Chapter 8 Mindtap In-class quiz KEY PDF

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ECO201 In-class assignment to count as Chapter 8 Mindtap Quiz: The Costs of Taxation To receive full credit, you must work with at least two other classmates. Please put their names on the lines below.

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Multiple Choice: (1 point each) The following gr graph aph depicts the impact of a $3 per unit tax on the Frisbee market by the government. Use tthe he graph to answer the n next ext eight questions.

S1 $12.00 tax R S

$7.00 T

U V

W

300

500

__C__1) The per unit economic burden (a(actual ctual incidence) of the tax to consumers is A. $7 B. $3 C. $2 D. $1 Before the tax the price consumers pay is $7.00 per Frisbee. After the tax consumers pay $9.00 per Frisbee. The price consumers pay increases $2.00, which is the economic burden of the tax to consumers.

__D__2) The per unit economic burden (a(actual ctual incidence) of the tax to producer is A. $7 B. $3 C. $2 D. $1 Before the tax the producers receive $7.00 per Frisbee. After the tax the producers receive $6.00 per Frisbee. The price producers receive decreases by $1.00, which is the per unit economic burden of the tax on producers. (To check yourself you can compare the after tax price the consumers pay and the after tax price the producers receive. The difference has to be the amount of the tax. Here consumers are paying $9.00 per Frisbee so producers must receive $6.00, since the tax is $3.00).

__A__3) Based on the “actual incidence” of the tax, between supply and demand, which is relatively more ELASTIC? A. Supply B. Demand Whichever side of the market is more elastic pays less. Here the consumers pay 2/3 of the per unit economic burden and producers pay 1/3 of the per unit economic burden of the tax, so the producers side of the market is more elastic. So supply must be more elastic.

__C__4) What is the total vvalue alue of consumer surplus BEFORE the imposition of the tax? A. $200 B. $450 C. $1,250 D. $2,700 The consumer surplus is the area from the demand line to the price paid. Before the tax, the consumer surplus is the triangle above the equilibrium price line. The consumer surplus is the area R, S and U. The area of this triangle is .5 x (Base x Height). The base of the triangle is 500-0=500. The height of the triangle is 12.00-7.00=5.00. So the total area and the consumer surplus is .5 x (500 x 5) =$1,250. BEFORE T TAX AX

S1

Price $12.00

S0

$9.00$9.00 $7.00

V

T

$6.00$6.00 W

D 300

500

Frisbee

__B__5) What is the total vvalue alue of consumer surplus AFTER the imposition of the ta tax? x? A. $200 B. $450 C. $1,250 D. $2,700 Consumer surplus is still the area from the demand line down to the price paid, but now the price has increased to $9.00. So the consumer surplus is now the triangle R. We can use the same formula from question 4 to calculate the area of this triangle, .5 x (Base x Height). The base is now 300-0=300. The height is 12.00-9.00=3.00. So the area of the triangle and the consumer surplus is now .5 x (300 x 3) =$450. (To practice this type of problem, try repeating questions 4 and 5 calculating producer surplus).

AFTER T TAX AX

S1

Price $12.00 tax

S0

R $9.00 S

$7.00 T

$6.00

U V

W

D

300

500

Frisbee

__C__6) How much revenue do does es the government gener generate ate fro from m this tax? A. $300 B. $600 C. $900 D. $1,500 To calculate government revenue, Gov. Rev= [Tax per Unit x Units Sold]. The government receives $3.00 per Frisbee sold and with the tax in place 300 Frisbees are sold. So the government revenue is $3.00 x 300 = $900.

__C__7) What areas on the gr graph aph repre represent sent the deadweight loss that results fro from m the tax? A. B. C. D.

Areas U+W Areas S+U Areas U+V Areas S+T

The deadweight loss is the area that is not included in consumer surplus, producer surplus or government revenue. The deadweight loss triangle is area U+V.

.

S1

Price $12.00 tax

S0

C.S. $9.00 $7.00

Deadweight Loss Traingle (U+V)

Rev

$6.00 P.S.

D

300

500

Frisbee

__C__8) What is the dollar vvalue alue of the deadweight loss gen generated erated b by y this tax? A. $100 B. $200 C. $300 D. $600 There are a few different approaches. A simple method is to calculate the area of triangle U+V, using the triangle formula. The base of the triangle is $9.00-$6.00=$3.00. The height of the triangle is 500-300=200. So the area of the triangle and the total deadweight loss is .5 x (3 x 200)= $300.

THESE LAST TWO QUESTIONS DO NO NOT T REFER T TO O THE GRAPH ON THE O OTHER THER SIDE OF T THE HE PAGE.

__A__9) The demand for bbeer eer is more elastic than the demand fo forr milk.

The supply of beer and the supply of milk

are similar in steepness. Which w would ould generate a la larger rger deadweight loss? A. a $1 per unit excise tax imposed on beer B. a $1 per unit excise tax imposed on milk

Sketch an example of the two markets.

BEER MARKET AFTER T TAX AX (Elastic Demand) PricePrice

SS0

DD QuantityFrisbee

MILK MARKET AFTER T TAX AX (Inelastic Demand) Price

S

D

Quantity

Remember that the height of the tax must be the same in both markets. (The tax line must be $1.00 tall in the graph of both markets). The $1.00 tax in the beer market creates a larger deadweight loss triangle.

__C__10) The Laff Laffer er Curve shows us that A. as the size of the tax increases, tax revenue always increases. B. as the size of the tax increases, tax revenue always decreases. C. as the size of the tax increases, tax revenue increases but then eventually starts to decrease. D. the size of the tax and tax revenue are unrelated.

LAFFER C CURVE URVE...