In the Absence of Taxes,Ashley Would Prefer to Purchase a Large

question 323

Multiple Choice

In the absence of taxes,Ashley would prefer to purchase a large sport utility vehicle (SUV) .The government has recently decided to place a $10,000 nuisance tax on SUVs.If Ashley decides to purchase a small economy car as a result of the tax,which of the following statements is correct?

• A) Other people who choose to purchase SUVs will incur the cost of the deadweight loss of the tax.
• B) There are no deadweight losses as long as some people still choose to purchase SUVs.
• C) In order to determine the magnitude of the deadweight loss, we must add the revenues from the tax to the loss in Ashley's consumer surplus.
• D) Ashley is worse off, and her loss of welfare is part of the deadweight loss of the tax.

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Definitions:

Pretax Income

The amount of income earned by a business before paying income taxes.

Variable Costs

Expenses that change in proportion with the level of production or business activity, such as materials and labor directly involved in manufacturing.

Fixed Costs

Costs that remain constant for a set period of time, regardless of changes in the level of activity or volume of output.

Contribution Margin Ratio

The portion of sales revenue that exceeds variable costs, expressed as a percentage.