Chapter 8: Application: The Costs of Taxation - Questions

What causes deadweight loss?

a) Perfect competition

b) Inefficient allocation of resources

c) Lower prices

d) Increase in consumer surplus

b) Inefficient allocation of resources

How does a tax on buyers affect the demand curve?

a) It shifts the demand curve upward

b) It shifts the demand curve downward

c) It shifts the supply curve upward

d) It has no effect

b) It shifts the demand curve downward

How does a tax on sellers affect the supply curve?

a) It shifts the supply curve downward

b) It shifts the supply curve upward

c) It shifts the demand curve downward

d) It has no effect

b) It shifts the supply curve upward

How is tax revenue calculated?

a) Price x Quantity

b) Tax amount x Quantity

c) Consumer surplus + Producer surplus

d) Supply + Demand

b) Tax amount × Quantity

What happens to overall welfare after a tax is imposed?

a) It increases

b) It remains the same

c) It decreases due to deadweight loss

d) It has no effect on welfare

c) It decreases due to deadweight loss

What does the height of the tax revenue rectangle represent?

a) Quantity sold

b) Tax rate

c) Market price

d) Deadweight loss

b) Tax rate

What happens when tax rates are too high?

a) Quantity sold in the market decreases

b) Tax revenue increases infinitely

c) Deadweight loss disappears

d) Consumer surplus increases

a) Quantity sold in the market decreases

What does the Laffer Curve explain?

a) Relationship between tax rates and tax revenue

b) How demand affects prices

c) Relationship between supply and demand

d) Why taxes should never be imposed

a) Relationship between tax rates and tax revenue

What happens when a small tax rate is imposed?

a) Large deadweight loss

b) Small deadweight loss

c) No effect on the economy

d) Market failure

b) Small deadweight loss

What happens when a large tax rate is imposed?

a) Deadweight loss decreases

b) Deadweight loss increases

c) It benefits consumers

d) It benefits producers

b) Deadweight loss increases

________ is the cost to society caused by market inefficiency.

Deadweight loss

A tax on _______ shifts the demand curve downward.

Buyers

A tax on _______ shifts the supply curve upward.

Sellers

________ is calculated as tax amount × quantity sold.

Tax revenue

A _____ decreases overall welfare by creating deadweight loss.

Tax

_______ are collected as a percentage of salary.

Payroll taxes

The _______ Curve explains how tax rates affect tax revenue.

Laffer

If the tax rate is too high, it will _______ quantity sold and ______ tax revenue.

Reduce; lower

What is deadweight loss?

A deadweight loss is the cost to society which happens when the markets are out of equilibrium.

What happens to overall welfare after a tax is imposed?

It will decrease the overall economic welfare since the deadweight loss occurs.

An economy which consists of illegal and undocumented transactions that are not recorded in official accounts is?

Underground economy.

What is supply-side economics?

It is macroeconomic policy aimed at increasing the supply of goods and services claiming that it will increase the economic growth.