STAYER ECO 450 Week 8 Quiz 6 Ch 11 and 12 .pdf
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STAYER ECO 450 Week 8 Quiz 6 Ch 11 and 12
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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
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
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
a. $500,000 per year.
b. $1 million per year.