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Effects of Taxes on a Market quiz #1 Flashcards

Effects of Taxes on a Market quiz #1
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  • Why does an increase in business taxes shift the investment demand curve to the left?
    An increase in business taxes raises the cost of investing for firms, reducing the expected return on investment. As a result, firms are less willing to invest at any given interest rate, causing the investment demand curve to shift to the left. This reflects a decrease in the quantity of investment demanded at each possible price, similar to how taxes in a market reduce producer surplus and create deadweight loss by discouraging some trades.
  • How is tax revenue calculated when a per unit tax is imposed on a market?
    Tax revenue is calculated by multiplying the per unit tax amount by the quantity exchanged after the tax is imposed. This is represented as Tax Revenue = Tax per unit × Quantity with tax (QT).
  • What happens to the price buyers pay and the price sellers receive when a tax is imposed?
    When a tax is imposed, the price buyers pay increases while the price sellers receive decreases, creating a gap between the two prices. This means the market is no longer in equilibrium.
  • Which areas of surplus are lost from consumer and producer surplus when a tax is imposed?
    Consumers lose areas B and C from their surplus, while producers lose areas D and E. These lost areas represent the reduction in surplus due to the tax.
  • What does the rectangle formed by areas B and D represent in the context of a taxed market?
    The rectangle formed by areas B and D represents the tax revenue collected by the government. It is the portion of surplus transferred from consumers and producers to the government.
  • How does the imposition of a tax affect total economic surplus in a market?
    Total economic surplus decreases because areas C and E are lost as deadweight loss. The new total surplus includes consumer surplus, producer surplus, and tax revenue, but excludes the lost areas.
  • What is deadweight loss and how is it represented on the market graph after a tax is imposed?
    Deadweight loss is the loss of economic surplus due to trades that no longer occur because the market is not at the efficient quantity. On the graph, it is represented by the areas C and E.
  • Why is there no deadweight loss in a market without a tax?
    Without a tax, the market is at equilibrium and all possible trades occur, maximizing total surplus. Therefore, there is no deadweight loss because no surplus is lost from missed trades.
  • How does the quantity exchanged in the market change after a tax is imposed?
    The quantity exchanged decreases from the equilibrium quantity to a lower quantity (QT) after a tax is imposed. This reduction reflects fewer trades occurring due to the tax.
  • Why is tax revenue included in the calculation of total economic surplus after a tax is imposed?
    Tax revenue is included because it represents benefits that accrue to the government, even though consumers and producers do not receive it directly. It is considered part of the total surplus, unlike deadweight loss which provides no benefit.