Question 1

If the price elasticity of supply of labor is equal to 0.5 and the price elasticity of demand for labor is -2, then which of the following is likely to result from a tax on labor earnings?

Accepted Answer

A tax on labor earnings will decrease the net wage workers receive, which will reduce the marginal benefit of working and decrease the quantity of labor supplied. Due to the low price elasticity of labor supply, workers will bear most of the burden of the tax, but because the price elasticity of labor demand is high, some of the tax will be shifted to employers. This will result in an increase in market equilibrium wages, but the extent to which wages increase will depend on the relative magnitudes of the elasticities of supply and demand. Therefore, choice B is the most likely outcome.

Question 2

Other things being equal, the more inelastic the demand for a taxed good, the

Accepted Answer

When demand for a taxed good is inelastic, buyers are less likely to reduce their purchases in response to the price increase caused by the tax. As a result, sellers are able to pass on more of the tax burden to buyers in the form of higher prices, and therefore buyers pay a greater portion of the tax.

Question 3

Which of the following is true about a lump-sum tax?

Accepted Answer

A lump-sum tax is a fixed amount of tax that doesn't change with an individual's income or consumption choices, thus it doesn't distort decision-making or cause substitution effects. However, it does affect the overall income level, leading to income effects.

Question 4

Currently, a 10 cent per gallon tax is levied on gasoline consumption.The tax is increased to 20 cents per gallon.The excess burden of the tax will:

Accepted Answer

The excess burden of the tax will increase four times. This is because the tax has doubled, so the deadweight loss (excess burden) increases by a factor of four (square of the proportional change in the tax rate).

Question 5

The efficiency-loss ratio relative to tax is:

Accepted Answer

The efficiency-loss ratio relative to tax refers to the excess burden or deadweight loss caused by a tax in relation to the tax revenue generated. Therefore, the efficiency-loss ratio relative to tax is the excess burden divided by the tax revenue, making choice C the correct answer.

Question 6

Housing construction is generally believed to be an industry of constant costs.In the long run, which of the following is true if a $10 per square foot tax on housing construction is collected directly from builders?

Accepted Answer

Housing construction is generally believed to be an industry of constant costs, meaning that builders may not be able to absorb the entire tax without increasing prices. Therefore, the tax is likely to be fully shifted to buyers of new construction, resulting in a decrease in the quantity of new construction supplied. The excess burden of the tax may also not be zero as the tax may lead to a deadweight loss by reducing the efficiency of the housing market.

Question 7

The demand for medical care is very inelastic.If a 10 percent tax is levied on the sale of medical services and is collected from medical-care providers, then:

Accepted Answer

Since the demand for medical care is very inelastic, it is difficult for consumers to significantly reduce their consumption of medical care, even if the price increases due to the tax. Therefore, most of the tax burden is likely to be passed on to consumers through higher prices for medical care. The incidence of the tax may also be shared between medical-care providers and consumers, but it is unlikely to be borne entirely by providers. The market equilibrium price of medical care may increase or stay the same, but it is unlikely to fall due to the tax. The excess burden of the tax may be high, but we cannot say for certain without more information.

Question 8

Most studies show that the price elasticity of demand for gasoline is -0.2.If the price elasticity of supply is 2, then a tax on gasoline will:

Accepted Answer

A tax on gasoline will shift the supply curve to the left, causing the price paid by buyers to rise and the net price received by sellers to fall. The magnitude of the change in the equilibrium price will depend on the relative elasticities of supply and demand. Since the price elasticity of supply is greater than the absolute value of the price elasticity of demand, the impact on quantity will be greater than the impact on price. As a result, both (b) and (c) are likely to occur.

Question 9

The elasticity of supply of land is zero.A tax on land results only in an income effect to landlords.It then follows that a 10 percent tax on land rents will:

Accepted Answer

Since the elasticity of supply of land is zero, the tax will be paid entirely by landlords, and there will be no excess burden as the burden cannot be shifted to consumers or reduced production. Therefore, both option (b) and (c) are correct.

Question 10

Differential tax incidence measures the effect:

Accepted Answer

Differential tax incidence measures the effect of substituting one tax for another while holding the size and composition of the budget fixed. It is used to analyze the distributional effects of tax policy changes by examining how different taxes affect different groups of people. Thus, option C is the correct choice. Option A is incorrect because it refers to the overall effect of a tax and the expenditures it finances, without considering the impact of different taxes. Option B is incorrect because it refers to the impact of a single tax rather than the comparison between two different taxes. Option D is incorrect because it refers to the effect of changing both the tax and the government services financed, rather than focusing solely on the tax changes.

