ECO 450 Week 8 Quiz 6 Ch 11 and 12 .pdf
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ECO 450 Week 8 Quiz 6 Ch 11 and 12
1. A lump-sum tax results in both income and substitution effects.
2. A consumer currently pays $500 a year retail sales taxes. She would be better off if she
paid the same amount annually as a lump-sum tax.
3. Clothing is sold in perfectly competitive markets where no externalities prevail. An excise
tax on clothing will result in a market price for clothing that equals the marginal social benefit
and marginal social cost of service.
4. Assuming that the income effects are negligible and that beer is sold in a competitive
market, a 10-cent per can tax on beer that causes a 10,000 can per month decline in sales will
result in an excess burden of $1,000 per month.
5. A tax on land results in an income effect on landlords but no substitution effect. Then it
follows that the excess burden of a tax on land will be zero.
6. The excess burden of a tax on interest income is $5 billion per year. Total interest income
per year is $50 billion. The tax currently collects $15 billion in revenue per year. The
efficiency-loss ratio of the tax is therefore 0.33.
7. A payroll tax results in a difference between the gross wages paid by employers and the
net wages received by workers.
8. If the market supply of labor services is perfectly inelastic, a tax on labor income will
reduce the net wages received by workers by the full amount of the tax per labor hour.
9. If a $10 per unit tax is levied on the output of a monopolist, more of that tax will be
shifted to consumers than would be the case if the same good were produced by a
10. A study indicates that taxes in the United States reduce the Gini coefficient for the
nation by 10 percent. This implies that taxes make the income distribution more equal.
11. A lump-sum tax only results in income effects.
12. An income tax is an example of a price-distorting tax.
13. The more price-elastic the demand of a taxed item, the lower the excess burden of a tax
on the sale of that item.
14. If the tax on the sale of gasoline is doubled from 20 cents per gallon to 40 cents per
gallon, the excess burden of the tax will quadruple.
15. If the compensated elasticity of supply of labor is zero, then a tax on labor earnings will
have zero excess burden.
16. Lump-sum taxes do not prevent prices from equaling the marginal social cost and
benefit of any goods and services.
17. Lump-sum taxes can vary in amount based on income level.
18. A lump-sum tax can distort prices and affect consumption behavior.
Multiple Choice Questions
1. A lump-sum tax:
a. distorts market prices so that they do not simultaneously equal MSB and MSC.
b. can result in price changes but does not prevent prices from simultaneously being equal
to MSB and MSC.
c. results in substitution effects that change prices.
d. results in both substitution effects and income effects that change prices.
2. The current price of compact discs, which are traded in perfectly competitive markets, is
$10. A $1 per unit tax is levied on the discs. Annual record sales decline from five million to
four million as a result of the tax. Assuming that the income effect of the tax-induced price
change is negligible, the excess burden of the tax will be:
a. $500,000 per year.
b. $1 million per year.
c. $2 million per year.
d. $2.5 million per year.
3. The elasticity of supply of land is zero. A tax on land results only in an income effect to
landlords. Then it follows that a 10-percent tax on land rents will:
a. have a positive excess burden.
b. be shifted forward to tenants.
c. be paid entirely by landlords.
d. have zero excess burden.
e. both (c) and (d)
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:
a. remain the same.
c. increase four times.
5. The supply of new cars is perfectly elastic. A $400 per car tax is levied on
buyers. As a result of the tax,
a. the price received by sellers will fall by $400.
b. the price paid by buyers, including the tax, will increase by $400.
c. the quantity of cars sold per year will be unchanged.
d. the excess burden of the tax will be zero.
e. both (c) and (d)
6. Other things being equal, the more inelastic the demand for a taxed good,
a. the greater the portion of the tax paid by sellers.
b. the greater the excess burden of the tax.
c. the greater the portion of the tax paid by buyers.
d. the less the portion of a tax on sellers that can be shifted to buyers.
7. The market supply of labor is perfectly inelastic. However, the income effect of taxinduced wage changes are believed to be substantial. Then it follows that a tax on labor
a. have zero excess burden.
b. have positive excess burden.
c. be paid entirely by workers as a reduction in net wages.
d. both (a) and (c)
e. both (b) and (c)
8. 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:
a. decrease the price of food.
b. increase the price of housing.
c. decrease the price of housing.
d. have no effect on either the price of food or housing.
9. Differential tax incidence measures the effect:
a. that a tax and the expenditures it finances have on the distribution of income.
b. that one tax alone has on the distribution of income.
c. on the distribution of income of substituting one tax for another while holding the size
and composition of the budget fixed.
d. on the distribution of income of substituting one tax for another while changing the kinds
of government services financed.
