Deck 15: Taxation and Efficiency

Question 1

A tax wedge causes

A)consumer prices to equal producer prices.
B)producer prices to rise above consumer prices.
C)consumer prices to separate from producer prices.
D)all prices to fall.

Answer 1

consumer prices to separate from producer prices.

Question 2

The slope of the production possibilities curve is the

A)marginal rate of substitution.
B)contract curve.
C)offer curve.
D)Engel curve.
E)marginal rate of transformation.

Answer 2

marginal rate of transformation.

Question 3

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

Answer 3

False

Question 4

Excess burden is largest with

A)lump-sum taxes.
B)unit taxes.
C)no taxes.
D)all of the above.

Question 5

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 6

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.

Question 7

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

Question 8

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 9

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 10

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 11

The economic incidence of a unit tax is

A)generally borne by the buyers.
B)generally borne by sellers.
C)generally borne by the government.
D)independent of the statutory incidence for the tax.

Question 12

Which of the following is a unit excise tax?

A)a tax of 15%
B)an admissions fee of $5.00 on each ticket purchased
C)an ad valorem tax of $3.00
D)an income tax of $3.00

Question 13

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

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

Question 14

A lump sum tax can create an excess burden.

Question 15

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 16

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."

Question 17

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)only a and b.

Question 18

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)is all of the above.

Question 19

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

A)0.
B)1.
C)( $\infty$ ).
D)-1.

Question 20

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 the above.

Question 21

Refer to Figure 15.5 in your textbook.Suppose that the demand curve for barley can be characterized by the equation P = 100 - 2Q_d.Suppose further that price was $10.00 and a $10.00 tax is imposed on the market.
(A)How many barleys would be purchased at a price of $10.00? After tax?
(B)What is the amount of tax revenue generated by the tax?
(C)How much excess burden is generated by the tax?
(D)What is the amount of consumer surplus before and after the tax? What is the difference in consumer surplus? Is it equal to excess burden plus the tax revenue?

Question 22

Suppose that demand is perfectly inelastic.Supply is normal and upward sloping.What is the economic incidence of a unit tax placed on suppliers? Illustrate this with an appropriate diagram.

Question 23

Excess burden calculations typically assume many other distortions.

Question 24

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 25

All taxes impose an excess burden.

Question 26

Taxes that create an excess burden are bad.

Question 27

Refer to Figure 15.7 in your textbook.If the supply curve for labor can be written as L = w/2 - 3/2 and the initial wage was $10,how much excess burden is created if there is a tax on wages of $2?

Question 28

Refer to Figure 15.8 in your textbook.If VMPmkt can be characterized by the equation VMPmkt = 50 - 2Hmkt,where H is the number of hours worked,and VMP_home can be characterized by the equation VMP_home = 45 - 3Hhome,where H is the number of hours worked,what is H* if there are a total of 40 hours to be worked between work and home?

Question 29

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 30

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.

Question 31

Unit taxes vary along with the price of the taxed commodity.

Question 32

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 33

The VMP is the Value of Marginal Product.

Question 34

Lump sum taxation is an attractive policy tool.