Taxes – Chapter 8 | Full Test Bank – 9th Edition - Foundations of Microeconomics 9e | Test Bank with Answer Key by Robin Bade by Robin Bade. DOCX document preview.
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Foundations of Microeconomics, 9e (Bade)
Chapter 8 Taxes
8.1 Taxes on Buyers and Sellers
1) Tax incidence is the
A) burden buyers have to absorb from a tax on goods and services.
B) burden sellers have to absorb from a tax on goods and services.
C) lost revenue the government endures from goods and services that are not taxed.
D) division of the burden of a tax between the buyer and the seller.
E) deadweight loss created by a tax.
Topic: Tax incidence
Skill: Level 1: Definition
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
2) Tax incidence is the
A) dollar amount of a tax, expressed as a percentage of the purchase price.
B) dollar amount of a tax per unit sold.
C) division of a tax burden between the buyer and seller.
D) amount of revenue collected by government on a specific good.
E) deadweight loss from the tax.
Topic: Tax incidence
Skill: Level 1: Definition
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
3) Which of the following is TRUE regarding tax incidence?
i. The elasticities of supply and demand determine tax incidence.
ii. When the government taxes the seller, the firm always pays most of the tax.
iii. When the government taxes the buyer, the consumer always pays most of the tax.
A) i only
B) i and ii
C) i and iii
D) ii and iii
E) i, ii and iii
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
4) The incidence of a tax refers to
A) the division of the burden of a tax between buyers and sellers.
B) the deadweight loss that a tax generates.
C) the inefficiency of a tax.
D) the revenue collected by government because of a tax.
E) the division of the burden of a tax between the public and the government.
Topic: Tax incidence
Skill: Level 1: Definition
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
5) If a $10 sales tax is imposed on a good and the equilibrium price increases by $10, the tax is
A) split between buyers and sellers but not evenly.
B) paid fully by sellers.
C) paid fully by buyers.
D) split evenly between buyers and sellers.
E) perhaps split between buyers and sellers but it is impossible to determine the incidence without further information.
Topic: Tax incidence
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
6) Sales taxes are usually collected from sellers, who view the tax as
A) resulting from a leftward of the demand curve.
B) an additional cost of selling the good.
C) an addition to the demand for the product.
D) an addition to profit.
E) the same as a rightward shift of the demand curve.
Topic: Tax incidence
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
7) Imposing a sales tax on sellers of a product has an effect that is similar to which of the following?
A) a decrease in consumers' preferences for the good
B) an increase in the costs of production
C) an increase in demand for the good
D) a decrease in people's willingness to work
E) anything that decreases the demand and shifts the demand curve leftward
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
8) A sales tax imposed on sellers of a good
A) decreases the demand and shifts the demand curve rightward.
B) decreases the supply and shifts the supply curve leftward.
C) decreases both the demand and the supply and shifts both the demand and supply curves leftward.
D) decreases the supply and shifts the supply curve rightward.
E) has no effect on either the demand or the supply.
Topic: Tax incidence
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
9) Suppose the government imposes a $1 per gallon per gallon tax on sellers of gasoline. As a result, the
A) supply curve shifts leftward.
B) supply curve shifts rightward.
C) demand curve shifts leftward.
D) demand curve shifts rightward.
E) demand and supply curves both shift leftward.
Topic: Tax incidence
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
10) If a good has a tax levied on it, sellers respond to the price that excludes the tax and not the price with the tax because
A) the tax is handed over to the state directly by buyers.
B) sellers do not get to keep the tax revenue.
C) the demand for the good has decreased.
D) the quantity supplied of the good increases.
E) demanders pay none of the tax.
Topic: Tax incidence, price wedge
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
11) Neither the demand nor the supply of gasoline is perfectly elastic or inelastic. When the government increases the federal tax on gasoline, the effect on buyers is that the price they pay
A) rises.
B) falls.
C) does not change.
D) rises if the demand is inelastic and falls if the demand is elastic.
E) rises if the supply is inelastic and falls if the supply is elastic.
Topic: Tax incidence
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
12) The demand curve for pizza is downward sloping and the supply curve is upward sloping. If the government imposes a $2 tax on a pizza, ________ the tax.
A) only consumers pay
B) only producers pay
C) both producers and consumers pay part of
D) neither producers nor consumers pay part of
E) the government pays
Topic: Tax incidence
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
13) Neither the demand nor the supply of automobiles is perfectly elastic or inelastic. If the government imposes a $1,000 tax on automobiles, then the price of an automobile buyers pay
A) increases by $1,000.
B) increases by less than $1,000.
C) increases by more than $1,000.
D) decreases by $1,000.
E) does not change.
Topic: Tax incidence
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
14) Neither the demand nor the supply of sugar is perfectly elastic or inelastic. If the government imposes a 5 percent tax on sugar, the
A) price of sugar buyers pay falls by 5 percent.
B) price of sugar buyers pay increases by less then 5 percent.
C) price of sugar buyers pay does not change.
D) quantity of sugar increases.
E) price of sugar buyers pay rises by 5 percent.
Topic: Tax incidence
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
15) Giving in to the demand of protestors, suppose the French government reduces the tax on gasoline by 15 percent. Neither the demand for gasoline nor the supply of gasoline is perfectly elastic or inelastic. As a result of the tax cut, the price for a gallon of gasoline paid by buyers
A) falls by 15 percent.
B) rises by 15 percent.
C) falls by less than 15 percent.
D) rises by less than 15 percent.
E) falls by more than 15 percent.
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
16) Neither the demand for gasoline nor the supply of gasoline is perfectly elastic or inelastic. If the federal government eliminated the 18.4 cents per gallon gasoline tax, the price paid by buyers would
A) decrease by less than 18.4 cents.
B) decrease by 18.4 cents.
C) decrease by more than 18.4 cents.
D) stay the same.
E) increase by 18.4 cents.
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
17) To calculate the revenue government receives when a tax is imposed on a good, multiply the
A) pre-tax equilibrium price by the pre-tax quantity.
B) after-tax equilibrium price by the after-tax quantity.
C) tax by the pre-tax quantity.
D) tax by the after-tax quantity.
E) after-tax equilibrium price by the after-tax quantity and then subtract the pre-tax equilibrium price multiplied by the pre-tax quantity.
Topic: Tax incidence, government revenue
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
18) The imposition of a tax on a good enables the government to
A) raise the price received by sellers of the goods that have been taxed.
B) lower the price paid by buyers for the goods that have been taxed.
C) create a more efficient economic system.
D) take part of consumer and producer surplus as tax revenue when the good is purchased.
E) decrease the deadweight loss in this market.
Topic: Tax incidence, government revenue
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
19) In the figure above, suppose that the government imposes a tax of $4 per pizza. Then, the
A) buyers and sellers equally share the incidence of the tax.
B) shaded area is the deadweight loss from the tax.
C) shaded area is the tax revenue from the tax.
D) Both answers A and B are correct.
E) Both answers A and C are correct.
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
20) In the figure above, suppose that the government imposes a tax of $4 per pizza. Then, the tax revenue collected by the government equals
A) $240.
B) $320.
C) $160.
D) $120.
E) $4.
Topic: Tax incidence, government revenue
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
21) The above figure shows the market for gourmet ice cream. In effort to reduce obesity, government places a $2 tax per gallon on suppliers in this market, shifting the supply curve from S0 to S1. The quantity of ice cream consumed before the tax is ________ gallons and the quantity consumed after the tax is ________ gallons.
A) 300,000; 200,000
B) 200,000; 250,000
C) 250,000; 200,000
D) 200,000; 300,000
E) 200,000; 200,000
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
22) The above figure shows the market for gourmet ice cream. In effort to reduce obesity, government places a $2 tax per gallon on suppliers in this market, shifting the supply curve from S0 to S1. The total tax revenue is equal to
A) $400,000.
B) $800,000.
C) $500,000.
D) $200,000.
E) More information is needed to determine the total tax revenue.
Topic: Tax incidence, government revenue
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
23) The above figure shows the market for gourmet ice cream. In effort to reduce obesity, government places a $2 tax per gallon on suppliers in this market, shifting the supply curve from S0 to S1. The tax incidence is
A) split equally between consumers and producers, each paying $1 per gallon.
B) split equally between consumers and producers, each paying $2 per gallon.
C) such that consumers pay $2 per gallon and producers pay $1 per gallon.
D) such that consumers pay $1 per gallon and producers pay $2 per gallon.
E) such that producers pay all of the tax.
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
24) The above figure shows the market for buckets of golf balls at the driving range. A new leisure time tax is placed on suppliers in this market, shifting the supply curve from S0 to S1. The amount of this tax is ________ per bucket of golf balls.
A) $4
B) $2
C) $2.50
D) $1
E) $3
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
25) The above figure shows the market for buckets of golf balls at the driving range. A new leisure time tax is placed on suppliers in this market, shifting the supply curve from S0 to S1. The tax incidence is
A) split equally between buyers and sellers, each paying $1 per bucket.
B) split equally between buyers and sellers, each paying $2 per bucket.
C) such that buyers pay $2 per bucket and sellers pay $1 per bucket.
D) such that buyers pay $1 per bucket and sellers pay $2 per bucket.
E) such that sellers pay all of the tax.
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
26) The above figure shows the market for buckets of golf balls at the driving range. A new leisure time tax is placed on suppliers in this market, shifting the supply curve from S0 to S1. The total tax revenue is equal to
A) $1,800.
B) $600.
C) $1,200.
D) $900.
E) $5,600.
Topic: Tax incidence, government revenue
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
27) The above figure shows the market for buckets of golf balls at the driving range. A new leisure time tax is placed on suppliers in this market, shifting the supply curve from S0 to S1. The quantity of buckets without the tax is ________ and the quantity with the tax is ________.
A) 400; 600
B) 600; 400
C) 400; 400
D) 800; 500
E) 600; 500
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
28) The figure above shows the market for tires. The figure shows that the government has imposed a tax of ________ per tire.
A) $10
B) $30
C) $40
D) $60
E) None of the above answers is correct.
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
29) The figure above shows the market for tires. The figure shows that the government has imposed a tax of ________ per tire and that ________ pay most of the tax.
