Question 1

Jim and Celia receive great satisfaction from their consumption of micro-brewed beer. Celia would be willing to purchase only one 12-litre bottle and would pay up to $6 for it. Jim would be willing to pay $9 for his first 12-litre bottle, $7 for his second bottle, and $3 for his third bottle. The current market price is $3 per bottle.
-According to the information provided, assume that the government places a tax of $4 on each bottle of micro-brewed beer. What is Celia's consumer surplus from micro-brewed beer?
A) zero
B) $4
C) $8
D) $12

Accepted Answer

The answer of Jim and Celia receive great satisfaction from...

Question 2

Jim and Celia receive great satisfaction from their consumption of micro-brewed beer. Celia would be willing to purchase only one 12-litre bottle and would pay up to $6 for it. Jim would be willing to pay $9 for his first 12-litre bottle, $7 for his second bottle, and $3 for his third bottle. The current market price is $3 per bottle.
-According to the information provided, how much total consumer surplus do Celia and Jim collectively receive from consuming micro-brewed beer when it is priced at $3 a bottle?
A) $13
B) $9
C) $6
D) $3

Accepted Answer

Celia and Jim's total consumer surplus is calculated by adding the difference between their maximum willingness to pay and the market price for each bottle they purchase. If both are willing to pay more than $3 for each bottle they buy, their combined consumer surplus is the sum of these differences for all the bottles they purchase at $3.

Question 3

The extra tax that is paid by a taxpayer on their next additional dollar of income is called:
A) a deadweight loss
B) the marginal tax rate
C) a consumption tax
D) the average tax rate

Accepted Answer

The extra tax paid on the next additional dollar of income is referred to as the marginal tax rate. This rate is important to consider when making decisions on whether or not to work more hours or take on additional income, as it determines the rate at which that income will be taxed.

Question 4

One of the benefits from switching taxation away from income towards consumption is that:
A) it will necessarily increase tax revenues
B) it is always administratively simpler
C) it distorts incentives to earn income
D) it eliminates disincentives to save

Accepted Answer

By switching taxation away from income towards consumption, people are not penalized for saving their income instead of spending it, thus eliminating disincentives to save. This can encourage people to save more and ultimately contribute to long-term economic growth.

Question 5

Policymakers consider two main objectives when designing a taxation system:
A) revenue and debt reduction
B) equity and efficiency
C) revenue and expenditures
D) expenditures and efficiency

Accepted Answer

The two main objectives when designing a taxation system are equity (fairness in how taxes are distributed among individuals and groups) and efficiency (minimizing economic distortions or negative impacts). While revenue and expenditures and revenue and debt reduction are important considerations, they are not the primary objectives of a taxation system. Expenditures and efficiency are also not the main objectives as tax policy is designed to raise revenue and ensure fairness while minimizing negative impacts on economic activity.

Question 6

The average tax rate is equal to:
A) total sales taxes divided by total expenditures
B) total expenditures divided by total income
C) total taxes paid divided by total income
D) total income divided by total taxes

Accepted Answer

The average tax rate is the percentage of total income that is paid in taxes. Therefore, the correct choice is C which defines the calculation of the average tax rate as total taxes paid (numerator) divided by total income (denominator).

Question 7

Jim and Celia receive great satisfaction from their consumption of micro-brewed beer. Celia would be willing to purchase only one 12-litre bottle and would pay up to $6 for it. Jim would be willing to pay $9 for his first 12-litre bottle, $7 for his second bottle, and $3 for his third bottle. The current market price is $3 per bottle.
-According to the information provided, if a tax of $2 is levied on each bottle of micro-brewed beer, what is the deadweight loss of the tax?
A) zero
B) $4
C) $8
D) $12

Accepted Answer

The answer of Jim and Celia receive great satisfaction from...

Question 8

Large deadweight losses and large administrative burdens are characteristic of a tax system that is best defined as:
A) equitable
B) bureaucratic
C) revenue-maximising
D) inefficient

Accepted Answer

Large deadweight losses and administrative burdens indicate that the tax system is creating inefficiencies in the market, resulting in reduced economic welfare. Therefore, option D, inefficient, is the best choice. The other options do not accurately describe the negative effects of deadweight losses and administrative burdens on the tax system.

