Chapter 8 Mankiw/Taylor, Economics

True/False
Indicate whether the sentence or statement is true or false.

1. In general, a tax raises the price the buyers pay, lowers the price the sellers receive,
and reduces the quantity sold.

ANSWER: T
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2. If a tax is placed on a good and it reduces the quantity sold, there must be a
deadweight loss from the tax.

ANSWER: T
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3. Deadweight loss is the reduction in consumer surplus that results from a tax.

ANSWER: F
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4. When a tax is placed on a good, the revenue the government collects is exactly
equal to the loss of consumer and producer surplus from the tax.

ANSWER: F
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5. If John values having his hair cut at €20 and Mary's cost of providing the hair cut is
€10, any tax on hair cuts larger than €10 will eliminate the gains from trade and
cause a €20 loss of total surplus.

ANSWER: F
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6. If a tax is placed on a good in a market where supply is perfectly inelastic, there is

no deadweight loss and the sellers bear the entire burden of the tax.

ANSWER: T
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 7. A tax on cigarettes would likely generate a larger deadweight loss than a tax on
luxury boats.

ANSWER: F
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8. A tax will generate a greater deadweight loss if supply and demand are inelastic.

ANSWER: F
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9. A tax causes a deadweight loss because it eliminates some of the potential gains
from trade.

ANSWER: T
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10. A larger tax always generates more tax revenue.

ANSWER: F
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11. A larger tax always generates a larger deadweight loss.

ANSWER: T
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12. If an income tax rate is high enough, a reduction in the tax rate could increase tax
revenue.

ANSWER: T
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13. A tax collected from buyers generates a smaller deadweight loss than a tax collected
from sellers.

ANSWER: F
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14. If a tax is doubled, the deadweight loss from the tax more than doubles.

ANSWER: T
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 15. A deadweight loss results when a tax causes market participants to fail to produce
and consume units on which the benefits to the buyers exceeded the costs to the
sellers.

ANSWER: T
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Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

16. Refer to Exhibit 4. If there is no tax placed on the product in this market, consumer
surplus is the area

a. C + D + F.
b. A.
c. A + B + E.
d. D + C + B.
e. A + B + C.

ANSWER: C
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17. Refer to Exhibit 4. If there is no tax placed on the product in this market, producer
surplus is the area
 a. A + B + E.
b. D.
c. C + F.
d. A + B + C + D.
e. C + D + F.

ANSWER: E
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18. Refer to Exhibit 4. If a tax is placed on the product in this market, consumer surplus
is the area

a. D.
b. A.
c. A + B + E.
d. A + B + C + D.
 e. A + B.

ANSWER: B
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19. Refer to Exhibit 4. If a tax is placed on the product in this market, producer surplus
is the area

a. A + B + E.
b. A + B + C + D.
c. A.
d. D.
e. C + D + F.

ANSWER: D
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20. Refer to Exhibit 4. If a tax is placed on the product in this market, tax revenue paid
by the buyers is the area
 a. B + C + E + F.
b. B.
c. B + C.
d. A.
e. C.

ANSWER: B
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21. Refer to Exhibit 4. If a tax is placed on the product in this market, tax revenue paid
by the sellers is the area

a. C + F.
b. A.
c. B.
 d. B + C + E + F.
e. C.

ANSWER: E
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22. Refer to Exhibit 4. If there is no tax placed on the product in this market, total
surplus is the area

a. B + C + E + F.
b. E + F.
c. A + B + C + D.
d. A + B + C + D + E + F.
e. A + D + E + F.

ANSWER: D
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23. Refer to Exhibit 4. If a tax is placed on the product in this market, total surplus is
the area
 a. A + B + C + D + E + F.
b. A + B + C + D.
c. A + D.
d. B + C + E + F.
e. E + F.

ANSWER: B
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24. Refer to Exhibit 4. If a tax is placed on the product in this market, deadweight loss
is the area

a. B + C + E + F.
b. E + F.
c. B + C.
 d. A + B + C + D.
e. A + D.

ANSWER: B
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25. Refer to Exhibit 4. Which of the following is true with regard to the burden of the
tax in Exhibit 4?

a. The buyers pay a larger portion of the tax because demand is more inelastic
than supply.
b. The sellers pay a larger portion of the tax because supply is more elastic
than demand.
c. The buyers pay a larger portion of the tax because demand is more elastic
than supply.
d. The sellers pay a larger portion of the tax because supply is more inelastic
than demand.

ANSWER: D
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26. Which of the following would likely cause the greatest deadweight loss?
a. a tax on salt
b. a tax on cigarettes
c. a tax on petrol
d. a tax on cruise line tickets

ANSWER: D
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27. A tax on petrol is likely to
a. generate a deadweight loss that is unaffected by the time period over which
it is measured.
b. cause a greater deadweight loss in the long run when compared to the short
run.
c. none of these answers
d. cause a greater deadweight loss in the short run when compared to the long
run.

ANSWER: B
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28. Deadweight loss is greatest when

a. supply is elastic and demand is perfectly inelastic.
b. demand is elastic and supply is perfectly inelastic.
c. both supply and demand are relatively inelastic.
d. both supply and demand are relatively elastic.

ANSWER: D
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29. Since the supply of undeveloped land is relatively inelastic, a tax on undeveloped
land would generate
a. a small deadweight loss and the burden of the tax would fall on the renter.
b. a large deadweight loss and the burden of the tax would fall on the landlord.
c. a large deadweight loss and the burden of the tax would fall on the renter.
d. a small deadweight loss and the burden of the tax would fall on the landlord.

ANSWER: D
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30. Which of the following is true with regard to a tax on labour income? Taxes on
labour income tend to encourage
a. the unscrupulous to enter the underground economy.
b. the elderly to retire early.
c. all of the things described in these answers.
d. second earners to stay home.
e. workers to work fewer hours.

ANSWER: C
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31. When a tax on a good starts small and is gradually increased, tax revenue
a. will fall.
b. will rise.
 c. will first rise and then fall.
d. will first fall and then rise.
e. none of these answers

ANSWER: C
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32. The graph that shows the relationship between the size of a tax and the tax revenue
collected by the government is known as a
a. none of these answers
b. Reagan curve.
c. Keynesian curve.
d. Laffer curve.
e. Henry George curve.

ANSWER: D
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33. If a tax on a good is doubled, the deadweight loss from the tax
a. doubles.
b. stays the same.
c. increases by a factor of four.
d. could rise or fall.

ANSWER: C
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34. The reduction of a tax

a. will have no impact on tax revenue.
b. will always reduce tax revenue regardless of the prior size of the tax.
c. could increase tax revenue if the tax had been extremely high.
d. causes a market to become less efficient.

ANSWER: C
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35. When a tax distorts incentives to buyers and sellers so that fewer goods are
produced and sold than otherwise, the tax has
a. caused a deadweight loss.
b. decreased equity.
c. generated no tax revenue.
d. increased efficiency.

ANSWER: A
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