A) $30; buyers
B) $40; buyers
C) $30; sellers
D) $60; sellers
E) $60; buyers
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
30) The figure above shows the market for tires. The government has imposed a tax on tires, and the buyers pay ________ of the tax.
A) $10
B) $20
C) $50
D) $60
E) $30
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
31) The figure above shows the market for tires. The government has imposed a tax on tires, and the sellers pay ________ of the tax.
A) $10
B) $20
C) $50
D) $60
E) $30
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
32) The figure above shows the market for tires. According to the figure, the government collects ________ per month in total tax revenue.
A) $600 million
B) $1,200 million
C) $2,000 million
D) $900 million
E) None of the above answers is correct.
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
33) The figure above shows the market for tires. According to the figure, the price elasticity of demand is ________ the price elasticity of supply.
A) greater than
B) equal to
C) less than
D) not comparable to
E) More information is needed to determine if the price elasticity of demand is greater than, equal to, less than, or comparable to the price elasticity of supply.
Topic: Tax incidence and the elasticity of supply
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
34) For a given supply elasticity, the more inelastic the demand for a good, the larger the share of the tax paid by the
A) buyers.
B) sellers.
C) participants other than the buyers and sellers.
D) government.
E) None of the above answers is correct.
Topic: Tax incidence and the elasticity of demand
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
35) If a tax is placed on suppliers of a good, then the incidence of the tax
A) falls more on the sellers if demand is elastic.
B) falls more on the sellers if demand is inelastic.
C) is usually split equally between the buyers and the sellers.
D) usually falls more on the sellers than the buyers.
E) usually falls more on the buyers than the sellers.
Topic: Tax incidence and the elasticity of demand
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
36) Suppose that the elasticity of demand for insulin is 0.1, the elasticity of demand for oranges is 1.2, and the elasticity of supply for insulin and oranges is 0.4. If the government imposes a 10 percent tax on both insulin and oranges, the percentage decrease in the quantity of oranges is ________ the percentage decrease in the quantity of insulin.
A) larger than
B) smaller than
C) equals to
D) not comparable to
E) More information is needed to determine how the decrease in the quantity of oranges compares to the decrease in the quantity of insulin.
Topic: Tax incidence and the elasticity of demand
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
37) The demand for insulin is quite inelastic. The demand for Pepsi is quite elastic. Suppose the elasticity of supply for insulin is the same as the elasticity of supply for Pepsi. If a $0.20 tax was imposed on each of these goods (holding everything else constant), which consumers would pay more of the tax?
A) the Pepsi consumers
B) the insulin consumers
C) There would be no difference in the amount of tax paid by the consumers.
D) More information is needed to determine which consumers pay more of the tax.
E) The premise of the question is wrong because the elasticity of demand and the incidence of a tax are not related.
Topic: Tax incidence and the elasticity of demand
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
38) The demand for gasoline is inelastic and the supply of gasoline is elastic. Therefore
A) sellers bear most of the incidence of a tax on gasoline.
B) buyers bear most of the incidence of a tax on gasoline.
C) the government bears most of the incidence of a tax on gasoline.
D) the incidence of a tax on gasoline depends if the tax is imposed on sellers or on buyers.
E) None of the above answers is correct.
Topic: Tax incidence and the elasticity of demand
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
39) The buyers pay all of a tax when the demand is
A) perfectly elastic.
B) more elastic than the supply.
C) more inelastic than the supply.
D) unit elastic.
E) perfectly inelastic.
Topic: Tax incidence and the elasticity of demand
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
40) If the demand curve for a good is horizontal, a tax is levied on this product is
A) split between the buyers and the sellers but not evenly so that either the buyer or the seller pays more.
B) split evenly between the buyers and the sellers.
C) paid entirely by buyers.
D) paid entirely by sellers.
E) not paid by either the buyers or the sellers.
Topic: Tax incidence and the elasticity of demand
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
41) Suppose the demand for specialty car license plates is perfectly inelastic and the supply curve for specialty license plates is upward sloping. A tax is imposed on specialty license plates. Which of the following is TRUE?
A) Drivers pay the smallest share of the tax.
B) Drivers pay none of the tax.
C) Drivers pay all of the tax.
D) The government pays all of the tax.
E) The government collects nothing in tax revenues.
Topic: Tax incidence and the elasticity of demand
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
42) Suppose the elasticity of demand for a product is 0 and elasticity of supply is 1. If the government imposes a tax on the product, then
A) buyers and sellers pay exactly the same share of the tax.
B) buyers pay all of the tax.
C) sellers pay all of the tax.
D) buyers pay a smaller share of the tax than do sellers, but both buyers and sellers pay some of the tax.
E) because the elasticity of demand is zero, the government collects no revenue from this tax.
Topic: Tax incidence and the elasticity of demand
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
43) Suppose the demand for peaches from South Carolina is perfectly elastic. If the supply curve is upward sloping and a tax is imposed on peaches from South Carolina, then
A) peach sellers pay all of the tax.
B) peach buyers pay all of the tax.
C) peach buyers and sellers evenly split the tax.
D) the government does not collect any revenue from the tax.
E) the tax does not change the equilibrium quantity of peaches.
Topic: Tax incidence and the elasticity of demand
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
44) If buyers pay more of a tax than do the sellers
A) demand is more elastic than supply.
B) the amount of tax revenue collected by the government is almost zero.
C) supply is more elastic than demand.
D) the equilibrium price paid by buyers rises by less than half the amount of the tax.
E) None of the above answers is correct.
Topic: Tax incidence and the elasticity of demand
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
45) Cigarettes are highly addictive and therefore have a very low elasticity of demand. A $2.00 increase in the national sales tax on cigarettes would likely cause the price paid by buyers of cigarettes to
A) increase by more than $1.00 but less than $2.00.
B) increase by $2.00.
C) increase by more than $2.00.
D) increase by less than $1.00.
E) remain unchanged.
Topic: Tax incidence and the elasticity of demand
Skill: Level 5: Critical thinking
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
46) A $2.00 increase in a tax on a good definitely will cause the price paid by buyers to increase by $2.00 if
A) demand is perfectly inelastic.
B) demand is perfectly elastic.
C) demand is unit elastic.
D) demand is inelastic, but not perfectly inelastic.
E) demand is elastic, but not perfectly elastic.
Topic: Tax incidence and the elasticity of demand
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Revised
AACSB: Analytical thinking
47) If the supply of automobiles becomes more inelastic, then a tax on automobiles is
A) paid more by the buyers after the change than before.
B) paid more by the sellers after the change than before.
C) always split evenly between the buyers and the sellers.
D) paid more by the government after the change than before.
E) always paid entirely by the buyers.
Topic: Tax incidence and the elasticity of supply
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
48) For a given elasticity of demand, the less elastic the supply, the
A) larger the deadweight loss from a tax.
B) larger the share of a tax paid by the sellers.
C) greater the burden on the government from a tax.
D) greater is the excess burden from a tax.
E) larger the share of a tax paid by the buyers.
Topic: Tax incidence and the elasticity of supply
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
49) Sellers bear the entire incidence of a tax on a good. This outcome can occur if
A) supply is perfectly inelastic.
B) the good is an inferior good.
C) demand is perfectly inelastic.
D) the demand curve is downward sloping and the supply curve is upward sloping.
E) supply is perfectly elastic.
Topic: Tax incidence and the elasticity of supply
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
50) Why do sellers pay all of a tax when supply is perfectly inelastic?
A) because a perfectly inelastic supply means that the demand is elastic
B) because the government requires firms to collect the tax
C) because a perfectly inelastic supply means that the quantity supplied is quite sensitive to a change in price
D) because a perfectly inelastic supply means that suppliers will produce the same amount regardless of the price
E) because in this case the price of the good that suppliers receive and keep does not change
Topic: Tax incidence and the elasticity of supply
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
51) Suppose the elasticity of supply of land is 0 and elasticity of demand is 2. If the government imposes a 10 percent tax on land, then
A) buyers and sellers each pay 5 percent of the tax.
B) buyers pay all of the tax.
C) sellers pay all of the tax.
D) sellers pay a smaller share of the tax than do buyers but both buyers and sellers pay some of the tax.
E) buyers pay 1/2 of the tax.
Topic: Tax incidence and the elasticity of supply
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
52) The supply of sand is perfectly inelastic and the demand curve for sand is downward sloping. Hence, if a tax on sand is imposed
A) sand buyers pay the entire tax.
B) sand sellers pay the entire tax.
C) the tax is split evenly between the buyers and sellers.
D) the government pays the entire tax.
E) the government collects no tax revenue because the supply is perfectly inelastic.
Topic: Tax incidence and the elasticity of supply
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
53) Suppose the supply of apartments in Minneapolis is perfectly elastic. The effect of a $100 per month tax on all apartments is that
A) landlords pay none of the tax and there is a surplus of apartments.
B) landlords pay all of the tax and suffer all of the deadweight loss.
C) landlords pay all of the tax and no changes take place in the quantity of apartments supplied.
D) renters pay all of the tax.
E) the government collects no tax revenue because the supply is perfectly elastic.
Topic: Tax incidence and the elasticity of supply
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
54) If the government eliminates a tax on a good with a perfectly elastic supply, who benefits most?
A) buyers
B) sellers
C) buyers if the demand is also perfectly elastic, otherwise sellers
D) buyers if the demand is unit elastic, otherwise sellers
E) Buyers and sellers benefit equally.
Topic: Tax incidence and the elasticity of supply
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
55) If the elasticity of demand for a product equals 3 and the supply is perfectly elastic, then if a tax is imposed on this product
A) the buyer pays all the tax.
B) the seller pays all the tax.
C) the buyer pays 3/4 of the tax.
D) the seller pays 3/4 of the tax.
E) the buyer pays 4/3 of the tax.
Topic: Tax incidence and the elasticity of supply
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
56) The loss to society resulting from a tax includes the
A) deadweight loss.
B) consumer surplus paid to the government in the form of tax revenue.
C) producer surplus paid to the government in the form of tax revenue.
D) deadweight loss plus the consumer surplus and producer surplus paid to the government as tax revenue.
E) deadweight loss minus the tax revenue collected by the government.
