Cost of Taxation - Tutorial

01. 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 price received by sellers
c. Reduced welfare of buyers to the revenue raised by the government
d. Consumer surplus to the deadweight loss
e. Increased welfare of buyers and sellers to the revenue lost by the government.

Answer the question from 02 to 03 using following scenario.

“Tom mows Stephanie’s lawn for $25. Tom’s opportunity cost of mowing Stephanie’s lawn is
$20, and Stephanie’s willingness to pay Tom to mow her lawn is $28.”

2. If Stephanie hires Tom to mow her lawn, Stephanie’s consumer surplus is

a. $3
b. $5
c. $8
d. $25

03. If Stephanie hires Tom to mow her lawn, Tom’s producer surplus is
a. $2
b. $3
c. $5
d. $8

Answer the questions from 04 to 10 using following diagram. The vertical distance between
points A and B represents a tax in the market

04. Without a tax, the equilibrium price and quantity are

a. $16 and 300
b. $10 and 600
c. $10 and 300
d. $6 and 300
e. $6 and 600

05. When the tax is imposed in this market, the price

buyers effectively pay is
a. $4
b. $6
c. $10
d. $16
e. $20

06. When the tax is imposed in this market, buyers effectively pay what amount of the $10 tax?
a. $0
b. $2
 c. $4
d. $6
e. $10

07. When the tax is imposed in this market, sellers effectively pay what amount of the $10 tax?
a. $0
b. $2
c. $4
d. $6
e. $10

08. When the tax is imposed in this market, the price sellers effectively receive is
a. $4
b. $6
c. $10
d. $16
e. $20

09. When the tax is placed on this good, the quantity sold
a. Is 600, and buyers effectively pay $10
b. Is 300, and buyers effectively pay $10
c. Is 600, and buyers effectively pay $16
d. Is 300, and buyers effectively pay $16
e. Is 600, and buyers effectively pay $6

10. When the government imposes the tax in this market, tax revenue is
a. $300
b. $600
c. $900
d. $1500
e. $3000

Use the following graph to answer the questions from 11 to 15

11. Suppose the government imposes a tax of P’ – P’’’.

Total surplus before the tax is measured by the area
a. I + Y
b. J + K + L + M
c. L + M + Y
d. I + J + K + L + M + Y
e. B + N

12. Suppose the government imposes a tax of P’ – P’’’. Total surplus after the tax is measured by
the area
a. I + Y
b. J + K +L +M
 c. I + Y + B
d. I + J +K + L + M + Y

13. Suppose the government imposes a tax of P’ – P’’’. The area measured by K + L represents
a. Tax revenue
b. Consumer surplus before the tax
c. Producer surplus after the tax
d. Total surplus before the tax
e. Deadweight loss

14. Suppose the government imposes a tax of P’ – P’’’. The area measured by M represents
a. Consumer surplus after the tax
b. Consumer surplus before the tax
c. Producer surplus after the tax
d. Producer surplus before the tax
e. Total surplus after the tax

15. Suppose the government imposes a tax of P’ – P’’’. The area measured by I + Y represents
the
a. Deadweight loss due to the tax
b. Loss in consumer surplus due to the tax
c. Loss in producer surplus due to the tax
d. Total surplus before the tax
e. Total surplus after the tax

16. A deadweight loss is a consequence of a tax on a good because the tax

a. Induces the government to increase its expenditures
b. Induces buyers to consume less, and sellers to produce less
c. Increases the equilibrium price in the market
d. Imposes a loss on buyers that is greater than the loss to sellers
e. Increases both consumers and producer surplus

17. When the government imposes taxes on buyers or sellers of a good, society,
a. Loss some of the benefits of market efficiency
b. Gains efficiency but loses equality
c. Is better off because the government’s tax revenues exceed the deadweight loss
d. Moves from an elastic supply curve to an inelastic supply curve
e. Gains efficiency and gains equality

18. The deadweight loss from a $1 tax will be smallest in a market with
a. Inelastic supply and elastic demand
b. Inelastic supply and inelastic demand
c. Elastic supply and elastic demand
d. Elastic supply and inelastic demand
e. Inelastic supply and unit elastic demand
19. The deadweight loss from a $3 tax will be largest in a market with
a. Inelastic supply and elastic demand
b. Inelastic supply and inelastic demand
c. Elastic supply and elastic demand
d. Elastic supply and inelastic demand
e. Elastic supply and unit elastic demand

20. The government’s benefit from a tax can be measured by

a. Consumer surplus
b. Producer surplus
c. Tax revenue
d. Deadweight loss
e. All of the above are correct

21. The benefit to buyers of participating in a market is measured by

a. Consumer surplus
b. Producer surplus
c. Total surplus
d. Deadweight loss
e. Market price

22. The benefit to sellers of participating in a market is measured by the

a. Amount of taxes collected on sales of the good
b. Producer surplus
c. Amount sellers receive for their product
d. Seller’s willingness to sell
e. market price

Use the following diagram to answer the questions from 23 to 25. The vertical distance between
points A and B represents a tax in the market.

24. The imposition of the tax causes the quantity sold to

a. increase by 1 unit
b. decrease by 1 unit
c. increase by 2 units
d. decrease by 2 units
e. decrease by 1.5 units

25. The imposition of the tax causes the price paid by buyers to
a. decrease by $2
b. increase by $3
c. decrease by $4
d. increase by $5
e. increase by $2