Question 1

Leonard, Sheldon, Raj, and Penny each like science fiction moves. The price of a special boxed set of Star Trek DVDs is $50. Leonard values the set of movies at $70, Sheldon at $65, Raj at $60, and Penny at $55. Suppose that if the government taxes DVDs at $10 each, the price rises to $60. A consequence of the tax is that consumer surplus shrinks by
A)$50 and tax revenues increase by $30, so there is a deadweight loss of $20.
B)$35 and tax revenues increase by $30, so there is a deadweight loss of $5.
C)$20 and tax revenues increase by $20, so there is no deadweight loss.
D)$15 and tax revenues increase by $20, so there is no deadweight loss.

Accepted Answer

Before the tax, the total value that Leonard, Sheldon, Raj, and Penny received from the DVDs was $70 + $65 + $60 + $55 = $250. They paid $50 for it, so their consumer surplus was $200.
After the tax, the price rose to $60, so they paid $60 each for a total spending of $240 (4 x $60). Their total value from the DVDs is still $250, so their consumer surplus decreased to $10 (=$250 - $240).
The tax revenue is $10 x 4 = $40. The deadweight loss is the decrease in consumer surplus, which is $200 - $10 = $190. However, the tax revenue is only $40, so there is a deadweight loss of $190 - $40 = $150. Therefore, the best choice is B, as it correctly explains that consumer surplus shrinks by $35 and tax revenues increase by $30, resulting in a deadweight loss of $5.

Question 2

Scenario 12-1
Ken places a $20 value on a cigar, and Mark places a $17 value on it. The equilibrium price for this brand of cigar is $15.
-Refer to Scenario 12-1. Suppose the government levies a tax of $3 on each cigar, and the equilibrium price of a cigar increases to $18. What is total consumer surplus after the tax is levied?
A)$0
B)$2
C)$5
D)$6

Accepted Answer

The answer of Scenario 12-1
Ken places a $20 value on...

Question 3

Wilma values a decorative garden rock at $15, while Fred values it at $10. The price of a decorative garden rock is $9. If the government imposes a $2 tax per decorative garden rock and the price of the rock rises to $11, what part of the deadweight loss comes from Wilma, and what part comes from Fred?
A)none comes from Wilma; $1 comes from Fred
B)none comes from Wilma; $3 comes from Fred
C)$2 comes from Wilma; $1 comes from Fred
D)$4 comes from Wilma; $3 comes from Fred

Accepted Answer

The answer of Wilma values a decorative garden rock at...

Question 4

Athos, Porthos,and Aramis each like to take fencing lessons. The price of a fencing lesson is $11. Athos values a lesson at $16, Porthos at $14, and Aramis at $12. Suppose that if the government taxes fencing lessons at $2 each, the price will rise to $13. A consequence of the tax is that consumer surplus shrinks by
A)$4 and tax revenues increase by $6, so there is a deadweight loss of $2.
B)$6 and tax revenues increase by $6, so there is no deadweight loss.
C)$5 and tax revenues increase by $6, so there is no deadweight loss.
D)$5 and tax revenues increase by $4, so there is a deadweight loss of $1.

Accepted Answer

The answer of Athos, Porthos,and Aramis each like to take...

Question 5

Suppose Darby values a certain smart phone at $400. Jake values the same smart phone at $300. The pre-tax price of this smart phone is $250. The government imposes a tax of $75 on each smart phone, and the price rises to $325. The deadweight loss from the tax is
A)$150.
B)$100.
C)$50.
D)$0.

Accepted Answer

The deadweight loss from a tax is the loss of economic efficiency that occurs when the tax reduces the quantity of a good sold below the market equilibrium level. In this case, the pre-tax equilibrium price of the phone is $250, but with the $75 tax, the price rises to $325.

Darby and Jake's valuations show that the consumer surplus for this product is between $100 and $150. With the tax, the price rises from $250 to $325, a difference of $75. This increase in price reduces consumer surplus, but it also increases revenue for producers and taxes for the government.

The deadweight loss occurs when the quantity demanded is reduced due to the higher price caused by the tax. The demand for this phone is likely to be relatively elastic, given the availability of substitute products and the fact that Darby and Jake have valuations below the pre-tax price.

The deadweight loss can be calculated as 0.5*(price difference)*(quantity reduction). In this case, the price difference is $75 and the quantity reduction can be estimated based on the elasticity of demand. A conservative estimate might be a 10% reduction in quantity demanded, which would be 10 phones.

