Question 1

The more inelastic are demand and supply, the greater is the deadweight loss of a tax.

Accepted Answer

The more elastic are demand and supply, the greater is the deadweight loss of a tax, because consumers and producers are more responsive to price changes, leading to larger reductions in quantity traded.

Question 2

The most important tax in the U.S. economy is the tax on corporations' profits.

Accepted Answer

While taxes on corporations' profits are significant, there are several other important taxes in the U.S. economy, including income taxes on individuals, sales taxes, property taxes, and payroll taxes.

Question 3

When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is relatively inelastic.

Accepted Answer

When demand is relatively elastic, consumers are more sensitive to changes in price and therefore are more likely to reduce their quantity demanded in response to a tax, resulting in a larger decrease in overall quantity transacted and a larger deadweight loss. On the other hand, when demand is relatively inelastic, consumers are less sensitive to changes in price and therefore are more likely to continue purchasing despite the tax, resulting in a smaller decrease in overall quantity transacted and a smaller deadweight loss.

Question 4

The Social Security tax, and to a large extent, the federal income tax, are labor taxes.

Accepted Answer

The Social Security tax is specifically a tax on employment income, while the federal income tax is largely based on income earned from labor. Therefore, both are considered labor taxes.

Question 5

When a tax is imposed on a good, consumer surplus decreases and producer surplus remains unchanged.

Accepted Answer

When a tax is imposed on a good, both consumer surplus and producer surplus are affected. Consumer surplus decreases because the price paid by consumers increases, while producer surplus decreases because the price received by producers decreases. The amount of decrease in each surplus depends on the elasticities of supply and demand for the good.

Question 6

The greater the elasticity of demand, the smaller the deadweight loss of a tax.

Accepted Answer

The answer of The greater the elasticity of demand, the...

Question 7

When a tax is imposed on a good, the resulting decrease in consumer surplus is always larger than the resulting decrease in producer surplus.

Accepted Answer

The decrease in consumer surplus and producer surplus due to a tax depends on the elasticities of demand and supply. If demand is more elastic than supply, the decrease in producer surplus will be larger than the decrease in consumer surplus, and vice versa.

Question 8

As the price elasticities of supply and demand increase, the deadweight loss from a tax increases.

Accepted Answer

When both demand and supply are more elastic (responsive to price changes), a tax leads to a larger reduction in quantity traded, resulting in a larger deadweight loss. Therefore, an increase in price elasticities of supply and demand leads to an increase in the deadweight loss from a tax.

Question 9

Economists disagree on whether labor taxes have a small or large deadweight loss.

Accepted Answer

While there is some debate, most economists agree that labor taxes have a sizable deadweight loss, with the exact magnitude depending on factors such as the elasticity of labor supply and the tax rate.

Question 10

A tax on insulin is likely to cause a very large deadweight loss to society.

Accepted Answer

The answer of A tax on insulin is likely to...

Question 11

Taxes drive a wedge into the market by raising the price that sellers receive and lowering the price that buyers pay.

Accepted Answer

Taxes drive a wedge into the market by raising the price that buyers pay and lowering the price that sellers receive, not the other way around.

Question 12

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

Accepted Answer

The demand for bread is typically more inelastic than the demand for donuts because bread is considered a basic staple food, while donuts are more of a luxury or non-essential item. Inelastic demand means consumers are less sensitive to price changes, so a tax on bread would likely result in a smaller deadweight loss compared to the same tax on donuts, as consumers would continue to buy bread despite the price increase, leading to less distortion in the market.

Question 13

The elasticities of the supply and demand curves in the market for cigarettes affect how much a tax distorts that market.

Accepted Answer

The elasticities of supply and demand curves determine how much a tax shifts the market equilibrium and affects the quantity and price of the product. If either curve is more elastic (responsive to changes in price), the tax will have a bigger distortion effect on the market.

Question 14

Taxes on labor tend to encourage second earners to stay at home rather than work in the labor force.

Accepted Answer

When taxes on labor increase, the cost of working increases, which in turn reduces the net income earned from working. This can make it economically feasible for second earners, such as a spouse or partner, to stay at home rather than work.

Question 15

Tax revenue equals the size of the tax multiplied by the quantity sold in the market after the tax is levied.

Accepted Answer

This is the correct formula for calculating tax revenue in a market after the tax has been imposed.

Question 16

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

Accepted Answer

This is because if buyers and sellers do not change their behavior in response to the tax, there will be no inefficiency in the market and therefore no deadweight loss. However, in most cases, taxes do induce some level of behavioral change which leads to the loss of welfare known as deadweight loss.

Question 17

Taxes on labor tend to encourage the elderly to retire early.

Accepted Answer

Taxes on labor decrease the net income earned by individuals, thus making retirement more attractive. The elderly, who have already earned a considerable amount of money and may have retirement savings, may be more likely to retire early when faced with high taxes on their labor income.

Question 18

The larger the deadweight loss from taxation, the larger the cost of government programs.

Accepted Answer

Deadweight loss is the loss of economic efficiency that occurs when the optimal level of goods and services are not produced due to distortions caused by taxes or other market inefficiencies. When deadweight loss from taxation is large, it means that there is a significant distortion in the market and fewer goods and services are being produced than would be the case in a more efficient market. This can lead to higher costs for government programs as they may need to provide additional support or subsidies to offset the negative effects of the tax. Therefore, the larger the deadweight loss from taxation, the larger the cost of government programs.

Question 19

Taxes create deadweight losses.

Accepted Answer

Taxes create deadweight losses because they alter the behavior of buyers and sellers, causing them to trade less and reducing the overall efficiency of the market. The deadweight loss is the reduction in economic activity that results from the tax, and it represents a loss of potential economic output.

Question 20

Taxes on labor tend to increase the number of hours that people choose to work.

Accepted Answer

Taxes on labor increase the cost of hiring workers, which can lead to less demand for labor and fewer hours worked.

Quiz 8: Applications: the Costs of Taxation