Question 9

Suppose the government imposes a tax of 10 per cent on the first $30 000 of income, and 20 per cent on all income above $30 000, what is the average tax rate when income is $40 000?
A) 20 per cent
B) 15 per cent
C) 12.5 per cent
D) 10 per cent

Accepted Answer

The tax on the first $30,000 is 10%, which is $3,000. The tax on the next $10,000 (income above $30,000) is 20%, which is $2,000. The total tax is $5,000. The average tax rate is $5,000/$40,000 = 12.5%.

Question 10

The average tax rate measures the:
A) fraction of spending paid in taxes
B) fraction of income paid in taxes
C) incremental rate of tax on income
D) average deadweight loss from all taxes

Accepted Answer

The average tax rate is a measure of the fraction of income that is paid in taxes. It is calculated by dividing total taxes paid by total income earned. Therefore, the correct choice is B.

Question 11

Jim and Celia receive great satisfaction from their consumption of micro-brewed beer. Celia would be willing to purchase only one 12-litre bottle and would pay up to $6 for it. Jim would be willing to pay $9 for his first 12-litre bottle, $7 for his second bottle, and $3 for his third bottle. The current market price is $3 per bottle.
-According to the information provided, if a tax of $4 is levied on each bottle of micro-brewed beer, how much tax revenue will be generated from sales to Jim and Celia?
A) zero
B) $4
C) $8
D) $12

Accepted Answer

Celia is willing to pay up to $6 for a 12-litre bottle of beer, but with the tax of $4, the total price of the bottle would be $7 (including the market price of $3). Therefore, she will not purchase any bottle of beer.

Jim's willingness to pay for the first bottle is $9, which is greater than the post-tax price of $7, so he will still purchase the first bottle.

However, for the second bottle, Jim's willingness to pay is $7 but with the tax, the total price would be $10, which is greater than the value he places on the product. Thus, he will not purchase the second bottle.

Similarly, for the third bottle, Jim's willingness to pay is only $3, but with the tax, the total cost would be $6, which is again greater than his willingness to pay.

Therefore, the tax revenue generated from sales to Jim and Celia is only from Jim's first bottle, which is $4 (the market price of $3 and the tax of $1).

Hence, the best choice is C ($8).

Question 12

Which of the following is a cost of taxes to the taxpayer?
A) the tax itself
B) deadweight losses
C) administrative burdens
D) all of the above

Accepted Answer

All three options are costs of taxes to the taxpayer. The tax itself is an obvious cost, while deadweight losses and administrative burdens are indirect costs that taxpayers face. Deadweight losses refer to the reduction in economic activity that results from taxes, while administrative burdens refer to the time and effort required to comply with tax regulations. Therefore, the answer is D, all of the above.

Question 13

Jim and Celia receive great satisfaction from their consumption of micro-brewed beer. Celia would be willing to purchase only one 12-litre bottle and would pay up to $6 for it. Jim would be willing to pay $9 for his first 12-litre bottle, $7 for his second bottle, and $3 for his third bottle. The current market price is $3 per bottle.
-According to the information provided, if a tax of $4 is levied on each bottle of micro-brewed beer:
A) there will be no deadweight loss
B) Jim will bear the full burden of the deadweight loss
C) Celia and Jim will share the burden of the deadweight loss
D) Celia will bear the full burden of the deadweight loss

Accepted Answer

The answer of Jim and Celia receive great satisfaction from...

Question 14

Suppose the government imposes a tax of 10 per cent on the first $24 000 of income and 20 per cent on all incomes above $24 000, what are the tax liability and the average tax rate for a person whose income is $48 000?
A) 10 per cent and 20 per cent, respectively
B) 10 per cent and $24 000, respectively
C) $7200 and 15 per cent, respectively
D) $7200 and 20 per cent, respectively

Accepted Answer

The tax liability for the first $24,000 is 10% of $24,000 = $2,400. For the remaining $24,000 (since the total income is $48,000), the tax rate is 20%, which equals $4,800. Therefore, the total tax liability is $2,400 + $4,800 = $7,200. The average tax rate is the total tax liability divided by the total income: $7,200 / $48,000 = 15%.