Using these estimates, the deadweight loss would be 0.5*($75)*(10) = $375, which is greater than the revenue collected by the tax ($75*10 = $750). Therefore, the best choice is to try to reduce or eliminate the tax to minimize the deadweight loss.

Question 6

Suppose Tyler values a basketball at $20. Jacqui values a basketball at $16. The pre-tax price of a basketball $15. The government imposes a tax of $2 on each basketball, and the price rises to $17. The deadweight loss from the tax is
A)$1.
B)$2.
C)$3.
D)$6.

Accepted Answer

The answer of Suppose Tyler values a basketball at $20....

Question 7

Suppose Max values a concert ticket at $45. Charles values the same concert ticket at $40. The pre-tax price of a concert ticket is $30. The government imposes a tax of $5 on each concert ticket, and the price rises to $35. The deadweight loss from the tax is
A)$15.
B)$10.
C)$5.
D)$0.

Accepted Answer

The answer of Suppose Max values a concert ticket at...

Question 8

Suppose Hillary values a large order of French fries at $4. Bill values a large order of French fries at $7. The pre-tax price of a large order of French fries is $2. The government imposes a "fat tax" of $3 on each large order of French fries, and the price rises to $5. The deadweight loss from the tax is
A)$4, and the deadweight loss comes from both Hillary and Bill.
B)$4, and the deadweight loss comes only from Hillary because she does not buy a large French fries after the tax.
C)$2, and the deadweight loss comes from both Hillary and Bill.
D)$2, and the deadweight loss comes only from Hillary because she does not buy a large French fries after the tax.

Accepted Answer

The deadweight loss from the tax is the loss of consumer surplus and producer surplus due to the reduction in quantity demanded and supplied, respectively, as a result of the tax. In this case, Hillary's willingness to pay is lower than the post-tax price, so she chooses not to buy French fries anymore. This results in a reduction in quantity demanded and a loss of consumer surplus for Hillary equal to $2. Since Bill's willingness to pay is still higher than the post-tax price, he still buys French fries, but at a higher price, resulting in a loss of producer surplus for him equal to $1. The total deadweight loss in this case is therefore $3, which only comes from Hillary because she is the only one who changes her behavior as a result of the tax. Thus, the correct answer is D.

Question 9

Deadweight losses are associated with
A)taxes that distort the incentives that people face.
B)taxes that target expenditures on survivor's benefits for Social Security.
C)taxes that have no efficiency losses.
D)lump-sum taxes.

Accepted Answer

Deadweight losses occur when taxes distort the incentives that people face, leading to a reduction in overall economic efficiency. Taxes such as lump-sum taxes and those targeting specific expenditures (such as survivor's benefits for Social Security) may not have the same efficiency losses as traditional taxes on income or consumption, but they also do not generate the same revenue for the government.

Question 10

Taxes create deadweight loss when they
A)distort behavior.
B)cause the price of the product to increase.
C)don't raise sufficient government revenue.
D)cannot be computed easily.

Accepted Answer

Deadweight loss is the loss of economic efficiency that occurs when the equilibrium quantity of a good is not consumed or produced due to market inefficiencies, such as taxes. Taxes can distort behavior by making certain goods relatively more expensive and therefore reducing their consumption, which can lead to deadweight loss. Choices B, C, and D are not correct because a tax causing the price of a product to increase, not raising sufficient government revenue, or being difficult to compute do not necessarily result in deadweight loss.

Question 11

Suppose Luke values a scoop of Italian gelato at $4. Leia values a scoop of Italian gelato at $6. The pre-tax price of a scoop of Italian gelato is $2. The government imposes a "fat tax" of $3 on each scoop of Italian gelato, and the price rises to $5. The deadweight loss from the tax is
A)$1.
B)$2.
C)$3.
D)$4.

Accepted Answer

Without the tax, the market equilibrium quantity would be where the demand and supply curves intersect at a price of $2. Luke's willingness to pay is $4, which is above the price, so he buys a scoop. Leia's willingness to pay is $6, which is also above the price, so she buys a scoop as well. Thus, there are 2 scoops purchased in total.

With the tax, the price increases to $5. At this price, Leia still purchases a scoop because her willingness to pay is greater than $5. However, Luke is now unwilling to purchase a scoop because his willingness to pay is below $5. Thus, only one scoop is sold.

The deadweight loss is the difference between the quantity sold without the tax (2 scoops) and the quantity sold with the tax (1 scoop). This is a loss of 1 scoop, which has a value of $4 (Luke's willingness to pay). Thus, the deadweight loss is $4 - the revenue raised by the tax ($3) = $1. Therefore, the correct answer is B) $2.

