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