Topic: Taxes, deadweight loss
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
57) The inefficiency of a sales tax on a good is ultimately the result of the
A) low tax revenue earned by the government relative to the cost of collection.
B) wedge between what buyers pay for the good and what sellers receive for the good.
C) buyers being unable to avoid paying the tax.
D) sellers being unable to avoid paying the tax.
E) increase in the consumer surplus that is more than offset by the decrease in the producer surplus.
Topic: Taxes, deadweight loss
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
58) A tax
A) places a wedge between the price paid by the buyers and the price received by the sellers.
B) reduces consumer surplus and producer surplus.
C) decreases government spending.
D) Both answers A and B are correct.
E) None of the above answers is correct.
Topic: Taxes, deadweight loss
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
59) When a tax is imposed on a good, at the after-tax equilibrium the marginal benefit of the last unit produced ________ the marginal cost.
A) equals
B) is greater than
C) is less than
D) can be calculated but is not comparable to
E) The premise of the question is incorrect because after a tax is imposed, it becomes impossible to determine the marginal benefit and the marginal cost.
Topic: Taxes, deadweight loss
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
60) When a tax is imposed on a good or a service, the marginal benefit of the last unit bought ________ the marginal cost of the last unit.
A) is equal to
B) is greater than
C) is less than
D) None of the above answers is correct because there is no consistent relationship between the marginal benefit of the last unit and its marginal cost.
E) is not able to be compared to
Topic: Taxes, deadweight loss
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
61) If neither the demand nor supply of a good is perfectly elastic or inelastic, a tax on the good ________ consumer surplus and ________ producer surplus.
A) decreases; decreases
B) increases; increases
C) decreases; increases
D) increases; decreases
E) decreases; does not change
Topic: Taxes, deadweight loss
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
62) If the demand curve is downward sloping and the supply curve is upward sloping, then when a product is taxed
A) part of the initial consumer surplus goes to the government as revenue.
B) part of the initial consumer surplus becomes a deadweight loss.
C) the producer surplus never changes because consumers pay taxes, not producers.
D) Both answers A and B are correct.
E) Both answers B and C are correct.
Topic: Taxes, deadweight loss
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Revised
AACSB: Reflective thinking
63) The size of the deadweight loss, or excess burden, of a tax depends on the
A) amount of producer surplus but not the amount of consumer surplus because it is the producers who send the tax revenues to the government.
B) strength of demand.
C) strength of supply.
D) elasticities of demand and supply.
E) number of demanders and the number of suppliers.
Topic: Taxes, deadweight loss
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
64) When a tax is imposed on a good or service, the
A) revenue gained by the government is the excess burden.
B) deadweight loss that arises from a tax is the excess burden.
C) share of the tax paid by the buyer is the excess burden.
D) share of the tax paid by the seller is the excess burden.
E) amount the government collects as tax revenue is the deadweight loss from the tax.
Topic: Deadweight loss, excess burden
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
65) The excess burden of a tax refers to the fact that
A) the benefits from a tax exceed the tax revenue.
B) the deadweight loss from a tax exceeds the remaining consumer surplus.
C) marginal cost is greater than marginal benefit after the tax.
D) a tax creates a deadweight loss.
E) taxes are split between buyers and sellers.
Topic: Deadweight loss, excess burden
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
66) The deadweight loss from a tax
A) is the tax revenue the government collects when people die.
B) is the split of a tax between the amount paid and the amount collected.
C) equals the amount collected as revenue from the tax.
D) is called the excess burden of the tax.
E) equals the amount collected as revenue from the tax plus the excess burden of the tax.
Topic: Deadweight loss, excess burden
Skill: Level 1: Definition
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
67) The deadweight loss of a tax
A) is the transfer of income from households to the government.
B) determines the incidence of a tax.
C) is part of the total burden of a tax.
D) is greater than the total burden of a tax.
E) equals the tax revenue collected by the government.
Topic: Deadweight loss, excess burden
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
68) Suppose the elasticity of demand for Mexican food is 3.00 and the elasticity of supply is 1.20. If the government imposes a sales tax on Mexican food, which of the following occurs?
i. Less Mexican food is purchased by buyers.
ii. Less Mexican food is produced by sellers.
iii. The government receives the excess burden as revenue.
iv. Both the consumer surplus and the producer surplus decrease.
A) i and ii
B) iii only
C) i, ii, and iv
D) iv only
E) i, ii, iii, and iv
Topic: Deadweight loss, excess burden
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
69) The above figure shows the demand curves in four different markets. If each of the markets has an identical upward sloping supply curve and the same tax is levied on suppliers, which market would produce the smallest amount of deadweight loss?
A) A
B) B
C) C
D) D
E) C and D
Topic: Taxes, deadweight loss
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
70) The above figure shows the demand curves in four different markets. If each of the markets has an identical upward sloping supply curve and the same tax is levied on suppliers, which market would produce the largest amount of deadweight loss?
A) A
B) B
C) C
D) D
E) C and D
Topic: Taxes, deadweight loss
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
71) The above figure shows the supply curves in four different markets. If each of the markets has an identical downward sloping demand curve and the same tax is levied on suppliers, which market would produce the smallest amount of deadweight loss?
A) A
B) B
C) C
D) D
E) A and D
Topic: Taxes, deadweight loss
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
72) The above figure shows the supply curves in four different markets. If each of the markets has an identical downward sloping demand curve and the same tax is levied on suppliers, which market would produce the largest amount of deadweight loss?
A) A
B) B
C) C
D) D
E) A and D
Topic: Taxes, deadweight loss
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
73) Tax incidence refers to
A) how government taxes are spent by the government.
B) the incidences of tax revolts by the taxpayers.
C) the amount of a tax minus its burden.
D) the division of the burden of a tax between the buyer and the seller.
E) tax revenue minus excess burden.
Topic: Tax incidence
Skill: Level 1: Definition
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
74) If a $1 sales tax is imposed on the sale of a CD, and neither the demand nor the supply is perfectly elastic or perfectly inelastic, then the price of a CD paid by consumers will
A) increase by $1 and fewer CDs will be bought.
B) increase by less than $1 and fewer CDs will be bought.
C) not change and the same number of CDs will be bought.
D) increase by $1 and the same number of CDs will be bought.
E) increase by more than $1 and fewer CDs will be bought.
Topic: Tax incidence
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
75) Neither the supply of nor demand for a good is perfectly elastic or perfectly inelastic. So, imposing a tax on the good results in a ________ in the price paid by buyers and ________ in the equilibrium quantity.
A) rise; an increase
B) rise; a decrease
C) fall; an increase
D) fall; a decrease
E) a rise; no change
Topic: Tax incidence
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
76) The graph shows the market for textbooks. If the government introduces a tax of $20 a textbook, then the price paid by buyers
A) increases by $20.
B) increases to $80 a textbook.
C) decreases to $60 a textbook.
D) is $70 a textbook.
E) does not change because the demand for textbooks is perfectly elastic.
Topic: Tax incidence
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
77) Neither the supply of nor demand for a good is perfectly elastic or perfectly inelastic. So, imposing a tax on the good results in a ________ in the price received and kept by sellers and a ________ in the price paid by buyers.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
E) no change; rise
Topic: Tax incidence, price wedge
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
78) Suppose the demand for barley is perfectly elastic. The supply curve of barley is upward sloping. If a tax is imposed on barley
A) barley sellers pay the entire tax.
B) barley buyers pay the entire tax.
C) the government pays the entire tax.
D) the tax is split evenly between barley buyers and sellers.
E) who pays the tax depends on whether the government imposes the tax on barley sellers or on barley buyers.
Topic: Tax incidence and the elasticity of demand
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
79) The demand for apple pies is perfectly elastic. If the government taxes apple pies at $1 a pie, then
A) the seller pays the entire tax.
B) the buyer pays the entire tax.
C) the seller and the buyer split the tax evenly.
D) the seller and the buyer split the tax but the seller pays more.
E) who pays the tax depends on whether the government imposes the tax on pie buyers or on pie sellers.
Topic: Tax incidence and the elasticity of demand
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
80) At harvest time the supply of wheat is perfectly inelastic. If the government taxes wheat at $1 a bushel, then
A) the seller pays the entire tax.
B) the buyer pays the entire tax.
C) the seller and the buyer split the tax evenly.
D) the seller and the buyer split the tax but the seller pays more.
E) no one pays the tax because the wheat must be harvested or it will go to waste.
Topic: Tax incidence and the elasticity of supply
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
81) To determine who bears the greater share of a tax, we compare the
A) number of buyers to the number of sellers.
B) elasticity of supply to the elasticity of demand.
C) size of the tax to the price of the good.
D) government tax revenue to the revenue collected by the suppliers.
E) pre-tax quantity to the post-tax quantity.
Topic: Tax incidence and the elasticity of demand and supply
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
82) The supply of oil is more elastic than the demand for oil. If oil is taxed $10 per barrel, how will the tax be divided between the buyer and seller?
A) The seller will pay more of the tax than the buyer pays.
B) The buyer will pay more of the tax than the seller pays.
C) The seller and buyer will split the tax evenly.
D) The seller will pay the entire tax.
E) The buyer will pay the entire tax.
Topic: Tax incidence and the elasticity of demand and supply
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
83) The buyer will pay the entire tax levied on a good when the demand for the good is ________ or when the supply of the good is ________.
A) perfectly elastic; perfectly inelastic
B) perfectly elastic; perfectly elastic
C) perfectly inelastic; perfectly inelastic
D) perfectly inelastic; perfectly elastic
E) unit elastic; unit elastic
Topic: Tax incidence and the elasticity of demand and supply
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
84) A sales tax imposed on tires ________ consumer surplus and ________ producer surplus.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) does not change; does not change
Topic: Taxes, deadweight loss
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
85) If a tax is placed on tires, then
i. the equilibrium quantity of tires will decrease.
ii. a deadweight loss will be created.
iii. the producer surplus will decrease.
A) i only
B) ii only
C) i and iii
D) i and ii
E) i, ii, and iii
Topic: Taxes, deadweight loss
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
86) The deadweight loss from a tax is called the
A) marginal benefit of the tax.