Question 12

Suppose Luke values a scoop of Italian gelato at $4. Leia values a scoop of Italian gelato at $6. The pre-tax price of a scoop of Italian gelato is $2. The government imposes a "fat tax" of $3 on each scoop of Italian gelato, and the price rises to $5. The deadweight loss from the tax is
A)$4, and the deadweight loss comes from both Luke and Leia.
B)$4, and the deadweight loss comes only from Luke because he does not buy gelato after the tax.
C)$2, and the deadweight loss comes from both Luke and Leia.
D)$2, and the deadweight loss comes only from Luke because he does not buy gelato after the tax.

Accepted Answer

After the tax, the price of a scoop of Italian gelato becomes $5, which is higher than the value that Luke places on a scoop ($4), so he will not buy gelato anymore. Therefore, the deadweight loss comes only from Luke and is equal to the difference between the value he places on a scoop and the pre-tax price ($4-$2=$2). Leia will still buy gelato because the price is lower than the value she places on it, so there is no deadweight loss from her consumption. The total deadweight loss is therefore $2.

Question 13

In the absence of taxes, Carlos would prefer to purchase a large fishing boat with a 75 hp motor. The government has recently decided to place a tax on boats with 75 hp motors or higher. If Carlos decides to purchase a smaller boat with a 50 hp motor as a result of the tax, which of the following statements is correct?
A)Other people who choose to purchase large boats will incur the cost of the deadweight loss of the tax.
B)There are no deadweight losses as long as some people still choose to purchase large boats.
C)In order to determine the size of the deadweight loss, we must add the revenues from the tax to the loss in Carlos's consumer surplus.
D)Carlos is worse off, and his loss of welfare is part of the deadweight loss of the tax.

Accepted Answer

Carlos's decision to purchase a smaller boat with a lower horsepower motor indicates that he is worse off as a result of the tax. This loss in welfare for a consumer is part of the deadweight loss of the tax. Therefore, D is the correct choice. A is incorrect because deadweight loss is a loss of welfare to all parties involved and not just those who purchase large boats. B is incorrect because deadweight loss is incurred regardless of the number of people who choose to purchase large boats. C is incorrect because deadweight loss is not simply the sum of revenue from the tax and loss in consumer surplus, but rather the overall loss in welfare to all parties involved.

Question 14

One reason that deadweight losses are so difficult to avoid is that
A)taxes affect the decisions that people make.
B)income taxes are not paid by everyone.
C)consumption taxes must be universally applied to all commodities.
D)the administrative burden is hard to calculate.

Accepted Answer

Deadweight losses occur when taxes discourage people from buying or selling goods and services, which affects the decisions they make. This means that even if a tax is designed to be efficient and fair, it can still result in deadweight losses because people change their behavior in response to the tax.

Question 15

Scenario 12-1
Ken places a $20 value on a cigar, and Mark places a $17 value on it. The equilibrium price for this brand of cigar is $15.
-Refer to Scenario 12-1. Suppose the government levies a tax of $3 on each cigar, and the equilibrium price of a cigar increases to $18. How much tax revenue is collected?
A)$0
B)$2
C)$3
D)$6

Accepted Answer

The tax revenue collected is equal to the tax per unit multiplied by the quantity sold. In this case, the tax is $3 per cigar and the new equilibrium price is $18 per cigar. So, the quantity sold will decrease from the initial equilibrium quantity. Let's assume the new equilibrium quantity is 100 cigars. Then, the tax revenue collected will be:
$3 per cigar x 100 cigars = $300 
Therefore, the correct answer is C.

Question 16

Suppose Tyler values a basketball at $20. Jacqui values a basketball at $25. The pre-tax price of a basketball $10. The government imposes a tax of $5 on each basketball, and the price rises to $15. The deadweight loss from the tax is
A)$25.
B)$15.
C)$10.
D)$0.

Accepted Answer

The answer of Suppose Tyler values a basketball at $20....

Question 17

Athos, Porthos,and Aramis each like to take fencing lessons. The price of a fencing lesson is $10. Athos values a fencing lesson at $15, Porthos at $13, and Aramis at $11. Suppose that if the government taxes fencing lessons at 50 cents each, the price rises to $10.50. A consequence of the tax is that consumer surplus shrinks by
A)$1.50 and tax revenues increase by $1.50, so there is no deadweight loss.
B)$9.00 and tax revenues increase by $1.50, so there is a deadweight loss of $7.50.
C)$7.50 and tax revenues increase by $7.50, so there is no deadweight loss.
D)$7.50 and tax revenues increase by $1.50, so there is a deadweight loss of $6.