Question 15

Which of the following statements is most correct?
A) deadweight loss is the efficiency that a tax creates as people allocate resources according to market incentives
B) deadweight loss is the inefficiency that a tax creates as people allocate resources according to market incentives
C) deadweight loss is the inefficiency that a tax creates as people allocate resources according to the tax incentives
D) deadweight loss is the efficiency that a tax creates as people allocate resources according to the tax incentives

Accepted Answer

Deadweight loss refers to the inefficiency that arises from a tax, as it distorts the allocation of resources by changing incentives, leading individuals to make decisions based on the tax rather than purely on market incentives.

Question 16

Jim and Celia receive great satisfaction from their consumption of micro-brewed beer. Celia would be willing to purchase only one 12-litre bottle and would pay up to $6 for it. Jim would be willing to pay $9 for his first 12-litre bottle, $7 for his second bottle, and $3 for his third bottle. The current market price is $3 per bottle.
-According to the information provided, if a tax of $4 is levied on each bottle of micro-brewed beer, what is the total deadweight loss of the tax?
A) $13
B) $9
C) $6
D) $3

Accepted Answer

The answer of Jim and Celia receive great satisfaction from...

Question 17

Suppose the government imposes a tax of 10 per cent on the first $40 000 of income and 20 per cent on all incomes above $40 000, what are the tax liability and the marginal tax rate for a person whose income is $30 000?
A) both are 10 per cent
B) 10 per cent and $2000, respectively
C) $3000 and 10 per cent, respectively
D) $3000 and 20 per cent, respectively

Accepted Answer

The tax liability is 10% of $30,000, which is $3,000. The marginal tax rate is 10% because the income is within the first $40,000 bracket.

Question 18

The most appropriate measure of the sacrifice made by a taxpayer is the:
A) average tax rate
B) marginal tax rate
C) lump-sum tax rate
D) sales tax rate

Accepted Answer

The average tax rate, which is the total tax paid divided by the total income, best represents the sacrifice made by a taxpayer because it reflects the proportion of income that is paid in taxes, giving a clear picture of the taxpayer's burden.

Question 19

If we are trying to gauge how much the income tax system distorts incentives, then:
A) the average tax rate is the most meaningful measure
B) the distortion is entirely captured in the administrative burden of the tax
C) total tax revenue collected is the most meaningful measure
D) the marginal tax rate is the most meaningful measure

Accepted Answer

The marginal tax rate measures the additional tax paid on each additional dollar earned, and is therefore a more accurate measure of how the income tax system distorts incentives. As the marginal tax rate increases, individuals may be less inclined to work additional hours or take on additional income-generating opportunities since they will be receiving a smaller portion of each additional dollar earned due to taxes. The average tax rate and total tax revenue collected do not capture this dynamic. The administrative burden of the tax, while important, does not directly relate to how much the income tax system distorts incentives.

Question 20

One tax system is less efficient than another if it:
A) places a lower tax burden on lower income families than on higher income families
B) places a higher tax burden on lower income families than on higher income families
C) raises the same amount of revenue at a higher cost to taxpayers
D) raises the same amount of revenue at a lower cost to taxpayers

Accepted Answer

A less efficient tax system raises the same amount of revenue but at a higher cost to taxpayers. Therefore, option C is the correct answer. Options A and B refer to the equity or fairness of the tax system, not its efficiency. Option D describes a more efficient tax system.

Quiz 12: The Design of the Tax System

The extra tax that is paid by a taxpayer on their next additional dollar of income is called:

One of the benefits from switching taxation away from income towards consumption is that:

Policymakers consider two main objectives when designing a taxation system:

The average tax rate is equal to:

Large deadweight losses and large administrative burdens are characteristic of a tax system that is best defined as:

Suppose the government imposes a tax of 10 per cent on the first $30 000 of income, and 20 per cent on all income above $30 000, what is the average tax rate when income is $40 000?

The average tax rate measures the:

Which of the following is a cost of taxes to the taxpayer?

Suppose the government imposes a tax of 10 per cent on the first $24 000 of income and 20 per cent on all incomes above $24 000, what are the tax liability and the average tax rate for a person whose income is $48 000?

Which of the following statements is most correct?

Suppose the government imposes a tax of 10 per cent on the first $40 000 of income and 20 per cent on all incomes above $40 000, what are the tax liability and the marginal tax rate for a person whose income is $30 000?

The most appropriate measure of the sacrifice made by a taxpayer is the:

If we are trying to gauge how much the income tax system distorts incentives, then:

One tax system is less efficient than another if it: