ECON 1B03 Chapter Notes - Chapter 8: Tax Rate, Laffer Curve, Deadweight Loss

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21 Aug 2013

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Chapter 8: application the costs of taxation. Government gets a tax revenue of t x q (where t is the size of the tax and q is the quantity of the taxed good sold) Can be represented in the graph as the area (rectangle) between supply and demand curves. Surplus for both buyers and sellers, no tax revenue. Surplus for buyers and sellers drop, total surplus drops, tax revenue increases. Deadweight loss: the fall in total surplus that results from a market disorientation. The losses to buyers and sellers from a tax exceed the revenue raised by the government. Taxes distort incentives and cause markets to allocate resources inefficiently. Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade. Deadweight loss = surplus lost because tax discourages advantageous trades. Price elasticities of supply and demand determine whether the deadweight loss is large or small.

Related Questions

Under a binding price ceiling, what does the change in consumer surplus represent?
A) The gain in surplus for those buyers who can still purchase the product at the lower price.
B) The loss in surplus for those buyers who previously purchased some units of the good at the higher price, but these units are no longer produced at the lower price.
C) The loss in surplus for those buyers who would like the purchase the excess demand created by the price ceiling policy.
D) Both A and B are correct.
E) Both A and C are correct.

When the market price is held above the competitive level, the deadweight loss is composed of:

A) producer surplus losses associated with units that used to be traded on the market but are no longer exchanged.

B) consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
C) producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
D) There is no deadweight loss if the government uses a price floor policy to increase the price.

Compared to a tariff, an import quota, which restricts imports to the same amount as the tariff, will leave the country as a whole
A) worse off than a comparable tariff.
B) not as bad off as a comparable tariff.

C) about the same as a comparable tariff.

D) Any of the above can be true.

What is the welfare impact of a subsidy policy?
A) Producer surplus increases, consumer surplus declines, and total welfare declines.
B) Producer and consumer surplus increase, and these gains are larger than the government cost.

C) Producer and consumer surplus increase, and these gains are smaller than the government cost.

D) Producer surplus increases, consumer surplus declines, and total welfare increases due to the subsidy program.

Why is there a deadweight loss associated with subsidy payments?
A) There is no deadweight loss from a subsidy.
B) Quantity supplied is less than the equilibrium amount, so consumers and producers lose surplus value on those units that are no longer produced.
C) Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them.
D) The subsidy payment does not distort quantities in the market, but the government cost exceeds consumer willingness to pay for the quantity demanded.

violetmole943

1. True or false? Actions that allow oligopoly firms to coordinate their pricing behavior are called facilitating practices.

2. In the long run, if a perfectly competitive firm is incurring an economic loss, the firm

A. Will leave the industry

B. Is earning greater than normal profit but not an economic profit

C. Will minimize opportunity costs by staying in business

D. Will produce as long as total revenue exceeds the total fixed cost

E. Will have some long-run fixed costs

3. Which of the following is NOT one of the problems associated with common ownership of resources and a job that needed to be done?

A. Zimbody paid big body to do the antibody's job

B. Anybody could have done it, but nobody did it

C. Everybody was sure somebody would do it

D. Everybody blamed somebody

E. Nobody realized that everybody wouldn't do it

4. A negative externality related to a product

A. Results in an overallocation of resources to that product

B. Can be corrected by government subsidies

C. Is an example of government failure

D. Results in under allocation of resources to that product

E. Can be corrected by lowering the cost of production

5. A primary cause of inefficiency in government is that

A. Antitrust is applied to government policies as well as market situations

B. Government employees tend to be lazier than private-sector employees

C. The gains from government projects are often concentrated, while the costs are dispersed among all taxpayers

D. Markets interfere with governments

E. All of these are true

6. According to the survey reported in the text, most people believe that health-related goods and services should be allocated by the ___ allocation mechanism.

A. First come, first served

7. It is ___ that transfer(s) consumer surplus to producers and creates (s) deadweight losses.

A. The commodity market

B. Restrictions to entry

C. The allocation mechanism

D. Government

E. Perfect competition

8. The practice of legislators supporting one another's projects in order to ensure support for their own is called

9. When shopping in some countries, bargaining is standard. The sellers ask for a high price to start and then decrease the price until the sale is made. This is due to

A. Producers trying to gain as much consumer surplus as they can

B. Prices changing so quickly that it doesn't make sense to make price tags

C. No government control

D. The market unable to reach equilibrium

E. Consumers trying to gain as much consumer surplus as they can

10. All of the following are examples of a first-come, first-served system of allocation EXCEPT

A. Classes at school

B. Tickets to concerts

C. Medical care

D. Access to highways

E. All of these are examples allocated by a first-come, first-served system

periwinklelion416

Question 1 If it was impossible to have a comparative advantage, there would be no gains from trade. True False 4 points

Question 2 If the price of Good X is $10 and price of Good Y is $15, the slope of the budget constraint is 1.5. True False 4 points

Question 3 If the demand and supply curves have equal slopes in absolute value, the burden of a commodity tax will be split equally regardless of on whom the tax is placed. True False 4 points