B) marginal cost of the tax.
C) excess burden of the tax.
D) net gain from taxation.
E) net loss from taxation.
Topic: Deadweight loss, excess burden
Skill: Level 1: Definition
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
87) The graph shows the market for cell phones. The government imposes a sales tax on cell phones at $10 a cell phone. The excess burden of the sales tax on cell phones is
A) $20,000.
B) $15,000.
C) $35,000.
D) $7,500.
E) $30,000.
Topic: Deadweight loss, excess burden
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
88) A sales tax creates a deadweight loss because
A) there is some paper work opportunity cost of sellers paying the sales tax.
B) demand and supply both decrease.
C) less is produced and consumed.
D) citizens value government goods less than private goods.
E) the government spends the tax revenue it collects.
Topic: Taxes, deadweight loss
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
89) The graph shows the market for mattresses. As a result of a tax imposed by the government, the price buyers pay changes from ________ and the equilibrium quantity changes from ________ mattresses.
A) $300 to $325; 5,000 to 4,000
B) $295 to $325; 5,000 to 4,000
C) $325 to $300; 4,000 to 5,000
D) $325 to $295; 4,000 to 5,000
E) $295 to $300; 4,000 to 5,000
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Application of knowledge
90) The graph shows the market for mattresses. The government imposes a tax on mattresses. The amount of the tax is ________ which causes the price buyers pay to ________ with ________ bearing more of the tax.
A) $30; rise to $325;buyers
B) $25; fall to $295; buyers
C) $30; rise to $300; buyers
D) $5; fall to $295; firms
E) $25; rise to $325; firms
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Application of knowledge
91) The figure shows the market for mattresses. As a result of the government's tax on mattresses, consumer surplus ________, producer surplus ________ and the government collects tax revenue of ________.
A) shrinks; shrinks; $150,000
B) shrinks; shrinks; $120,000
C) grows; shrinks; $120,000
D) shrinks; grows; $150,000
E) grows; grows; $30 per mattress sold
Topic: Tax incidence, government revenue
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Application of knowledge
92) The figure shows the market for mattresses. If the government imposes a tax on mattresses, the figure shows that
A) firms will pay more of the tax because they have less elastic supply.
B) firms and buyers will bear equal tax burdens.
C) buyers will pay most of the tax because they have less elastic demand.
D) the excess burden of the tax falls mainly on firms.
E) inefficiency does not occur because buyers and sellers split the tax.
Topic: Tax incidence and the elasticity of demand and supply
Skill: Level 5: Critical thinking
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
93) The figure shows the market for mattresses. If the government had imposed the tax on the buyers instead of on the sellers, the
A) outcome would have been the same.
B) deadweight loss would have been smaller.
C) deadweight loss would have been larger.
D) equilibrium price would have risen a smaller amount.
E) equilibrium quantity would have fallen by a smaller amount.
Topic: Tax incidence
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Application of knowledge
94) The figure shows a market with perfectly inelastic demand. As a result of a tax imposed by the government
A) the price buyers pay increases by $1 and the equilibrium falls to 900 units.
B) sellers bear all of the tax and there is a deadweight loss of area ACD.
C) sellers bear all of the tax and there is no deadweight loss.
D) buyers bear all of the tax and there is a deadweight loss of area ABC.
E) buyers bear all of the tax and there is no deadweight loss.
Topic: Tax incidence
Skill: Level 5: Critical thinking
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
95) The figure shows a market with perfectly inelastic demand. Which of the following is TRUE regarding the figure?
i. The tax decreases the equilibrium quantity from 1,000 to 900 units.
ii. The tax increases the price buyers pay from $10 to $11.
iii. The tax creates a deadweight loss of area ABC.
A) ii only
B) i and ii only
C) i only
D) i and iii only
E) ii and iii only
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Application of knowledge
96) Suppose that in a market, supply is perfectly elastic while demand is perfectly inelastic. If the government imposes a tax of $10 per unit
A) the price buyers pay increases by less than $10 per unit with firms and buyers splitting the tax.
B) the price buyers pay is unaffected by the tax.
C) the market quantity is unaffected by the tax.
D) at the new equilibrium, marginal cost equals marginal benefit and there is no deadweight loss.
E) both C and D are correct.
Topic: Tax incidence and the elasticity of demand and supply
Skill: Level 5: Critical thinking
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
8.2 Income Tax and Social Security Tax
1) If we look at the percentage of total tax revenue collected by different taxes in the United States, we see that
A) personal income taxes are the largest.
B) Social Security taxes are the largest.
C) excise taxes, while not the largest, are second only to Social Security taxes.
D) sales taxes are the smallest.
E) corporate income taxes are by far the largest.
Topic: Eye on the U.S. economy, taxes in the United States today
Skill: Level 1: Definition
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
2) Which of the following types of taxes generates the most revenue for governments in the United States?
A) Social Security tax
B) personal income tax
C) property tax
D) sales tax
E) excise tax
Topic: Eye on the U.S. economy, taxes in the United States today
Skill: Level 1: Definition
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
3) For the United States, which tax is the single biggest source of tax revenue?
A) Social Security tax
B) sales tax
C) property tax
D) personal income tax
E) corporation income tax
Topic: Eye on the U.S. economy, taxes in the United States today
Skill: Level 1: Definition
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
4) Taxes on corporate profit are a type of ________ tax.
A) sales
B) property
C) income
D) regressive
E) selling
Topic: Taxes
Skill: Level 1: Definition
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
5) If there is an income tax levied on labor income, the labor demand curve ________ and the labor supply curve ________.
A) shifts rightward; does not shift
B) shifts leftward; does not shift
C) does not shift; shifts rightward
D) does not shift; shifts leftward
E) shifts leftward; shifts leftward
Topic: Tax on labor income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
6) What happens to the acceptable wage rate at each level of employment once an income tax is levied on labor income?
A) Nothing, it remains the same.
B) It increases by the amount of the tax that must be paid.
C) Workers and employers split the tax, so the acceptable wage increases by half the tax.
D) Because workers have to work more to make up for the tax, the acceptable wage rate falls by some amount that cannot be determined.
E) Because workers have to work more to make up for the tax, the acceptable wage rate falls by the precise amount of the tax that must be paid.
Topic: Tax on labor income
Skill: Level 2: Using definitions
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
7) Suppose the government imposes a tax on labor income. Which of the following describe the effect of the tax in the labor market?
i. If the demand for labor is more elastic than the supply, workers will bear more of the tax.
ii. Employment is not affected because workers need jobs.
iii. The tax creates a deadweight loss.
A) i and iii only
B) i, ii and iii
C) ii only
D) iii only
E) ii and iii
Topic: Tax on labor income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
8) Suppose that before any tax on labor income, the equilibrium wage in a market is $10 per hour.
Once the government imposes a $3 per hour tax on labor income, the equilibrium wage rises to $11 per hour. What does that reveal about the elasticities of supply and demand for labor?
A) Supply is more elastic than demand.
B) Demand is more elastic than supply.
C) Supply and demand are equally elastic.
D) Both the supply and demand are inelastic.
E) Nothing because more information is needed to learn about the elasticities.
Topic: Tax on labor income, incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
9) Taxes on labor income ________ a deadweight loss and ________ the supply of labor.
A) create; decrease
B) do not create; increase
C) create; increase
D) do not create; decrease
E) create; do not change
Topic: Tax on labor income, deadweight loss
Skill: Level 2: Using definitions
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
10) The figure above shows the labor supply and labor demand curves for personal trainers in the state of Florida. The initial equilibrium hourly wage is $10. Suppose the state of Florida institutes an income tax on labor income of $6 an hour in order to buy voting machines for the next election. With the tax in place, the labor supply curve will
A) remain at LS.
B) shift to LS1.
C) shift to LS2.
D) change so that it becomes the same as LD.
E) None of the above answers is correct.
Topic: Tax on labor income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
11) The figure above shows the labor supply and labor demand curves for personal trainers in the state of Florida. The initial equilibrium hourly wage is $10. Suppose the state of Florida institutes an income tax on labor income of $6 an hour in order to buy voting machines for the next election. How much of the tax is paid by employers?
A) $0
B) $2
C) $4
D) $6
E) $600
Topic: Tax on labor income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
12) The figure above shows the labor supply and labor demand curves for personal trainers in the state of Florida. The initial equilibrium hourly wage is $10. Suppose the state of Florida institutes an income tax on labor income of $6 an hour in order to buy voting machines for the next election. How much of the tax is paid by employees?
A) $0
B) $2
C) $4
D) $6
E) $600
Topic: Tax on labor income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
13) The figure above shows the labor supply and labor demand curves for personal trainers in the state of Florida. The initial equilibrium hourly wage is $10. Suppose the state of Florida institutes an income tax on labor income of $6 an hour in order to buy voting machines for the next election. The deadweight loss from this tax equals the region
A) abe.
B) bce.
C) cef.
D) efg.
E) cdf.
Topic: Tax on labor income, deadweight loss
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
14) The above figure shows the labor market for land surveyors. Dave is a land surveyor. What is the tax incidence for this income tax?
A) Though the employer pays some of the tax, Dave pays more of the income tax than his employer.
B) Dave pays the same amount of the income tax as his employer.
C) While Dave pays some of tax, Dave pays less of the income tax than his employer.
D) Dave does not pay any tax.
E) Dave's employer does not pay any tax.
Topic: Tax on labor income, incidence
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
15) The above figure shows the labor market for land surveyors. Dave is a land surveyor. What is the total income tax Dave pays each year?
A) $1,500
B) $4,500
C) $3,000
D) $40,500
E) $45,000
Topic: Tax on labor income
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
16) The above figure shows the labor market for land surveyors. Dave is a land surveyor. If there was no income tax, Dave would work ________ hours per year and the wage rate would be ________ per hour.
A) 2,000; $28
B) 1,500; $28
C) 1,500; $27
D) 2,000; $30
E) 1,500; $30
Topic: Tax on labor income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
17) The above figure shows the labor market for land surveyors. Dave is a land surveyor. With the income tax, Dave works ________ hours per year and his after-tax wage rate is ________ per hour.
