ALLIED ECN150 module 3 Check Your Understanding

Question Points

1. To fully understand how taxes affect economic well-being, we must compare the:

a. consumer surplus to the producer surplus.

b. price paid by buyers to the producer surplus.

c. reduced welfare of buyers and sellers to the revenue raised by the government.

d. consumer surplus to the deadweight loss.

2. When the government imposes taxes on buyers and sellers of a good, society loses some of the benefits of market efficiency.

a. True

b. False

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3. The loss in consumer surplus caused by the tax is measured by the area:

a. P1P3AC.

b. P3ABP2.

c. P1P3ABC.

d. ABC.

4. Which of the following statements is correct?

a. A decrease in the size of a tax always decreases the tax revenue raised by that tax.

b. A decrease in the size of a tax always decreases the deadweight loss of that tax.

c. Tax revenue decreases when there is a small decrease in the tax rate and the economy is on the downward-sloping part of the Laffer curve.

d. An increase in the size of a tax leads to an increase in the deadweight loss of the tax only if the economy is on the upward-sloping part of the Laffer curve.

5. The vertical distance between points A and B represents a tax in the market of:

a. $16 and 300.

b. $10 and 600.

c. $10 and 300.

d. $6 and 300.

6. If the tax on a good is doubled, the deadweight loss of the tax:

a. remains constant.

b. doubles.

c. quadruples.

d. increases by a percentage that cannot be determined without further information.

7. Consumer surplus can be measured as the area between the demand curve and the equilibrium price.

a. True

b. False

8. The amount of the tax on each unit of the good is:

a. P3 – P1.

b. P3 – P2.

c. P2 – P1.

d. P4 – P3.

9. The "invisible hand" is:

a. used to describe the welfare system in the United States.

b. a concept developed by Adam Smith to describe the virtues of free markets.

c. a concept used by J.M. Keynes to describe the role of government in guiding the allocation of resources in the economy.

d. a term used by some economists to characterize the role of government in an economy — inevitable but invisible.

10. Normally, both buyers and sellers of a good become worse off when the good is taxed.

a. True

b. False

11. Suppose the government is considering levying a tax in one or more of the markets described in the table. Which of the markets will allow the government to minimize the deadweight loss(es) from the tax?

a. Market A only

b. Markets A and C only

c. Markets B and D only

d. Market C only

12. Which vertical distance between points A and C represents a tax in the market?

a. P1

b. P2

c. P3

d. P4

13. Which of the following statements correctly describes the relationship between the size of the deadweight loss and the amount of tax revenue as the size of a tax increases from a small tax to a medium tax and finally to a large tax?

a. Both the size of the deadweight loss and tax revenue increase.

b. The size of the deadweight loss increases, but the tax revenue decreases.

c. The size of the deadweight loss increases, but the tax revenue first increases, then decreases.

d. Both the size of the deadweight loss and tax revenue decrease.

14. A tax raises the price received by sellers and lowers the price paid by buyers.

a. True

b. False

15. Joel has a 1966 Mustang, which he sells to Susie, an avid car collector. Susie is pleased since she paid $8,000 for the car, but would have been willing to pay $11,000 for the car. Susie's consumer surplus is $2,000.

a. True

b. False

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16. When a good is taxed:

a. both buyers and sellers of the good are made worse off.

b. only buyers are made worse off, because they ultimately bear the burden of the tax.

c. only sellers are made worse off, because they ultimately bear the burden of the tax.

d. neither buyers nor sellers are made worse off, since tax revenue is used to provide goods and services that would otherwise not be provided in a market economy.

17. When a tax is imposed on buyers, consumer surplus decreases but producer surplus increases.

a. True

b. False

18. A tax on a good causes the size of the market to increase.

a. True

b. False

19. When the price is P1, area A represents:

a. total benefit.

b. producer surplus.

c. consumer surplus.

d. None of the choices apply.

20. If the United States legally allowed for a market in transplant organs, it is estimated that one kidney would sell for at least $100,000.

a. True

b. False