Question 4 Suppose that supply is fixed at 100 units and demand is Q = 500 P. A price ceiling of $100 creates a shortage of 400 units. True False 4 points

Question 5 Housing shortages caused by rent controls are larger in the long run because the supply of housing is more elastic in the long run. True False 4 points

Question 6 Firms should exit the industry if average costs are greater than marginal costs. True False 4 points

Question 7 If a 3.67 percent increase in price causes a 1.97 percent decrease in quantity demanded, then total revenue must fall following an increase in price. True False 4 points

Question 8 Which of the following choices best illustrates the concept of Adam Smith's invisible hand ? A Vietnamese farmer grows rice; an exporter ships it to the United States, and a grocer in New York sells it to a customer. A fishery's stock of fish becomes depleted due to overfishing as boats from around the world converge. A government regulates a firm to clean up the pollutants it has released as part of its production process. An apartment building is built, which provides much needed housing, on the site of the only playground for children in that town. 4 points

Question 9 Figure: Labor Supply and Welfare Refer to the figure. The budget constraint is: ABC. BD. ABDC. ABD. 4 points Question 10 The price of coffee has increased, yet evidence suggests the demand for coffee has been stable. A possible explanation is that: there has been no change in the supply of coffee. there has been increased use of subsidies in coffee production. wages of workers in coffee production might have decreased. wages of workers in coffee production might have increased. 4 points Question 11 Which of the following statements is TRUE regarding profit maximization in competitive markets? I. When all firms pursue profits, none of them achieve profits. II. When all firms pursue profits, only the most innovative will achieve profits. III. Production is divided in such a way that total costs of production are minimized. I only II only I and III only II and III only 4 points Question 12 Suppose France can produce four phones or three computers with one unit of labor, and Sweden can produce one phone or two computers with one unit of labor. If France can trade only with Sweden, then the theory of comparative advantage suggests that: France should specialize in producing phones and import computers from Sweden. France should specialize in producing computers and import phones from Sweden. France should produce both phones and computers, and import nothing from Sweden. France should import both phones and computers from Sweden. 4 points Question 13 Potato chips and popcorn are substitutes. A subsidy for potato chips will ______the demand for popcorn and the quantity of popcorn sold will ______. (Table: Barrels of Oil) Refer to the table. What is the total amount of producer surplus (per barrel of oil) earned by all four producers if the market price per barrel of oil is $51? Table: Barrels of Oil Minimum willingness to sell Country a single barrel of oil Country A $32.00 Country B 16.00 Country C 17.25 Country D 56.99 increase; increase increase; decrease decrease; decrease decrease; increase 4 points Question 14 In the market for Good X a necessity good without any good substitutes the workers and capital in the industry can easily find work producing other goods. The burden of the tax is likely to fall: more heavily on buyers, given that demand is more inelastic than supply. evenly between buyers and sellers. more heavily on sellers, given that supply is more inelastic than demand. more heavily on buyers, given that demand is more elastic than supply. 4 points Question 15 A U.S. manufacturer arranges to purchase parts from a German supplier for 500,000 euros in six months. The U.S. manufacturer is concerned that the dollar will depreciate against the euro, meaning the dollar cost of the 500,000 euros will rise. What should the U.S. manufacturer do? lobby the Fed to lower interest rates on six-month T-bills buy a futures contract that fixes the dollar cost of 500,000 euros in six months buy an exchange rate contract that pegs the interest rate to the discount rate on interbank loans sell a naked option to cover the output spread 4 points Question 16 Which of the following scenarios would cause a speculator to buy low and sell high ? Farmers expect to have a bumper harvest of corn next year. Imports of corn begin to flood the country. The government is expected to pass legislation making it mandatory for all vehicles to use corn-based fuels within one year. The government is expected to subsidize corn production for farmers. 4 points Question 17 In a market with a price ceiling which of the following is TRUE? Buyers and sellers experience unexploited gains from trade. Resources are allocated to their most efficient uses. The supply of goods is sold by the sellers with the lowest costs. The supply of goods is bought by the buyers with the highest willingness to pay. 4 points Question 18 Consider the following statements: I. Relative to a no-trade situation, if the United States exported wheat, the U.S. domestic wheat price would rise and domestic production of wheat would expand. II. Relative to a no-trade situation, international trade causes prices of all goods to rise. I is true; II is false. I is false; II is true. Both I and II are true. Both I and II are false. 4 points Question 19 As the price of a good fluctuates, a profit-maximizing firm will expand or contract production along its: average cost curve. average product curve. marginal cost curve. marginal product curve. 4 points Question 20 An increase in demand and a decrease in supply occur in a market. What happens to the equilibrium price and quantity? The equilibrium price decreases; the change in the equilibrium quantity is ambiguous. The equilibrium price decreases; the equilibrium quantity increases. The equilibrium price increases; the change in the equilibrium quantity is ambiguous. The equilibrium price increases; the equilibrium quantity decreases.

periwinklebear649

ECON 1B03 Chapter Notes - Chapter 8: Tax Rate, Laffer Curve, Deadweight Loss

ECON 1B03 Full Course Notes

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