Learning something…or something

Chapter 8 Questions

What is the cost of a tax? (What does a tax really do?)

Are taxes good or bad? Why?

Question 1 John tutors Robert for $50 an hour. Robert’s willingness to pay John is $60. John’s opportunity cost for tutoring Robert is $35.

1.What is John’s producer surplus?2.What is Robert’s consumer surplus?3.If John has to pay a $5 tax how does the

market change? What about a $25 tax on Robert?

1. John’s consumer surplus is $15

2. Robert’s consumer surplus is $10

3. The $5 tax would not change the market because John would still have a consumer surplus even if he had to take all of the tax.

If the tax was placed on Robert the transaction would no longer take place since the total cost is above his willingness to pay with the distribution of the tax

Question 2

Price

Quantity0

Demand

SupplyA

B

D

F

Q1

C

E

Pricesellersreceive

=PS

Pricewithout

tax

=P1

Pricebuyers

pay =PB

Q2

1. What letter or letters represents consumer surplus before taxes?

2. What letter or letters represents producer surplus after tax?

3.What is total surplus after tax?

4. What does B represent?

5. What does A,B,C,D,E,F represent?

6. Tax is represented by the space between what two points?

1. A,B,C2. F3. A,B,D,F4. Part of the government tax revenue5. Total surplus before taxes6. Between PB & PS

Question 3What kind of market has the largest

deadweight loss? What market has the smallest?

Markets that have a very inelastic demands and supplies have the smallest deadweight loss.

Markets that have very elastic demands and supplies have the largest deadweight loss.

Question 41. The imposition of the

tax causes the quantity sold to do what?

2. What happens to the amount buyers pay? Producers receive?

3. What is the tax?4. How much of the tax

do sellers pay?5. How much of the tax

do buyers pay?

1. Reduce by about 42. Goes up by $6, down by $43. $104. $65. $4

Question 5 a. equilibrium price before the taxb. consumer surplus before the tax

c. producer surplus before the tax

d. total surplus before the tax

e. consumer surplus after the tax

f. producer surplus after the tax

g. total tax revenue to the government

h. total surplus after the tax

i. deadweight loss

a. $10b. $3,600c. $2,400d. $6,000e. $900f. $600g. $3,000h. $4,500i. $1,500

Question 6John has been in the habit of mowing

Willa's lawn each week for $20. John's opportunity cost is $15, and Willa would be willing to pay $25 to have her lawn mowed. What is the maximum tax the government can impose on lawn mowing without discouraging John and Willa from continuing their mutually beneficial arrangement?

If the tax is less than $10, there will exist a price at which both John and Willa will still benefit from the lawn-mowing arrangement. If the tax is $10, a price can be set which will leave John and Willa neither better off nor worse off from the lawn-mowing arrangement. If the tax is greater than $10, all possible prices will leave at least one of the parties worse off from the lawn-mowing arrangement.

Question 7

A

B

C