A) 2,000; $28
B) 1,500; $28
C) 2,000; $30
D) 1,500; $30
E) 1,500; $27
Topic: Tax on labor income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
18) The above figure shows the labor market for land surveyors. The total amount collected as taxes equals
A) area B + area C + area E + area F.
B) area D + area G.
C) area D + area F.
D) area B + area C.
E) area A.
Topic: Tax on labor income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
19) Because the supply of capital is highly elastic, taxing the income from capital results in
i. firms that demand capital paying the greater share of the tax.
ii. a decrease in the equilibrium quantity of capital.
iii. a deadweight loss.
A) i only
B) ii only
C) i and iii
D) ii and iii
E) i, ii, and iii
Topic: Tax on capital income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
20) If the supply of capital is perfectly ________ end up paying the tax on capital income.
A) elastic, lenders
B) elastic, firms that demand capital
C) inelastic, lenders
D) inelastic, firms that demand capital
E) unit elastic, firms that demand capital
Topic: Tax on capital income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
21) If the supply of capital is perfectly elastic, a tax on capital income results in
A) a deadweight loss and lenders pay all of the tax.
B) a deadweight loss and borrowers (firms) pay all of the tax.
C) no deadweight loss and borrowers (firms) and lenders split the tax.
D) no deadweight loss and lenders pay all of the tax.
E) no deadweight loss and borrowers (firms) pay all of the tax.
Topic: Tax on capital income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
22) As a result of the tax on capital income, labor productivity
A) increases.
B) decreases.
C) fluctuates.
D) does not change.
E) might change but whether it increases, decreases, or does not change depends on the magnitude of the tax.
Topic: Tax on capital income
Skill: Level 1: Definition
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
23) The government in Country A decides to impose a tax on capital income. As a result, Country A experiences a ________ in its capital stock, a ________ in the interest rate and a deadweight loss ________.
A) decline; rise; occurs
B) decline; rise; does not occur
C) rise; decrease; occurs
D) rise; decrease; does not occur
E) decline; decline; occurs
Topic: Tax on capital income
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Status: Old
AACSB: Application of knowledge
24) The elasticity of supply of capital is larger than the elasticity of supply of land, so a tax on capital income has ________ deadweight loss and a ________ effect on the equilibrium quantity than does an equal tax on land.
A) a larger; larger
B) a larger; smaller
C) a smaller; larger
D) a smaller; smaller
E) no; smaller
Topic: Tax on capital income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
25) The above figure shows the market for capital. Without a tax on capital income, the interest rate is ________ and firms use ________ million of capital.
A) 4 percent; $1,000
B) 3 percent; $2,000
C) 4 percent; $2,000
D) 2 percent; $1,000
E) 2 percent; $2,000
Topic: Tax on capital income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
26) The above figure shows the market for capital. With the tax on capital income, the interest rate is ________ and firms use ________ million of capital.
A) 2 percent; $2,000
B) 3 percent; $2,000
C) 6 percent; $1,000
D) 4 percent; $1,000
E) 2 percent; $1,000
Topic: Tax on capital income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
27) The above figure shows the market for capital. With the tax on capital income, the deadweight loss is equal to
A) area A + area B + area C.
B) area C + area D + area G.
C) area C.
D) area B + area F.
E) area D.
Topic: Tax on capital income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
28) The above figure shows the market for capital. With the tax on capital income, the total tax paid is equal to
A) area C.
B) area B.
C) area A + area B + area C.
D) area C + area D + area G.
E) area B + area F.
Topic: Tax on capital income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
29) Which resource has the least elastic supply?
A) labor
B) capital
C) land
D) money
E) taxes
Topic: Tax on land and unique resources
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
30) The supply of unique resources (like land) is ________. If the government imposes a 20 percent tax on land income, ________.
A) perfectly inelastic; landowners pay all of the tax
B) perfectly elastic; landowners pay all of the tax
C) perfectly inelastic; landowners pay none of the tax
D) perfectly elastic; the tax generates an efficient outcome
E) perfectly inelastic; the tax generates an inefficient outcome
Topic: Tax on land and unique resources
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Status: Old
AACSB: Application of knowledge
31) A tax imposed on a resource's income is paid by both the resource's owners and the resource's employers, except for a tax
A) on labor income.
B) on the income of capital.
C) on land rent.
D) that is imposed on employers.
E) that is imposed on employees.
Topic: Tax on land and unique resources
Skill: Level 2: Using definitions
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
32) If highly paid entertainers prefer to perform and would do so even if their pay were much lower, a tax of half of the entertainers' incomes would do which of the following?
A) decrease the amount of entertaining done by moving along a given labor supply curve
B) decrease the entertainers' supply of performances
C) collect no taxes at all
D) not change the quantity supplied of performances
E) increase the entertainers' supply of performances as they work more to make up the income they lose in taxes
Topic: Tax on land and unique resources
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
33) Because the supply of land is perfectly inelastic, a tax on land income
A) is paid entirely by the suppliers.
B) is paid entirely by the demanders.
C) is shared equally between the suppliers and the demanders.
D) is shared, but not equally, between the suppliers and the demanders.
E) creates a deadweight loss.
Topic: Tax on land and unique resources
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
34) A tax on the income from land or other resource with a perfectly inelastic supply
A) is efficient because it does not decrease the equilibrium quantity.
B) has no deadweight loss.
C) is paid entirely by the owner.
D) Only answers A and B are correct.
E) Answers A, B, and C are correct.
Topic: Tax on land and unique resources
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
35) Because the supply of land is perfectly inelastic, when governments tax land, the tax
A) creates a deadweight loss because the supply is fixed.
B) decreases both the demand for and the supply of land.
C) creates no deadweight loss because the equilibrium quantity is the same as without the tax.
D) increases the supply of land because the landlord pays all of the tax.
E) decreases the supply of land because the landlord pays all of the tax.
Topic: Tax on land and unique resources
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
36) From the standpoint of efficiency, imposing a tax on the income from what type of resource is best because it creates the least inefficiency?
A) a resource with a perfectly elastic supply
B) a resource with a perfectly elastic demand
C) a resource that earns a high reward
D) a resource with a fixed supply
E) a resource that earns a low reward
Topic: Tax on land and unique resources
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
37) If the Social Security tax imposed on employers increases, then
A) firms' demand for labor increases.
B) workers' supply of labor increases.
C) firms' demand for labor decreases.
D) firms' demand for labor does not change.
E) the equilibrium quantity of employment increases.
Topic: Social Security tax
Skill: Level 2: Using definitions
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
38) Suppose the government increases the Social Security tax imposed on employers by 25 percent. This tax leads to
A) an increase in the supply of labor.
B) a decrease in the supply of labor.
C) a decrease in the demand for labor.
D) no change in the demand for labor.
E) a decrease in the supply of labor and an increase in the demand for labor.
Topic: Social Security tax
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
39) Suppose the supply of labor is more inelastic than the demand for labor. Then, a Social Security tax imposed on employers
A) shifts the demand curve for labor leftward.
B) lowers the wage rate received by workers.
C) leads to the workers paying more of the tax than the employers.
D) Only answers B and C are correct.
E) Answers A, B, and C are correct.
Topic: Social Security tax
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
40) Consider a Social Security tax on workers versus a Social Security tax on employers. In comparing the outcomes of each type of tax, we see that
A) workers receive a higher take-home wage when the tax is imposed on employers than when the tax is imposed on workers.
B) workers receive the same take-home wage when the tax is imposed on workers and when the tax is imposed on employers.
C) employers pay a lower total wage when the tax is imposed on workers.
D) employment decreases by more when the tax is imposed on employers than when the tax is imposed on workers.
E) employment decreases by more when the tax is imposed on workers than when the tax is imposed on employers.
Topic: Social Security tax
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
41) If Congress wanted to change the Social Security tax so that firms paid most of the tax, they would need to
A) change the tax laws so that all of the Social Security tax was imposed on firms.
B) change the tax laws so that all of the Social Security tax was imposed on workers.
C) change the tax laws so that more than 50 percent of the Social Security tax was imposed on firms.
D) change the tax laws so that more than 50 percent of the Social Security tax was imposed on workers.
E) None of the above because the incidence of the Social Security tax does not depend on the tax laws but instead depends on the elasticities of the demand for labor and the supply of labor.
Topic: Social Security tax
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
42) Suppose the federal government reduced the Social Security tax on workers by 2 percentage points. This will likely cause
A) an increase in the quantity of workers employed and a decrease in deadweight loss.
B) an increase in the quantity of workers employed and an increase in deadweight loss.
C) a decrease in the quantity of workers employed and a decrease in deadweight loss.
D) a decrease in the quantity of workers employed and an increase in deadweight loss.
E) no change in the quantity of workers employed since the demand for labor is more elastic than the supply of labor.
Topic: Social Security tax
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
43) A tax on labor income
A) increases the quantity employed because the demand for labor increases.
B) decreases the quantity employed because the supply of labor decreases.
C) increases the quantity employed because the supply of labor increases.
D) decreases the quantity employed because the demand for labor increases.
E) does not change the quantity employed because people must have jobs in order to earn any income.
Topic: Tax on labor income
Skill: Level 2: Using definitions
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
44) The incidence of an income tax on labor income is generally that the tax is
A) paid by only workers.
B) paid by only employers.
C) shared equally between workers and employers.
D) shared but not necessarily equally between workers and employers.
E) funded by the deadweight loss.
Topic: Tax on labor income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
45) In the labor market shown in the graph, the government introduces a 10 percent income tax. The employer pays ________ cents of the tax and the employee pays ________ cents of the tax.
A) 45; 50
B) 95; 0
C) 0; 95
D) 50; 45
E) 42.5; 42.5
Topic: Tax on labor income, incidence
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
46) When governments tax capital income, the equilibrium quantity of capital
A) increases because of the international mobility of capital.
B) does not change because the supply of capital is perfectly elastic.
C) decreases.
D) does not change because the supply of capital is perfectly inelastic.
E) might increase or decrease depending on whether the demand for capital is inelastic or elastic.
Topic: Tax on capital income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
47) If the supply of capital is perfectly elastic, the incidence of a tax on capital income is
A) paid entirely by the suppliers of capital.
B) paid entirely by firms that demand capital.
