Question 1

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 economic incentives, leading to inefficiencies in the allocation of resources.

Question 2

When the top marginal tax rates were lowered substantially during the 1980s, the inflation-adjusted income tax revenue collected from the top 1 percent of all income earners
A) declined sharply.
B) remained approximately constant.
C) increased substantially.
D) did none of the above.

Accepted Answer

The reduction in top marginal tax rates during the 1980s led to increased economic activity and income growth, resulting in higher inflation-adjusted income tax revenue from the top 1 percent of earners.

Question 3

Suppose the demand curve for a good is highly elastic and the supply curve is highly inelastic. If the government taxes this good,
A) buyers and sellers will each share 50 percent of the burden, regardless of the elasticities of the demand and supply curves.
B) sellers will bear a larger share of the tax burden.
C) the distribution of the burden will depend upon whether the buyers or the sellers are required to send the tax to the government.
D) buyers will bear a larger share of the tax burden.

Accepted Answer

When demand is highly elastic and supply is highly inelastic, sellers bear a larger share of the tax burden because they cannot easily reduce the quantity supplied in response to the tax.

Question 4

A tax imposed on the sellers of a good will
A) raise the price paid by buyers and lower the equilibrium quantity.
B) raise the price paid by buyers and raise the equilibrium quantity.
C) raise the net price received by sellers and raise the equilibrium quantity.
D) raise the net price received by sellers and lower the equilibrium quantity.

Accepted Answer

A tax on sellers increases their costs, leading to a higher price for buyers and a lower equilibrium quantity as the market adjusts to the new tax burden.

Question 5

A deadweight loss results from the imposition of a tax on a good because the tax
A) induces the government to increase its expenditures.
B) reduces the quantity of exchanges between buyers and sellers.
C) causes a disequilibrium in the market.
D) imposes a loss on buyers that is greater than the loss to sellers.

Accepted Answer

A tax reduces the quantity of exchanges between buyers and sellers by increasing the price buyers pay and decreasing the price sellers receive, leading to a loss of economic efficiency and creating a deadweight loss.

Question 6

Taxes create deadweight losses because they
A) reduce profits of firms.
B) distort incentives.
C) cause prices to rise.
D) create revenue for the government.

Accepted Answer

Taxes create deadweight losses because they distort incentives, leading to less efficient allocation of resources and reduced economic activity.

Question 7

Approximately 50,000 luxury boats (priced $100,000 or more) are currently produced each year. Using the economic way of thinking, how much revenue would the government actually generate with a $10,000 excise tax on luxury boats?
A) $500 million
B) less than $500 million
C) more than $500 million
D) approximately $5 billion

Accepted Answer

The imposition of a $10,000 excise tax would likely reduce the quantity of luxury boats sold due to higher prices, leading to less than 50,000 boats being sold. Therefore, the revenue generated would be less than $500 million.

Question 8

The actual burden of a tax
A) falls most heavily on the side of the market that is more elastic.
B) falls most heavily on the side of the market that is more inelastic.
C) falls most heavily on the side of the market that is closest to unitary elasticity.
D) is distributed independently of relative elasticities of supply and demand.

Accepted Answer

The actual burden of a tax falls most heavily on the side of the market that is more inelastic because that side is less responsive to price changes and cannot easily avoid the tax by changing the quantity bought or sold.

Question 9

Suppose the federal excise tax rate on gasoline is increased by 50 percent. Which of the following is the most likely impact on the tax revenue derived from the federal gas tax?
A) Tax revenues will increase by less than 50 percent.
B) Tax revenues will increase by 50 percent.
C) Tax revenues will increase by more than 50 percent.
D) The revenue from the gasoline tax will go to zero.

Accepted Answer

An increase in the tax rate does not directly translate to an equivalent increase in tax revenue due to potential decreases in quantity demanded as prices rise.

Question 10

If the Federal government enacts a new excise tax of $1.50 per case of soda, which of the following is most likely to occur?
A) Consumers of soda will pay a higher price and buy a larger quantity.
B) Consumers of soda will pay a higher price, which will increase the profits of soda companies, inducing them to sell a larger quantity.
C) Consumers of soda will pay a higher price and buy a smaller quantity.
D) Consumers of soda will buy less bottled water.

Accepted Answer

An excise tax increases the cost of production, leading to higher prices for consumers and typically resulting in a decrease in the quantity demanded.

Question 11

The Laffer Curve indicates that
A) when tax rates are high, a rate reduction may lead to an increase in tax revenue.
B) when tax rates are low, an increase in tax rates will generally lead to a reduction in tax revenues.
C) an increase in tax rates will always lead to an increase in tax revenues.
D) the deadweight losses resulting from taxation are small at the tax rate that maximizes the revenues derived by the government.

Accepted Answer

The Laffer Curve suggests that there is an optimal tax rate that maximizes revenue. When tax rates are too high, reducing them can potentially increase revenue by encouraging economic activity.

Question 12

A tax on the buyers of coffee will
A) increase the price of coffee paid by buyers, increase the net price of coffee received by sellers, and increase the equilibrium quantity of coffee.
B) decrease the price of coffee paid by buyers, increase the net price of coffee received by sellers, and decrease the equilibrium quantity of coffee.
C) increase the price of coffee paid by buyers, decrease the net price of coffee received by sellers, and decrease the equilibrium quantity of coffee.
D) increase the price of coffee paid by buyers, decrease the net price of coffee received by sellers, and increase the equilibrium quantity of coffee.

Accepted Answer

A tax on buyers shifts the demand curve left, raising the price buyers pay, lowering the price sellers receive, and reducing the equilibrium quantity.