Accepted Answer

The answer of Athos, Porthos,and Aramis each like to take...

Question 18

When taxes are imposed on a commodity,
A)there is never a deadweight loss.
B)some consumers alter their consumption by not purchasing the taxed commodity.
C)tax revenue will rise by the amount of the tax multiplied by the before-tax level of consumption.
D)the taxes do not distort incentives.

Accepted Answer

When taxes are imposed on a commodity, it leads to a deadweight loss as some consumers may alter their consumption by not purchasing the taxed commodity. This is because the price of the commodity increases due to the tax, and some consumers may find it too expensive to continue purchasing it. As a result, the market equilibrium shifts, and there is a loss of total surplus. Therefore, choice B is the correct answer. Conversely, choice A is incorrect as there is always a deadweight loss. Choice C is incorrect as tax revenue will not always rise by the amount of the tax multiplied by the before-tax level of consumption due to changes in consumer behavior. Lastly, choice D is incorrect as taxes do distort incentives as they increase the cost of production and decrease the reward for engaging in a taxed activity.

Question 19

Scenario 12-1
Ken places a $20 value on a cigar, and Mark places a $17 value on it. The equilibrium price for this brand of cigar is $15.
-Refer to Scenario 12-1. How much total consumer surplus do Ken and Mark get when each purchases one cigar?
A)$1
B)$2
C)$5
D)$7

Accepted Answer

Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay. For Ken, his consumer surplus is $5 ($20 value minus $15 price). For Mark, his consumer surplus is $2 ($17 value minus $15 price). The total consumer surplus is the sum of their individual consumer surpluses, which is $7. Therefore, the best choice is D.

Question 20

Leonard, Sheldon, Raj, and Penny each like to attend comic-book conventions. The price of a ticket to a convention is $50. Leonard values a ticket at $70, Sheldon at $65, Raj at $60, and Penny at $55. Suppose that if the government taxes tickets at $5 each, the price will rise to $55. A consequence of the tax is that consumer surplus shrinks by
A)$50 and tax revenues increase by $20, so there is a deadweight loss of $30.
B)$30 and tax revenues increase by $20, so there is a deadweight loss of $10.
C)$20 and tax revenues increase by $20, so there is no deadweight loss.
D)$50 and tax revenues increase by $20, so there is no deadweight loss.

Accepted Answer

The answer of Leonard, Sheldon, Raj, and Penny each like...

Quiz 12: The Design of the Tax System

Suppose Darby values a certain smart phone at $400. Jake values the same smart phone at $300. The pre-tax price of this smart phone is $250. The government imposes a tax of $75 on each smart phone, and the price rises to $325. The deadweight loss from the tax is

Suppose Tyler values a basketball at $20. Jacqui values a basketball at $16. The pre-tax price of a basketball $15. The government imposes a tax of $2 on each basketball, and the price rises to $17. The deadweight loss from the tax is

Suppose Max values a concert ticket at $45. Charles values the same concert ticket at $40. The pre-tax price of a concert ticket is $30. The government imposes a tax of $5 on each concert ticket, and the price rises to $35. The deadweight loss from the tax is

Deadweight losses are associated with

Taxes create deadweight loss when they

Suppose Luke values a scoop of Italian gelato at $4. Leia values a scoop of Italian gelato at $6. The pre-tax price of a scoop of Italian gelato is $2. The government imposes a "fat tax" of $3 on each scoop of Italian gelato, and the price rises to $5. The deadweight loss from the tax is

Suppose Luke values a scoop of Italian gelato at $4. Leia values a scoop of Italian gelato at $6. The pre-tax price of a scoop of Italian gelato is $2. The government imposes a "fat tax" of $3 on each scoop of Italian gelato, and the price rises to $5. The deadweight loss from the tax is

One reason that deadweight losses are so difficult to avoid is that

Suppose Tyler values a basketball at $20. Jacqui values a basketball at $25. The pre-tax price of a basketball $10. The government imposes a tax of $5 on each basketball, and the price rises to $15. The deadweight loss from the tax is

When taxes are imposed on a commodity,

Scenario 12-1 Ken places a $20 value on a cigar, and Mark places a $17 value on it. The equilibrium price for this brand of cigar is $15. -Refer to Scenario 12-1. How much total consumer surplus do Ken and Mark get when each purchases one cigar?