelastic, meaning that consumers are not very responsive to changes in price. As a result, they will continue to purchase salt even if the price increases due to the tax. On the other hand, the demand for orange juice is relatively elastic, meaning that consumers are very responsive to changes in price. If the price of orange juice increases due to the tax, consumers may switch to alternative beverages, resulting in a larger deadweight loss.

Question 20

According to the information provided, what will be Phil's gain in producer surplus as a result of the proposed transaction?
A) Phil will gain $30 per week
B) Phil will gain $15 per week
C) Phil will gain $45 per week
D) Phil will gain no producer surplus

Accepted Answer

Phil's producer surplus is the difference between the market price of $50 and his cost of production, which is $20. Thus, his current producer surplus is $30 per week. If he agrees to sell to the second buyer at a higher price of $70, his new producer surplus will be $50 - $20 = $30 per week + an additional $30 from the second buyer, which equals to $60. Therefore, Phil's gain in producer surplus will be $30 per week (Option A).

Quiz 8: Application: the Costs of Taxation

Assume that a tax is levied on a good and the government uses the revenue to clean up lethal toxic waste that would cause irreparable harm to a large number of people. In this case there would be:

Graph 8-2 -According to Graph 8-2, the amount of deadweight loss in this market resulting from the levying of the tax is:

'Assume that the demand for entertainment is more elastic than the demand for petrol'. According to this statement, the tax levied on entertainment will cause the loss of consumer surplus to be:

'Assume that the supply of forest products is relatively inelastic and the supply of coffee is relatively elastic'. According to this statement, a tax levied on coffee will cause the loss of producer surplus to be:

The amount of deadweight loss from taxes depends on:

'Assume that the demand for entertainment is more elastic than the demand for petrol'. According to this statement, a tax levied on petrol will cause the loss of consumer surplus to be:

The marginal tax rate on labour income for many workers in Australia is almost:

Graph 8-2 -According to Graph 8-2, the benefits to the government (total tax revenue) is:

According to the information provided, the total gain in welfare due to the transaction described here is:

Graph 8-2 -According to Graph 8-2, the total surplus (consumer, producer and government) with the tax is:

The greater the elasticities of demand and supply the:

Graph 8-2 -According to Graph 8-2, the total surplus (consumer, producer and government) before the tax is:

Suppose the Government is looking to raise revenue by taxing a market and has hired you for advice on minimising the deadweight loss of taxation. In identifying which market to tax, you would advise the government to choose a market where:

'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:

According to the information provided, what will be Don's gain in consumer surplus as a result of the proposed transaction?

Suppose supply is perfectly inelastic, while demand is relatively elastic. A tax of $1.00 is levied on the purchasers of the good. Which of the following statements is correct?

Graph 8-2 -According to Graph 8-2, the reduction in producer surplus caused by the tax is:

Assume that the demand for salt is relatively inelastic and the demand for orange juice is relatively elastic. Compared to the deadweight loss from the same percentage tax on orange juice, the deadweight loss from imposing a tax on salt would be:

According to the information provided, what will be Phil's gain in producer surplus as a result of the proposed transaction?