Sample Questions #6

Figure 8-2
Price 12 11 10 9 8 7 6 5 4 3 2 1 0.5 1 1.5 2 2.5 3 3.5 B A

Supply

Demand
4 4.5 5 Quantity

1. Refer to Figure 8-2. The amount of deadweight loss as a result of the tax is a. $2.50. b. $5. c. $7.50. d. $10. Scenario 8-2 Tom mows Stephanie's lawn for $25. Toms opportunity cost of mowing Stephanies lawn is $20, and Stephanie's willingness to pay Tom to mow her lawn is $28. 2. Refer to Scenario 8-2. Assume Tom is required to pay a tax of $10 each time he mows a lawn. Which of the following results is most likely? a. Stephanie now will decide to mow her own lawn, and Tom will decide it is no longer in his interest to mow Stephanies lawn. b. Stephanie still is willing to pay Tom to mow her lawn, but Tom will decline her offer. c. Tom still is willing to mow Stephanies lawn, but Stephanie will decide to mow her own lawn. d. Tom and Stephanie still can engage in a mutually-agreeable trade.

3. Suppose a tax of $1 per unit is imposed on a good. The more elastic the supply of the good, other things equal, the a. smaller is the response of quantity supplied to the tax. b. larger is the tax burden on sellers relative to the tax burden on buyers. c. larger is the deadweight loss of the tax. d. All of the above are correct. 4. When a country is on the downward-sloping side of the Laffer curves, a cut in the tax rate will a. decrease tax revenue and decrease the deadweight loss. b. decrease tax revenue and increase the deadweight loss. c. increase tax revenue and decrease the deadweight loss. d. increase tax revenue and increase the deadweight loss.