This series of questions is designed to test the material presented
in the textbook on sales taxes.
Similar questions will appear on your next quiz.
Be sure that you figure out how to calculate the government revenue and the excess burden from a sales tax.
1. In Brass Monkey, Montana, there is a competitive
market for used
snowmobiles. In this
market there are 60 demanders willing to
pay up to $500, 60 demanders
willing to pay up to $400, and 60
demanders willing to pay
up to $300. There are 90 suppliers who
are willing to sell their
snowmobiles at any price of $200 or
higher but will not sell
for less than that amount. There are 120
suppliers who are willing
to sell their snowmobiles at any price
above $350 but will not
sell for less than that amount. Each
demander can buy at most
one unit and each seller can supply at
most one unit. In the absence
of a sales tax, what would be the
competitive equilibrium
price P and quantity Q?
(a) P=$350, Q=120
(b) P=$400, Q=90
(c) P=$250, Q=60
(d) P=$300, Q=120
(e) P=$300, Q=90
2. If the local government of Brass Monkey
collects a sales tax of
$150 at the time of sale
from each snowmobile buyer,
(a) the supply curve will
shift down by $150 from its pretax
level.
(b) the supply curve will
shift up by $150 from its pretax
level.
(c) the demand curve will
shift up by $150 from its pretax
level.
(d) the demand curve will
shift down by some amount x between 0
and $150 and the supply curve will shift up by $150-x.
(e) the demand curve will
shift down by $150 from its pretax
level.
3. A $150 sales tax that is paid by suppliers
will cause the price
that demanders pay for snowmobiles
in Brass Monkey to
(a) be $150 higher than the
equilibrium price without taxes.
(b) be $75 higher than the
equilibrium price without taxes.
(c) be $75 lower than the
equilibrium price without taxes.
(d) be $50 higher than the
equilibrium price without taxes.
(e) remain constant.
4. How much revenue does the government of
Brass Monkey collect from
its tax on snowmobiles?
(Hint: Ask yourself "How many units are sold when the tax is in place?"
and then ask yourself "How much revenue does the governor collect from
each sale?")
(a) $13,500
(b) $0
(c) $6,000
(d) $3,000
(e) $1,500
5. How much excess burden is caused by the tax on sales
of used
snowmobiles in Brass Monkey?
(a) $3,000
(b) $0
(c) $6,750
(d) $1,500
(e) $600
6. A $150 sales tax that must be paid by snowmobile buyers in
Brass
Monkey at the time of purchase
would cause the equilibrium price
that buyers pay to sellers
to
(a) be $75 lower than the
equilibrium price with no taxes.
(b) be $75 higher than the
equilibrium price with no taxes.
(c) be $100 lower than the
equilibrium price with no taxes.
(d) be $150 higher than
the equilibrium price with no taxes.
(e) be $150 lower than the
equilibrium price with no taxes.
1. A
2. E
3. D
4. A
5. D
6. C