Deck 15: Taxation and Efficiency

Question 1

Points on the same utility curve are

A) points where the person is indifferent between bundles on the line.
B) points where utility is maximized.
C) never possible.
D) known as "points of light."

Answer 1

points where the person is indifferent between bundles on the line.

Question 2

Taxing in labor markets creates more excess burden than taxing in commodity markets.

A) True
B) False
C) Uncertain

Answer 2

Uncertain

Question 3

Which of the following should be expected if the tax for a certain good increases?

A) price of the good increases.
B) the composition of the commodity bundle is distorted.
C) the budget line pivots out.
D) the composition of the commodity bundle is distorted and the price of the good increases.

Answer 3

the composition of the commodity bundle is distorted and the price of the good increases.

Question 4

Which of the following would be an example of a lump-sum tax?

A) A compensated tax.
B) A retail sales tax.
C) A head tax.
D) An admission fee.

Question 5

Equivalent variation means

A) finding an equivalent change in income that puts a person on the same utility as a change in price would.
B) finding equal tax rates that insure quantity demanded does not change.
C) equalizing excess burden across all markets.
D) moving the same distance in either direction from a starting point on an indifference curve.

Question 6

The compensated demand curve

A) shows how the quantity demanded changes when the price changes.
B) shows how income is compensated,so that the individual's commodity bundle stays on the same indifference curve.
C) is sometimes referred to as the Hicksian demand curve.
D) all of these answer options are correct.

Question 7

The tax interaction effect is the _________ in excess burden in the labor market stemming from the _______ in real wages caused by a Pigouvian tax.

A) increase; increase
B) reduce; reduction
C) increase; reduction
D) reduction; increase

Question 8

The Double Dividend Effect requires

A) double credit on airline miles.
B) two different taxes.
C) no taxes on stock dividends.
D) Pigouvian taxes.

Question 9

The differential taxation of inputs does not create an excess burden.

A) True
B) False
C) Uncertain

Question 10

Excess burden calculations typically assume many other distortions.

A) True
B) False
C) Uncertain

Question 11

A tax that causes the price that producers receive for a commodity to deviate from the buyer's price is

A) an unit tax.
B) a compensated tax.
C) an income tax.
D) a price-distorting tax.

Question 12

The VMP is the Value of Marginal Product.

A) True
B) False
C) Uncertain

Question 13

An income effect

A) is measured as the change in prices over time.
B) is not possible when people are unemployed.
C) requires interest rates to remain constant.
D) is the change in the quantity demand,due to the fact that real income changes when prices change.

Question 14

When a demand curve is vertical,the elasticity of demand is equal to

A) 0.
B) 1.
C) ∞.
D) -1.

Question 15

Taxes that create an excess burden are bad.

A) True
B) False
C) Uncertain

Question 16

The logic of the double-dividend hypothesis may not hold because the Pigouvian tax exacerbates pre-existing distortions in the labor market.

A) True
B) False
C) Uncertain

Question 17

The marginal rate of substitution is

A) the slope of the utility curve.
B) the slope of the contract curve.
C) the slope of the utility possibilities curve.
D) none of these answer options are correct.

Question 18

Excess burden is largest with

A) lump-sum taxes.
B) unit taxes.
C) no taxes.
D) all of these answer options are correct.

Question 19

A lump sum tax can create an excess burden.

A) True
B) False
C) Uncertain

Question 20

When a single tax is imposed,the excess burden is proportional to the compensated elasticity of demand and to the square of the tax rate.

A) True
B) False
C) Uncertain

Question 21

Is it possible to design a tax that does all of the following: i)leaves behavior unchanged so that the quantity demanded of goods and services does not change,ii)creates no excess burden,iii)is not regressive,and iv)is welfare enhancing?

Question 22

All taxes impose an excess burden.

A) True
B) False
C) Uncertain

Question 23

Suppose the inverse demand curve for good A is given by the equation P_A = 10 - Q_A/10,and the supply curve is perfectly elastic (horizontal)at $1.Good A is presently taxed at $2 per unit.Good B (which is independent of good A)has an inverse demand curve,P_B = 5 - Q_B/20,and is also perfectly elastic at $1.Good B is untaxed.
(A)How much tax revenue is collected and what is the excess burden of the $2 tax on A?
(B)How much revenue is collected if the tax on good A is reduced to $1 per unit and good B is taxed at $1 per unit?
(C)What is the total excess burden of taxing both goods at $1 per unit?
(D)Which tax system is preferable from the point of view of economic efficiency?

Question 24

Suppose you had to design an economic system for a country that had never existed before,like one of the former Soviet Union countries.What criteria would you consider to minimize the excess burden of the system of taxation?

Question 25

Lump sum taxation is an attractive policy tool.

A) True
B) False
C) Uncertain

Question 26

Equivalent variation is a method employed to measure excess burden.Comment on why a method such as compensating variation would not be appropriate for this analysis.