C) shared equally between firms that demand capital and the suppliers of capital.
D) shared but not equally between firms that demand capital and the suppliers of capital.
E) unknown.
Topic: Tax on capital income, tax incidence
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
48) A tax on income from land in Montana is borne entirely by landowners because the
A) demand for land is perfectly inelastic.
B) supply of land is perfectly inelastic.
C) supply of land is perfectly elastic.
D) demand for land is perfectly elastic.
E) deadweight loss from the tax would otherwise be infinite.
Topic: Tax on land and unique resources
Skill: Level 1: Definition
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
49) When a Social Security tax is imposed on workers, employment ________ and when a Social Security tax is imposed on employers, employment ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) decreases; does not change
Topic: Social Security tax on employers
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
50) Congress requires that firms and workers make the same Social Security contributions. The goal of the law is for ________ of the tax. The law results in ________ of the tax because the demand for labor is more elastic than the supply of labor.
A) workers and firms to pay equal amounts; workers paying more
B) workers to pay less; workers paying more
C) workers to pay more; workers paying more
D) employers to pay more; employers paying more
E) employers to pay more; employers paying less
Topic: Social Security tax
Skill: Level 5: Critical thinking
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
8.3 Fairness and the Big Tradeoff
1) Consider the two principles of fair taxation, the benefits principle and the ability-to-pay principle.
A) Both state that people should pay taxes according to the benefits they receive from public services.
B) Both state that people should pay taxes according to how easily they can bear the burden.
C) Both are based on horizontal equity.
D) Both present conflicting ideas on the fairness of taxes.
E) Both are based on vertical equity.
Topic: Fairness
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Ethical understanding and reasoning
2) If Sam pays $2,000 in taxes on an income of $20,000 and $2,800 in taxes on an income of $30,000, the tax rate is
A) regressive.
B) proportional.
C) progressive.
D) vertically fair.
E) not enough information is given to determine the answer.
Topic: Regressive tax
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
3) The percentage of an additional dollar that is paid in tax is called
A) the average tax rate.
B) the marginal tax rate.
C) a proportional tax.
D) a progressive tax.
E) a regressive tax.
Topic: Marginal tax rate
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
4) The marginal tax rate equals 100 ×
A) (total tax ÷ change in income).
B) (change in tax ÷ total income).
C) (total tax ÷ total income).
D) (change in tax ÷ change in income).
E) (average tax rate × total income).
Topic: Marginal tax rate
Skill: Level 3: Using models
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
5) The sales tax in Dutchess County, New York, is 7.5 percent. This sales tax is
A) fair because everyone pays the same tax.
B) proportional.
C) regressive.
D) progressive.
E) an example of the benefit principle of taxation.
Topic: Regressive tax
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
6) The marginal tax rate is the
A) average amount paid as taxes.
B) percentage of total income that is paid in tax.
C) percentage of an additional dollar of income paid in tax.
D) total amount of tax paid as a percentage of total income earned.
E) same as the average tax rate for a progressive tax.
Topic: Marginal tax rate
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
7) Which of the following is correct?
A) If your income is $20,000 and you are paying $2,000 in taxes, your marginal tax rate is 10 percent.
B) If your income is $20,000 and you are paying $2,000 in income taxes, the income tax you are paying is progressive.
C) If you paid $0.39 as tax from an additional dollar you earned, your marginal tax rate is 39 percent.
D) If your marginal tax rate falls as your income increases, the tax is progressive.
E) If your income is $20,000 and you are paying $2,000 in income taxes, the income tax you are paying is proportional.
Topic: Marginal tax rate
Skill: Level 3: Using models
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
8) ________ tax rate equals ________.
A) A marginal; the percentage of total income that is paid in tax
B) A progressive; the percentage of an additional dollar of income that is paid in tax
C) An average; the percentage of total income that is paid in tax
D) A regressive; the percentage of an additional dollar of income that is paid in tax
E) A proportional; the percentage of total income that is paid in tax
Topic: Average tax rate
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
9) The average tax rate is the
A) percentage of an additional dollar of income paid in tax.
B) percentage of income paid in tax.
C) total amount of taxes paid by an individual.
D) average of the rates at which income and taxes increase.
E) same as the marginal tax rate for a progressive tax.
Topic: Average tax rate
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
10) Ann pays $3,850 in taxes on an income of $38,500. Therefore her
A) marginal tax rate must be 10 percent.
B) taxes must be progressive in nature.
C) average tax rate must be 10 percent.
D) personal exemption is 10 percent.
E) proportional tax rate is undefined.
Topic: Average tax rate
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
11) The average tax rate equals
A) (total tax ÷ change in income) × 100.
B) (change in tax ÷ total income) × 100.
C) (total tax ÷ total income) × 100.
D) (change in tax ÷ change in income) × 100.
E) (marginal tax are × total income) × 100.
Topic: Average tax rate
Skill: Level 3: Using models
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
12) The average tax rate
A) can be calculated by summing all the marginal tax rates up to the level of income for which the average is being calculated.
B) is the marginal tax rate divided by the total tax.
C) is the percentage of income paid as taxes.
D) equals income divided by amount of taxes paid.
E) equals the marginal tax rate multiplied by total taxable income.
Topic: Average tax rate
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
13) If the average tax rate increases as income increases, the tax is
A) progressive.
B) proportional.
C) regressive.
D) an excise tax.
E) a decreasing marginal-rate tax.
Topic: Progressive tax
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
14) If the average tax rate increases as income increases, then the
A) tax is regressive tax.
B) tax is a progressive tax.
C) tax is a proportional tax.
D) income is tax exempt so that no tax needs to be paid on it.
E) marginal tax rate must be falling as income increases.
Topic: Progressive tax
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
15) If the average tax rate increases as income increases, the tax is a
A) progressive tax.
B) regressive tax.
C) proportional tax.
D) marginal tax.
E) production-efficient tax.
Topic: Progressive tax
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
16) If the average tax rate remains constant as income changes, the tax is
A) progressive.
B) proportional.
C) regressive.
D) definitely fair.
E) impossible to determine with the information given.
Topic: Proportional tax
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
17) A tax that has the same average rate at all levels is
A) a proportional tax.
B) a regressive tax.
C) a marginal tax.
D) a sales tax.
E) an efficient-price tax.
Topic: Proportional tax
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
18) When each taxpayer pays the same average tax rate regardless of the taxpayer's income, the tax is
A) a regressive tax.
B) a progressive tax.
C) an estate tax.
D) a proportional tax.
E) an efficient-price tax.
Topic: Proportional tax
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
19) If the average tax rate ________ as income increases, then the tax is a ________ tax.
A) does not change; proportional
B) does not change; regressive
C) decreases; progressive
D) decreases; proportional
E) increases; regressive
Topic: Proportional tax
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
20) With a proportional tax, as income increases the amount of tax paid
A) eventually phases out to zero.
B) rises as a percentage of income.
C) falls as a percentage income.
D) remains constant as a percentage of income.
E) first rises and then falls as a percentage of income.
Topic: Proportional tax
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
21) If the average tax rate falls as income increases, the tax is
A) progressive.
B) proportional.
C) regressive.
D) vertically unfair.
E) impossible to determine with the information given.
Topic: Regressive tax
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
22) A tax for which the average tax rate decreases as income increases is defined as
A) a proportional tax.
B) a regressive tax.
C) a progressive tax.
D) a sales tax.
E) an efficient-quantity tax.
Topic: Regressive tax
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
23) Suppose everybody paid the same total amount of tax regardless of their income. This type of tax system would be
A) regressive.
B) proportional.
C) progressive.
D) marginal.
E) efficient.
Topic: Regressive tax
Skill: Level 3: Using models
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
24) Assume that the government passes a tax so that every individual must pay $100. This tax is a
A) progressive tax.
B) proportional tax.
C) regressive tax.
D) marginal tax.
E) type of tax that is impossible to determine without more information.
Topic: Regressive tax
Skill: Level 4: Applying models
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
25) If Sam pays $2,000 in taxes on an income of $20,000 and $2,800 in taxes on an income of $30,000, the tax rate is
A) regressive.
B) proportional.
C) progressive.
D) vertically fair.
E) not enough information is given to determine the answer.
Topic: Regressive tax
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
26) The benefits principle of fair taxation means that people
A) pay taxes according to the level of benefits they receive.
B) pay taxes according to their ability to pay.
C) with the same ability pay the same taxes.
D) with a greater ability to pay, pay more taxes.
E) Answers B, C, and D are correct.
Topic: Benefits principle
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Ethical understanding and reasoning
27) The proposition that people should pay taxes equal to the benefits they receive from public services is known as the
A) ability-to-pay principle.
B) progressive tax principle.
C) fairness principle.
D) benefits principle.
E) "he or she who gets, pays" principle.
Topic: Benefits principle
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
28) The benefits principle of fair taxation
A) can be used to justify the progressive income tax.
B) can be used to justify high fuel taxes to pay for public schools.
C) is the proposition that people should pay taxes equal to the benefits they receive.
D) Both answers A and B are correct.
E) Both answers B and C are correct.
Topic: Benefits principle
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Ethical understanding and reasoning
29) The benefits principle of tax fairness argues that
A) everyone receives equal benefits from public services so taxes should be the same for all.
B) highly paid people should pay lower taxes because they work harder.
C) taxes should be related to the amount of income earned.
D) people should pay taxes equal to the benefits from public services received.
E) the benefits people get from the government should not be related to their taxes.
Topic: Benefits principle
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
30) The benefits principle of fairness of taxes is the proposition that
A) taxes should only be used to correct market failures.
B) people should pay taxes according to how easily they can bear the burden.
C) tax systems can only be fair if all people agree on them.
D) people should pay taxes equal to their benefit from public services.
E) the incidence of taxes should be equal across households.
Topic: Benefits principle
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
31) Which of the following is an example of a tax following the benefits principle?
i. sales taxes on gasoline used to fund road maintenance projects
ii. federal income tax used to fund food stamps for poorer households
iii. property taxes used to finance public education
A) i only
B) ii only
C) iii only
D) ii and iii
E) i, ii, and iii
Topic: Benefits principle
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
32) The argument that those who use the highways the most should pay most of the cost of providing them, is an example of
A) the benefits principle of fair taxes.
B) the ability-to-pay principle of fair taxes.
C) a progressive tax system.
D) a proportional tax system.
E) the "fairest incidence of tax benefits" principle.
Topic: Benefits principle
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
33) Which of the following taxes best illustrate the benefits principle of tax fairness?
A) Roads and highways are built and maintained through a tax on gasoline.
B) The local library is funded through property taxes levied on all homeowners.
C) The WIC program provides food to low income mothers and is funded through the federal income tax.
D) A sales tax on food pays for local police and fire protection.
E) City parks are maintained through local excise taxes.
Topic: Benefits principle
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
34) Which of the following taxes best illustrate the benefits principle of tax fairness?
A) A property tax that is proportional to the value of a home is used to fund K-12 education.
B) The local library is funded through property taxes levied on all homeowners.
C) The WIC program provides food to low income mothers and is funded through the federal income tax.
D) A sales tax on food pays for local police and fire protection.
E) The local youth sports leagues are financed by fees collected from participants by the city.
Topic: Benefits principle
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
35) Using fuel taxes to pay for maintaining public highways is an example of
A) the benefits principle of fair taxation.
B) horizontal equity approach to taxation.
C) vertical equity approach to taxation.
D) the ability-to-pay principle of taxation.
E) the excess burden from taxes.
Topic: Benefits principle
Skill: Level 3: Using models
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
36) The idea that taxpayers with the same ability to pay a tax should pay the same taxes is called
A) progressive taxes.
B) regressive taxes.
C) horizontal equity.
D) vertical equity.
E) fair-incidence principle.
Topic: Ability-to-pay principle
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
37) The ability-to-pay principle of tax fairness is equivalent to which of the following?
A) collecting taxes from those who benefit the most from provision of public services
B) collecting more taxes from people who can more easily bear the burden
C) a regressive income tax structure
D) a proportional income tax structure
E) concern about only horizontal equity and no concern about vertical equity
Topic: Ability-to-pay principle
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
38) Which of the following taxes best illustrates the ability-to-pay principle?
A) sales tax
B) state property tax
C) federal income tax
D) cigarette tax
E) marriage tax
Topic: Ability-to-pay principle
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
39) Which of the following taxes best illustrate the ability-to-pay principle of tax fairness?
A) Roads and highways are built and maintained through a tax on gasoline.
B) The local library is funded through a flat $10 tax levied on all homeowners.
C) A sales tax on food pays for local police and fire protection.
D) The WIC program provides food to low income mothers and is funded through the progressive federal income tax.
E) State parks are maintained through the state lottery.
Topic: Ability-to-pay principle
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
40) Which of the following taxes best illustrate the ability-to-pay principle of tax fairness?
A) Tuition at public universities is lower for in-state residents than for out-of-state residents.
B) The library is funded through a flat $10 tax levied on all homeowners.
C) A property tax that is proportional to the value of a home is used to fund K-12 education.
D) Free cholesterol check clinics are funded through a $0.20 tax on all prescriptions.
E) A sales tax on food pays for local police and fire protection.
Topic: Ability-to-pay principle
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
41) The 2010 health care reform that expanded public health care coverage for low income individuals by increasing taxes on high income earners. Taking more tax revenue from high income earners reflects
A) the benefits principle because high income earners can more easily bear the burden of taxes.
B) the ability-to-pay principle because high income earners can more easily bear the burden of taxes.
C) the ability-to-pay principle because high income earners use more public health care services.
D) the benefits principle because high income earners use more public health care services.
E) a regressive tax system since high income earners will pay a greater dollar amount in taxes.
Topic: Ability-to-pay principle
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Analytical thinking
42) When it comes to taxes, horizontal equity means that
A) people with lower incomes bear a smaller tax burden.
B) people with the same incomes pay the same amount of taxes.
C) progressive taxes must be imposed.
D) regressive taxes must be imposed.
E) only proportional taxes are fair.
Topic: Horizontal equity
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
43) The assertion that people with the same ability to pay taxes should pay the same amount in taxes best represents the idea of
A) horizontal equity.
B) vertical equity.
C) the benefits principle of tax fairness.
D) fairness principle of taxation.
E) benefits paid principle of taxation.
Topic: Horizontal equity
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
44) If taxes are collected on the basis of ability-to-pay and there are two taxpayers with the same income who also are identical in all other respects, which of the following is correct?
A) Vertical equity is impossible between these two taxpayers.
B) Vertical equity exists.
C) Horizontal equity exists.
D) The tax must be proportional.
E) The fair-incidence principle is potentially being violated.
Topic: Horizontal equity
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
45) Suppose that Anthony and Melissa both earn $30,000 and are otherwise the same. If they both pay 10 percent of their income as taxes, then
A) the income tax is regressive.
B) the benefits principle of fairness has been achieved.
C) horizontal equity has been achieved.
D) proportional equity has been achieved.
E) vertical equity has been achieved.
Topic: Horizontal equity
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
46) Vertical equity is the idea that
A) taxpayers with a greater ability to pay should bear a greater share of the taxes.
B) people should pay taxes equal to the benefits they receive from public benefits.
C) as income rises, taxes should be efficient, not equitable.
D) the marriage tax is equitable.
E) taxes must be fairest to people with the largest incomes.
Topic: Vertical equity
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
47) Progressive taxes can be justified as fair based on which of the following?
A) horizontal equity
B) vertical equity
C) benefits received
D) index of fairness principle
E) None of the above answers is correct.
Topic: Vertical equity
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Ethical understanding and reasoning
48) The assertion that LeBron James and Beyonce should pay more taxes than Average Joe best represents the idea of
A) horizontal equity.
B) vertical equity.
C) the benefits principle of tax fairness.
D) fairness principle of taxation.
E) benefits paid principle of taxation.
Topic: Vertical equity
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
49) Trying to achieve vertical equity by using a progressive income tax structure can create problems with which of the following?
A) horizontal equity
B) vertical equity
C) benefits received
D) tax incidence
E) regressive equality
Topic: Marriage tax problem
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
50) Which of the following taxes best illustrates the benefits principle of taxation?
A) sales tax on clothing used to fund food stamps
B) state income tax used to fund state universities
C) Medicare tax imposed on all workers used to fund medical care for the elderly
D) gasoline tax used to fund road repairs
E) federal income tax used to fund NASA spending
Topic: Benefits principle
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
51) The proposition that people should pay taxes according to how easily they can bear the burden is known as the ________ principle.
A) regressive tax
B) benefits
C) ability-to-pay
D) fairness
E) incidence of fairness
Topic: Ability-to-pay principle
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
52) The government once imposed a luxury tax on very expensive jewelry. This tax followed the ________ principle.
A) benefits
B) ability-to-pay
C) vertical equity
D) horizontal equity
E) fair-tax incidence
Topic: Ability-to-pay principle
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
53) The proposition that taxpayers with the same ability to pay should pay the same taxes is called
A) the benefits principle.
B) the ability-to-pay imperative.
C) vertical equity.
D) horizontal equity.
E) the fair-tax incidence principle.
Topic: Horizontal equity
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
54) Vertical equity implies that
i. tax rates should be equal for all tax payers.
ii. people with higher income should pay more in taxes.
iii. people with higher incomes should pay a lower average tax rate.
A) i only
B) ii only
C) iii only
D) i and ii
E) ii and iii
Topic: Vertical equity
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
55) Joan's income is $60,000 and she pays $6,000 in taxes. Juan's income is $40,000 and he pays $7,000 in taxes. This situation violates
A) the benefits principle.
B) the big tradeoff.
C) vertical equity.
D) horizontal equity.
E) the fair-tax incidence principle.
Topic: Vertical equity
Skill: Level 3: Using models
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
56) Compared to taxes on labor income, taxes on capital income generate ________ deadweight loss and are paid by people who generally have the ________ ability to pay.
A) a larger; most
B) a larger; least
C) a smaller; most
D) a smaller; least
E) no; least
Topic: Tax on capital income
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
57) Consider the table showing tax rates for a country:
Taxable income | Marginal tax rate |
$0-$10,000 | 7% |
$10,001 - $40,000 | 12% |
$40,001 or more | 25% |
The table shows a country with a
A) progressive tax rate based on vertical equity.
B) progressive tax rate based on horizontal equity.
C) regressive tax rate based on vertical equity.
D) regressive tax rate based on the ability-to-pay principle.
E) a flat average tax rate of 15 percent.
Topic: Progressive, regressive, proportional taxes
Skill: Level 5: Critical thinking
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
58) A flat tax can be ________ efficient than a progressive tax rate because the flat tax ________ the incentive to work, save and invest.
A) less; does not affect
B) more; increases
C) less; increases
D) more; decreases
E) less; decreases
Topic: Flat tax
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Analytical thinking
8.4 Chapter Figures
The figure above shows the market for MP3 players, where S is the supply curve and D is the demand curve before any tax. The government imposes a $10 per unit tax on buyers of MP3 players.
1) Based on the figure above, after the tax is imposed, the price (including the tax) paid by the buyer is ________ per MP3 player.
A) $105
B) $100
C) $95
D) $110
E) $90
Topic: Tax incidence, price wedge
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
2) Based on the figure above, after the tax is imposed, the price received by the seller is ________ per MP3 player.
A) $105
B) $100
C) $95
D) $110
E) $90
Topic: Tax incidence, price wedge
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
3) Based on the figure above, the tax ________ the price paid by the buyer by ________ per MP3 player.
A) raises; $5
B) lowers; $5
C) raises; $10
D) lowers; $10
E) raises; $7.50
Topic: Tax incidence, price wedge
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
4) Based on the figure above, the tax ________ the price received by the seller by ________ per MP3 player.
A) raises; $5
B) lowers; $5
C) raises; $10
D) lowers; $10
E) lowers; $2.50
Topic: Tax incidence, price wedge
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
5) Based on the figure above, after the tax is imposed, the government collects tax revenue of ________ a week.
A) $20,000
B) $10,000
C) $50,000
D) $60,000
E) $40,000
Topic: Tax incidence, government revenue
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
6) Based on the figure above, the burden of the tax
A) is split equally between the buyer and the seller.