Question 13

Suppose that a tax is placed on a particular good. If the sellers end up bearing most of the tax burden, this indicates that the
A) demand is more inelastic than supply.
B) supply is more inelastic than demand.
C) government has required that buyers remit the tax payments.
D) government has required that sellers remit the tax payments.

Accepted Answer

When supply is more inelastic than demand, sellers cannot easily change the quantity they produce, so they bear more of the tax burden.

Question 14

About 35,000 general aviation multiengine airplanes are licensed to operate in the United States. If an additional $1,000-per-year tax was levied on each plane to raise general revenue, economic thinking suggests the
A) annual revenue from this tax would be less than $35,000,000.
B) annual revenue from this tax would be $35,000,000.
C) annual revenue from this tax would be more than $35,000,000.
D) number of airplanes would increase dramatically.

Accepted Answer

The answer of About 35,000 general aviation multiengine airplanes are...

Question 15

If political officials want to minimize the excess burden accompanying a tax, they should set the tax at a rate
A) that will maximize the revenue derived from the tax.
B) slightly above the rate that will maximize the revenue derived from the tax.
C) well below the rate that will maximize the revenue derived from the tax.
D) that is the highest that could possibly be imposed.

Accepted Answer

Setting the tax rate well below the revenue-maximizing rate minimizes the excess burden because it reduces the distortionary effects on economic behavior, such as work, saving, and investment decisions.

Question 16

Suppose that a tax is placed on a particular good. If the buyers end up bearing most of the tax burden, this indicates that the
A) demand is more inelastic than the supply.
B) supply is more inelastic than the demand.
C) government has required that buyers remit the tax payments.
D) government has required that buyers remit the tax payments

Accepted Answer

When demand is more inelastic than supply, buyers are less responsive to price changes, so they bear a larger share of the tax burden.

Question 17

Data from the effects of the substantial tax rate reductions in the 1980s
A) cast serious doubt on the Laffer curve as a guide for tax policy.
B) are consistent with the principles illustrated in the Laffer curve.
C) generally reject the idea that lower tax rates can lead to higher tax revenue.
D) support an "inverted Laffer curve" in which reducing tax rates for those with high incomes leads to lower tax revenue.

Accepted Answer

The Laffer curve suggests that there is an optimal tax rate that maximizes revenue, and data from the 1980s showed that reducing high tax rates could lead to increased economic activity and potentially higher tax revenue, consistent with the Laffer curve's principles.

Question 18

If the government wants to generate large revenues from placing a tax on the consumption of a particular good, it should choose a good for which
A) the demand is price elastic
B) the demand is unitary elastic
C) the demand is price inelastic
D) there are many good substitutes available for the good

Accepted Answer

When demand is price inelastic, consumers are less sensitive to price changes, meaning they will continue to buy the good even if the price increases due to a tax. This allows the government to generate more revenue.

Question 19

Taxes adversely affect the allocation of resources because
A) they do not always fall more heavily on the rich than on the poor.
B) the taxes collected are not enough to finance government spending.
C) not everyone pays taxes.
D) they distort prices and thus distort the decisions of households and firms.

Accepted Answer

Taxes distort prices, which can lead to inefficient allocation of resources as they influence the decisions of households and firms, potentially leading to market inefficiencies.

Question 20

If Olivia's income increases from $40,000 to $50,000 and her tax liability increases from $6,000 to $9,000, which of the following is true?
A) Her marginal tax rate is 18 percent in this range.
B) Her marginal tax rate is 30 percent in this range.
C) Her average tax rate was 22.5 percent when her income was $40,000.
D) The tax structure must be regressive in the range between $40,000 and $50,000.

Accepted Answer

The marginal tax rate is calculated as the change in tax liability divided by the change in income. Here, the change in tax liability is $3,000 ($9,000 - $6,000) and the change in income is $10,000 ($50,000 - $40,000). Thus, the marginal tax rate is $3,000 / $10,000 = 0.30 or 30 percent.

Quiz 4: Supply and Demand: Applications and Extensions

Deadweight losses are associated with

When the top marginal tax rates were lowered substantially during the 1980s, the inflation-adjusted income tax revenue collected from the top 1 percent of all income earners

Suppose the demand curve for a good is highly elastic and the supply curve is highly inelastic. If the government taxes this good,

A tax imposed on the sellers of a good will

A deadweight loss results from the imposition of a tax on a good because the tax

Taxes create deadweight losses because they

Approximately 50,000 luxury boats (priced $100,000 or more) are currently produced each year. Using the economic way of thinking, how much revenue would the government actually generate with a $10,000 excise tax on luxury boats?

The actual burden of a tax

Suppose the federal excise tax rate on gasoline is increased by 50 percent. Which of the following is the most likely impact on the tax revenue derived from the federal gas tax?

If the Federal government enacts a new excise tax of $1.50 per case of soda, which of the following is most likely to occur?

The Laffer Curve indicates that

A tax on the buyers of coffee will

Suppose that a tax is placed on a particular good. If the sellers end up bearing most of the tax burden, this indicates that the

About 35,000 general aviation multiengine airplanes are licensed to operate in the United States. If an additional $1,000-per-year tax was levied on each plane to raise general revenue, economic thinking suggests the

If political officials want to minimize the excess burden accompanying a tax, they should set the tax at a rate

Suppose that a tax is placed on a particular good. If the buyers end up bearing most of the tax burden, this indicates that the

Data from the effects of the substantial tax rate reductions in the 1980s

If the government wants to generate large revenues from placing a tax on the consumption of a particular good, it should choose a good for which

Taxes adversely affect the allocation of resources because

If Olivia's income increases from $40,000 to $50,000 and her tax liability increases from $6,000 to $9,000, which of the following is true?