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Exam 8: Application: the Costs of Taxation

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Question 31

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Suppose a tax of $3 is imposed on each new garden hose that is sold, resulting in a deadweight loss of $22,500. The supply curve is a typical upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. Before the tax was imposed, the equilibrium quantity of garden hoses was 100,000. We can conclude that the equilibrium quantity of garden hoses after the tax is imposed is

A) 75,000.
B) 85,000.
C) 90,000.
D) 95,000.

E) None of the above
F) C) and D)

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Question 32

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Suppose that instead of a supply-demand diagram, you are given the following information: Q_s = 100 + 3P Q_d = 400 - 2P From this information compute equilibrium price and quantity. Now suppose that a tax is placed on buyers so that Q_d = 400 - 2(P + T). If T = 15, solve for the new equilibrium price and quantity. (Note: P is the price received by sellers and P + T is the price paid by buyers.) Compare these answers for equilibrium price and quantity with your first answers. What does this show you?

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Prior to the tax, the equilibrium price ...

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Question 33

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Taxes affect market participants by increasing the price paid by the buyer and decreasing the price received by the seller.

If the size of a tax triples, the deadweight loss increases by a factor of six.

Figure 8-1 -Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The consumer surplus after the tax is measured by the area

If the labor supply curve is very elastic, a tax on labor

Scenario 8-2 Roland mows Karla's lawn for $25. Roland's opportunity cost of mowing Karla's lawn is $20, and Karla's willingness to pay Roland to mow her lawn is $28. -Refer to Scenario 8-2. If Karla hires Roland to mow her lawn, Karla's consumer surplus is

Concerning the labor market and taxes on labor, economists disagree about

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

The Laffer curve relates

When a tax is imposed on a good, the

Scenario 8-3 Suppose the market demand and market supply curves are given by the equations: -Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve becomes: If T = 40, how much will be the deadweight loss from this tax?

Anger over British taxes played a significant role in bringing about the

Figure 8-4 The vertical distance between points A and B represents a tax in the market. -Refer to Figure 8-4. The price that sellers effectively receive after the tax is imposed is

Use the following graph shown to fill in the table that follows.

Figure 8-21 -Refer to Figure 8-21. Suppose the market is represented by Demand 1 and Supply 1. At first the government places a $3 per-unit tax on this good. Then the government decides to raise the tax to $6 per unit. Compared to the original tax rate, the higher tax will

Total surplus with a tax is equal to

In the market for widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. The equilibrium quantity in the market for widgets is 250 per month when there is no tax. Then a tax of $6 per widget is imposed. As a result, the government is able to raise $750 per month in tax revenue. We can conclude that the after-tax quantity of widgets is

Figure 8-5 Suppose that the government imposes a tax of P3 - P1. -Refer to Figure 8-5. The price that buyers effectively pay after the tax is imposed is

Figure 8-6 The vertical distance between points A and B represents a tax in the market. -Refer to Figure 8-6. Without a tax, total surplus in this market is