10. 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:
a. supply of those input services is very elastic.
b. supply of those input services is of unitary elasticity.
c. supply of those input services is perfectly inelastic.
d. demand for those input services is perfectly elastic.
11. 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:
a. have no effect on the market equilibrium price of gasoline.
b. cause the market equilibrium price of gasoline to fall.
c. cause the market equilibrium price paid by buyers to rise.
d. cause the net price received by sellers to fall.
e. both (c) and (d)
12. 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:
a. the incidence of the tax is likely to be borne entirely by medical-care providers.
b. most of the tax is likely to be shifted to those who purchase medical care.
c. the market equilibrium price of medical care will fall.
d. the excess burden of the tax is likely to be very high.
13. Which of the following is true about a lump-sum tax?
a. It prevents efficiency from being attained in competitive markets.
b. It causes substitution effects.
c. It causes income effects.
d. It causes both income effects and substitution effects.
14. 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?
a. The incidence of the tax will be borne by builders.
b. The excess burden of the tax will be zero.
c. The quantity of new construction supplied will be unaffected.
d. The tax will be fully shifted to buyers of new construction.
15. 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?
a. The tax will be fully borne by workers.
b. Some of the tax will be shifted to employers as market equilibrium wages increase.
c. Market equilibrium wages will decline.
d. There will be no effect on market equilibrium wages.
16. If a lump-sum tax is imposed, the slope of the new budget line relative to the budget line
prior to the tax:
a. remains unchanged.
d. can increase and decrease in different regions.
17. Viewed from origin a price distorting tax creates a new budget line with a ______ slope
relative to the budget line without the tax.
a. less steep
b. more steep
18. 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)?
d. Cannot be determined.
19. If a per unit tax is imposed, but the quantity supplied and demanded does not change
a. the demand is perfectly inelastic.
b. the supply is perfectly inelastic.
c. there is no deadweight loss.
d. All of the above.
20. The efficiency-loss ratio relative to tax is:
a. the deadweight loss less the tax revenue.
b. the deadweight loss divided by the tax revenue reduced by one.
c. the excess burden divided by the tax revenue.
d. None of the above.
1. From 1950 to 2009, the federal government budget has been in balance in most years.
2. The high employment budget deficit implies that increases in economic activity will not
eliminate the actual deficit.
3. Other things being equal, an increase in government borrowing is likely to increase
4. If taxpayers anticipate future tax increases when government borrows to finance
deficits, increased government borrowing will increase interest rates.
5. As of 2008, the amount of federal debt outstanding was equal to twice the annual GDP.
6. From 1950 to 1980, the value of the federal debt as a percent of GDP declined.
7. More than 50 percent of the federal debt in recent years has been outside debt.
8. An increase in market rates of interest tends to decrease the market value of
outstanding government debt.
9. Deficit finance postpones taxation from the present to the future.
10. The burden of the debt is borne by those who purchase government bonds.
11. The federal government budget recorded surpluses between 1998 and 2001.
12. State and local governments are usually required by state law to keep the budgets in
13. If business and personal saving are constant, then a federal budget deficit will have no
impact on national saving.
14. Other things being equal, a government surplus increases the supply of loanable funds
available for investment.
15. State revenue bonds are backed by the taxing power of state governments.
16. A federal budget surplus can lead to more credit being available for productive activity.
17. A federal budget deficit can strain credit markets forcing the real rate of interest to
18. The U.S. deficit in the 1980s was structural in the sense that federal spending would
exceed federal revenue even at a level of full employment.
Multiple Choice Questions
1. The outstanding federal debt will decline in value if:
a. budget deficits continue.
b. the government runs a budget surplus.
c. the market rate of interest increases.
d. either (b) or (c)
2. The federal budget has been in deficit:
a. for every year between 1970 and 1997.
b. for every year between 1950 and 1997.
c. only since 1980.
d. for every year between 1960 and 1997.
3. The high employment deficit is estimated at $100 billion. Assuming that the economy is
operating below full employment and that it will not overheat during the year,
a. the actual budget is not in deficit.
b. increasing GDP will eliminate the deficit.
c. increasing GDP will not eliminate the deficit.
d. the actual budget is in surplus.
4. An increase in government borrowing has no effect on the willingness of citizens to save
or on the demand for credit. Increased borrowing to cover deficits will therefore:
a. reduce interest rates.