Question 11

Most studies of tax incidence assume that taxes on labor income and other input services are borne entirely by the workers and other input owners that supply the services.This implies that the:

Accepted Answer

The assumption that taxes on labor income and other input services are borne entirely by the workers and other input owners implies that the supply of those input services is perfectly inelastic. This means that the quantity supplied does not change in response to changes in price, including the imposition of a tax, leading to the burden being fully absorbed by the suppliers.

Question 12

A 10 percent tax is levied on the sale of soft drinks.This tax is collected from the sellers of the drinks.A critic of the tax argues that the sellers will shift the entire tax to the buyers and therefore be no worse off.Evaluate this argument by showing the market conditions that would have to prevail for the prediction to be correct.Indicate under what circumstances the tax will be shared by the buyers and the sellers of soft drinks.

Accepted Answer

The answer of A 10 percent tax is levied on...

Question 13

A $0.30 per unit tax is imposed on a good that reduces the quantity supplied and demanded by 1000 units.What is the deadweight loss (ignore price elasticities)?

Accepted Answer

Without information on price elasticities, we cannot determine the exact deadweight loss. However, we do know that both the quantity supplied and demanded decrease by the same amount (1000 units). This means that the tax is efficient and there is no additional deadweight loss from excess burden. The deadweight loss is simply the area of the triangle formed by the tax and the new quantity traded, which can be calculated as 0.5 x 0.30 x 1000 = $150. Therefore, the best choice is C.

Question 14

Explain why the excess burden of a lump-sum tax will always be zero.Why is the payroll tax not a lump-sum tax? Show how a payroll tax affects the wages paid by employers and received by workers, assuming that it is withheld from their paychecks.Assuming that the supply of labor is not perfectly inelastic, show how the excess burden can be measured.

Accepted Answer

The answer of Explain why the excess burden of a...

Question 15

Suppose an economy is comprised of only two markets: one for food and the other for housing.A tax on food used to finance transfer payments is likely to:

Accepted Answer

A tax on food used to finance transfer payments will decrease the demand for food, leading to a decrease in the price of food. The decrease in the demand for food will also lead to a decrease in the demand for housing, as people will have more money to spend on other goods and services. This will lead to a decrease in the price of housing.

Question 16

The market supply of labor is perfectly inelastic.However, the income effect of tax-induced wage changes are believed to be substantial.It then follows that a tax on labor income will:

Accepted Answer

Since the market supply of labor is perfectly inelastic, a tax on labor income would not cause a change in the quantity of labor supplied. However, due to the income effect, workers may reduce their labor effort as their post-tax income decreases. This reduction in labor effort would lead to a decrease in output and economic efficiency, creating excess burden. Additionally, since the tax reduces workers' net wages, they will bear the burden of the tax in the form of a reduction in their post-tax income. Therefore, both (b) and (c) are correct, making option D the best choice.

Question 17

Viewed from origin, a price distorting tax creates a new budget line with a ______ slope relative to the budget line without the tax.

Accepted Answer

A price distorting tax shifts the original budget line to a higher price level, causing the new budget line to have a steeper slope than the original one. This is true as the consumer will have to give up more of one good to afford the same quantity of another good due to the increased price caused by the tax. Therefore, the correct choice is B, more steep.

Question 18

The supply of new cars is perfectly elastic.A $400 per car tax is levied on buyers.As a result of the tax, the

Accepted Answer

The answer of The supply of new cars is perfectly...

Question 19

If a per unit tax is imposed but the quantity supplied and demanded does not change, then:

Accepted Answer

When a per unit tax is imposed but the quantity supplied and demanded does not change, it indicates that both the demand and supply are perfectly inelastic, meaning consumers and producers will buy or sell the same amount regardless of price changes. This situation also means there is no deadweight loss, as the market efficiency does not change due to the tax.

Question 20

If a lump-sum tax is imposed, the slope of the new budget line relative to the budget line prior to the tax:

Accepted Answer

A lump-sum tax does not affect the relative prices of goods, so the slope of the budget line, which reflects the ratio of these prices, remains unchanged.

Quiz 11: Taxation, Prices, Efficiency, and the Distribution of Income