Question 1

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 2

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, with the idea that at a certain point increasing tax rates will actually result in decreasing revenue due to disincentivizing economic activity.

Question 3

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, and it shows that as tax rates increase from zero, eventually tax revenue will reach a maximum point and then begin to decrease. Therefore, the graph resembles an upside-down U.

Question 4

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 5

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 became popular in the 1980s with the Reagan administration, and Ronald Reagan is often associated with the term. Arthur Laffer is also a key figure in supply-side economics and is known for the "Laffer Curve," which shows the relationship between tax rates and revenue.

Question 6

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 7

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 8

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 9

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 outlined by Arthur Laffer and Ronald Reagan is commonly referred to as supply-side economics. It holds that reductions in tax rates will incentivize people to work more, save more and invest more money, consequently increasing economic growth and tax revenue. This economic theory remains a subject of debate among economists.

Question 10

When a country is on the downward-sloping side of the Laffer curves, a cut in the tax rate will
A)decrease tax revenue and decrease the deadweight loss.
B)decrease tax revenue and increase the deadweight loss.
C)increase tax revenue and decrease the deadweight loss.
D)increase tax revenue and increase the deadweight loss.

Accepted Answer

When a country is on the downward-sloping side of the Laffer curve, a cut in the tax rate will increase tax revenue because it encourages more economic activity and decreases the deadweight loss by making the tax system more efficient.

Question 11

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 12

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

The size of the deadweight loss from a tax on gasoline is determined by the size of the tax and the elasticity of supply and demand for gasoline. Therefore, increasing the tax per gallon would always increase the deadweight loss, regardless of changes in elasticity. A and B may or may not affect the deadweight loss, depending on the magnitude of the changes in elasticity.

Question 13

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 believed in supply-side economics, which held that reducing income tax rates would incentivize people to work harder and invest more, ultimately increasing economic well-being and potentially even tax revenue. This theory is often referred to as the "Laffer Curve." While there may be some deadweight losses associated with reducing income tax rates, Reagan believed that the benefits of increased economic activity would outweigh these costs.

Question 14

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. Countries on the negatively sloped part of the curve are experiencing diminishing returns in revenue as tax rates increase further, and may actually end up with less revenue if they keep increasing tax rates. Therefore, countries with higher tax rates are more likely to be on the negatively sloped part of the Laffer curve.

Question 15

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 16

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 17

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

The answer of Suppose the tax on gasoline is decreased...

Question 18

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 19

Which of the following scenarios is not consistent with the Laffer curve?
A)The tax rate is very low, and tax revenue is very low.
B)The tax rate is very high, and tax revenue is very low.
C)The tax rate is very high, and tax revenue is very high.
D)The tax rate is moderate (between very high and very low), and tax revenue is relatively high.

Accepted Answer

The answer of Which of the following scenarios is not...

Question 20

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...

Quiz 8: Applications: the Costs of Taxation

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

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

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

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 airline tickets increase by a factor of 9?

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 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

When a country is on the downward-sloping side of the Laffer curves, a cut in the tax rate will

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

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

Ronald Reagan believed that reducing income tax rates would

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

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

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,

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

Which of the following scenarios is not consistent with the Laffer curve?

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