Question 1

Which of the following would be considered tax evasion?

Accepted Answer

Claiming your dog as a dependent on your tax form is considered tax evasion as pets cannot be claimed as dependents on tax forms.

Question 2

Rent seeking activities by special interest groups result in

Accepted Answer

Rent seeking activities refer to the attempts made by individuals or special interest groups to secure benefits or privileges for themselves through the political process. This often results in diverting scarce resources away from their most productive uses, leading to lower economic activity and growth. As a result, B is the best choice as it correctly explains how such activities are detrimental to the economy.

Question 3

The underground economy refers to

Accepted Answer

The underground economy includes all market activity that is not reported to the government, which includes both legal and illegal transactions. It is also often referred to as the "shadow economy" or "informal economy."

Question 4

A tax on productive activity tends to

Accepted Answer

A tax on productive activity lowers the return on such activity, making it less profitable for individuals or companies to continue with the same level of productive activity. This leads to a decrease in formal market activity. Additionally, if the tax is too high, individuals or companies may choose to engage in the underground economy in order to avoid paying taxes, which could further decrease formal market activity. Therefore, option C is the best choice.

Question 5

Tax evasion differs from tax avoidance in the sense that evasion

Accepted Answer

Tax evasion is the illegal act of not reporting income or other taxable items on a tax return with the intent to evade taxes owed. Tax avoidance, on the other hand, is a legal strategy used to minimize tax liability by taking advantage of legal deductions, exemptions, and loopholes.

Question 6

Exhibit 16-4  Refer to Exhibit 16-4.Suppose the government announced it would give monopoly power to one firm in the industry through an exclusive license.If successful, the welfare l oss due to monopoly would be equl to what?

Accepted Answer

If the government granted an exclusive license to one firm, it would give that firm monopoly power in the market. This would result in a reduction in consumer surplus (areas a + b + e) and a deadweight loss (area e), as shown in Exhibit 16-4. Therefore, the welfare loss due to monopoly would be equal to area e, which is represented by choice C.

Question 7

Legal attempts to arrange one's financial decisions so as to pay the least tax possible are known as

Accepted Answer

Tax avoidance refers to legal methods of arranging financial decisions to reduce tax liability. Tax evasion, on the other hand, involves illegal actions to avoid paying taxes. Logrolling is a political term referring to the practice of exchanging favors or support for mutual benefit. Rent seeking refers to attempts to obtain economic gain by manipulating the political process. Underreporting refers to intentionally and illegally reporting less income than earned to reduce tax liability.

Question 8

Which of the following would be considered part of the underground economy?

Accepted Answer

The underground economy includes activities that are not reported to the government and often involve tax evasion or avoidance. Tax avoidance, when done illegally, is part of this economy.

Question 9

Some of the nation's best minds are occupied with devising schemes to avoid taxes and to transfer income to favored groups at the expense of market efficiency.These activities are called

Accepted Answer

Rent seeking refers to the pursuit of wealth through political means, such as lobbying for subsidies or tax breaks, rather than through market competition. This leads to a misallocation of resources and undermines market efficiency. Therefore, the nation's best minds being occupied with such activities is a clear example of rent seeking.

Question 10

Rent seeking reduces our economy's overall efficiency by

Accepted Answer

Rent seeking encourages the adoption of legislation that benefits a particular group or individual, which may reduce overall production efficiency.

Question 11

Suppose you want to buy a boat, but you know that interest paid on a boat loan is not tax deductible.Therefore, you take out a home equity loan, the interest on which is still tax deductible.This procedure is an example of

Accepted Answer

This is an example of legal tax avoidance because it involves structuring the financial transaction in a way that minimizes tax liability, using legal means. It is not illegal tax evasion, which involves intentionally and illegally concealing income or assets to avoid taxes.

Question 12

Filing a fraudulent income tax return that understates income or overstates deductions is known as

Accepted Answer

Filing a fraudulent income tax return that understates income or overstates deductions is a deliberate attempt to avoid paying the full amount of taxes owed, which is considered an illegal activity known as tax evasion.

Question 13

The term underground economy refers to

Accepted Answer

The term underground economy refers to market activity that is not reported to the government, such as off-the-books transactions or illegal activity. It is also known as the shadow economy or informal economy.

Question 14

Activities that go unreported to the government in order to avoid paying taxes or because the activity is illegal are known collectively as the

Accepted Answer

The term "underground economy" typically refers to activities that are not reported to the government for tax or regulatory purposes, and may include both legal (e.g. babysitting or lawn care) and illegal (e.g. drug trafficking) activities.

Question 15

Public goods legislation involves

Accepted Answer

Public goods legislation provides benefits that are widespread and shared by the public, but the costs associated with these benefits are usually also shared widely. For example, laws regulating emissions from industrial facilities provide a cleaner environment for everyone, but the costs of compliance are borne by businesses and ultimately passed on to consumers through higher prices.

Question 16

Suppose a carpenter builds a bookcase for an attorney in exchange for legal services.This transaction is

Accepted Answer

The answer of Suppose a carpenter builds a bookcase for...

Question 17

Exhibit 16-4  Refer to Exhibit 16-4.Suppose the government announced it would give monopoly power to one firm in the industry through an exclusive license.According to the theory of rent seeking, what is the maximum amount that might be spent on rent seeking to get that license?

Accepted Answer

The answer of Exhibit 16-4  Refer to Exhibit 16-4.Suppose...

Question 18

Officials have estimated the size of the U.S.underground economy to be approximately

Accepted Answer

The answer of Officials have estimated the size of the...

Question 19

A rise in marginal income tax rates would likely increase the size of the underground economy.

Accepted Answer

Higher marginal tax rates can create a greater incentive for individuals and businesses to avoid paying taxes by engaging in underground economic activities, such as undeclared work or unreported sales. This can result in an increase in the size of the underground economy.

Question 20

One goal of political action committees is to

Accepted Answer

Political action committees (PACs) engage in rent seeking, which is the process of seeking to influence government policy in order to increase one's own profits or benefits. PACs do this by donating to political campaigns and lobbying elected officials to support their interests.

Quiz 16: Public Goods and Public Choice