B) falls mostly on buyers.
C) falls mostly on sellers.
D) falls entirely on buyers.
E) falls entirely on sellers.
Topic: Tax incidence
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
The figure above shows the market for MP3 players, where S is the supply curve and D is the demand curve before any tax is imposed. The government imposes a $10 per unit tax on sellers of MP3 players.
7) Based on the figure above, after the tax is imposed, the price paid by the buyer is ________ per MP3 player.
A) $105
B) $100
C) $95
D) $110
E) $90
Topic: Tax incidence, price wedge
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
8) Based on the figure above, after the tax is imposed, the price received (and kept) by the seller is ________ per MP3 player.
A) $95
B) $105
C) $100
D) $110
E) $90
Topic: Tax incidence, price wedge
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
9) Based on the figure above, the tax ________ the price paid by the buyer by ________ per MP3 player.
A) raises; $5
B) lowers; $5
C) raises; $10
D) lowers; $10
E) raises; $7.50
Topic: Tax incidence, price wedge
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
10) Based on the figure above, the tax ________ the price received (and kept) by the seller by ________ per MP3 player.
A) lowers; $5
B) raises; $5
C) raises; $10
D) lowers; $10
E) lowers; $2.50
Topic: Tax incidence, price wedge
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
11) Based on the figure above, after the tax is imposed, the government collects tax revenue of ________ a week.
A) $20,000
B) $10,000
C) $50,000
D) $60,000
E) $40,000
Topic: Tax incidence, government revenue
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
12) Based on the figure above, the burden of the tax
A) is split equally between the buyer and the seller.
B) falls mostly on buyers.
C) falls mostly on sellers.
D) falls entirely on buyers.
E) falls entirely on sellers.
Topic: Tax incidence
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
The figure above shows the market for MP3 players, where S is the supply curve and D is the demand curve before any tax is imposed. The government imposes a $10 per unit tax on sellers of MP3 players.
13) In the figure above, at the market equilibrium with the tax, marginal benefit ________ marginal cost, and the quantity of MP3 players sold is ________.
A) exceeds; inefficient
B) is below; inefficient
C) is below; efficient
D) exceeds; efficient
E) equals; efficient
Topic: Taxes, inefficiency
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
14) Based on the figure above, the deadweight loss from the tax is
A) $15,000 per week.
B) $20,000 per week.
C) $35,000 per week.
D) $17,500 per week.
E) zero.
Topic: Taxes, deadweight loss
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
15) Based on the figure above, after the tax is imposed, the consumer surplus
A) decreases by $17,500.
B) increases by $17,500.
C) decreases by $7,500.
D) increases by $7,500.
E) does not change.
Topic: Taxes, deadweight loss
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
The figure above shows the demand (D) and supply (S) curves for insulin before any tax is imposed. The government imposes a $0.20 a dose tax on sellers of insulin.
16) Based on the figure above, after the tax is imposed, the price paid by the buyer is ________, and the price received (and kept) by the seller is ________.
A) $2.20; $2.00
B) $2.00; $2.20
C) $2.00; $2.00
D) $2.20; $2.20
E) $2.00; $1.80
Topic: Tax incidence, price wedge
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
17) Based on the figure above, at the market equilibrium with the tax, marginal benefit ________ marginal cost, and the quantity of insulin sold is ________.
A) equals; efficient
B) exceeds; inefficient
C) is below; inefficient
D) is below; efficient
E) exceeds; efficient
Topic: Taxes, inefficiency
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
8.5 Integrative Questions
1) The phrase "tax incidence" refers to
A) how easy it is to evade the tax.
B) how taxes redistribute income.
C) the degree of progressiveness or regressiveness of the tax.
D) who actually bears the burden of paying the tax.
E) how much the government collects in revenue from a tax.
Topic: Integrative
Skill: Level 1: Definition
Section: Integrative
Status: Old
AACSB: Reflective thinking
2) If the demand curve for hamburgers is downward sloping and the supply curve for hamburgers is upward sloping, then a tax imposed on hamburgers ________ the price paid by buyers and ________ the price received by sellers.
A) raises; raises
B) raises; lowers
C) lowers; raises
D) lowers; lowers
E) does not change; does not change
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Analytical thinking
3) We can see the inefficiencies created by a sales tax because
A) a deadweight loss occurs.
B) the tax creates an excess burden.
C) at the quantity produced, marginal benefit equals marginal cost.
D) Both answers A and B are correct.
E) Both answers B and C are correct.
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
4) If neither the demand nor the supply for goods or labor is perfectly inelastic, then a sales tax on a good ________ a deadweight loss and an income tax ________ a deadweight loss.
A) creates; creates
B) creates; does not create
C) does not create; create
D) does not create; does not create
E) might create; might create
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Reflective thinking
5) Which of the following is TRUE?
i. A tax on buyers has the same effect as the same sized tax on sellers.
ii. The more elastic the demand, the larger is the share of the tax paid by the buyers.
iii. The U.S. income tax is regressive.
A) only i
B) only ii
C) only iii
D) ii and iii
E) i and ii
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
6) Which of the following is TRUE?
i. If supply is perfectly inelastic, the tax creates no deadweight loss.
ii. The elasticities of supply and demand, not Congress, determine who pays the income tax.
iii. A tax is progressive if the average tax rate falls with income.
A) only i
B) only ii
C) only iii
D) ii and iii
E) i and ii
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
7) Which of the following is TRUE?
i. If demand is perfectly elastic, the tax creates no deadweight loss.
ii. The more elastic the supply of a factor of production, the greater is the deadweight loss from an income tax.
iii. A tax is regressive if the average tax rate rises with income.
A) only i
B) only ii
C) only iii
D) ii and iii
E) i and ii
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
8) A sales tax on cigarettes would likely decrease the quantity demanded by a smaller amount
A) for smokers who view cigarettes as a necessity.
B) for smokers who are not addicted.
C) for smokers with smaller incomes.
D) the longer the time elapsed.
E) for smokers who view cigarettes as a luxury.
Topic: Tax incidence and the elasticity of demand
Skill: Level 5: Critical thinking
Section: Integrative
Status: Old
AACSB: Analytical thinking
9) The figure above shows the impact of an income tax. The deadweight loss created by the income tax equals area
A) bce.
B) fed.
C) acf.
D) feba.
E) The question errs because an income tax does not create a deadweight loss.
Topic: Integrative
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
10) The figure above shows the impact of an income tax. The revenue collected by the government equals area
A) bce.
B) feba.
C) fed.
D) acf.
E) None of the above answers is correct.
Topic: Integrative
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
11) The imposition of ________ shifts the labor demand curve downward.
A) a sales tax
B) an income tax
C) a Social Security tax on workers
D) a Social Security tax on employers
E) Both answers C and D are correct.
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
12) ________ tax is progressive if the ________.
A) An income; average tax rate is constant as income increases
B) An income; average tax rate increases with income
C) Any; average tax rate is constant as income increases
D) Any; average tax rate decreases as income increases
E) A Social Security; tax is imposed on employers rather than workers
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
13) To levy a tax based on the benefits principle to pay for a bridge, the government
A) would impose an income tax instead of a Social Security tax on workers.
B) would impose a Social Security tax on workers instead of an income tax.
C) needs to know each person's benefit from the bridge.
D) needs to be able to calculate the deadweight loss of a tax.
E) cannot impose the tax on anyone who uses the bridge.
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Reflective thinking
14) Which of the following taxes guarantees vertical equity?
i. income tax
ii. Social Security tax on workers
iii. Social Security tax on employers
A) i only
B) i and ii
C) ii and iii
D) iii only
E) None of the above taxes guarantees vertical equity.
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Reflective thinking
15) Regardless of whether a tax is imposed on buyers or sellers, it has the same effects: In general, the price paid by the buyers ________ and the price received by the sellers ________.
A) rises; falls
B) rises; rises
C) falls; rises
D) falls; remains the same
E) rises; remains the same
Topic: Tax incidence
Skill: Level 5: Critical thinking
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
16) A tax on labor income ________ the wage rate paid by employers, ________ the wage rate received by employees, and ________ a deadweight loss.
A) rise; fall; creates
B) rise; rise; creates
C) rise; rise; does not create
D) fall; fall; does not create
E) fall; fall; creates
Topic: Tax on labor income
Skill: Level 5: Critical thinking
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
17) Most of a tax hike will be paid by workers if the demand for labor is ________ and the supply of labor is ________.
A) elastic; inelastic
B) elastic; elastic
C) inelastic; inelastic
D) inelastic; stable
E) elastic; stable
Topic: Tax on labor income
Skill: Level 5: Critical thinking
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
18) For a given elasticity of supply, the more ________ the demand for the good, the share of the tax paid by the buyers is ________.
A) inelastic; larger
B) inelastic; smaller
C) elastic; larger
D) elastic; smaller
E) elastic; the same
Topic: Taxes
Skill: Level 5: Critical thinking
Section: Checkpoint 8.2
Status: Old
AACSB: Application of knowledge
19) If a $2.00 tax per dose of insulin raises the price paid by the buyers by $2.00, then the demand for insulin is perfectly ________ and the buyers pay ________ the tax.
A) inelastic; all
B) inelastic; some of
C) inelastic; none of
D) elastic; all
E) elastic; none of
Topic: Taxes
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Application of knowledge
20) The demand curve for blue marker pens horizontal so the demand is perfectly ________. A tax of 50 cents lowers the price received by the seller by 50 cents and the seller pays ________ the tax.
A) elastic; all
B) inelastic; all
C) inelastic; some of
D) inelastic; none of
E) elastic; none of
Topic: Taxes
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Application of knowledge
21) If a tax of 5 cents a tomato lowers the price received by tomato sellers by 5 cents a tomato, then the supply of tomatoes is perfectly ________ and the seller pays ________ the tax.
A) inelastic; all
B) elastic; all
C) inelastic; some of
D) inelastic; none of
E) elastic; none of
Topic: Taxes
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Application of knowledge
22) The supply curve of sand is horizontal so the supply of sand is perfectly ________. A tax of 1 cent a pound increases the price by 1 cent a pound and the buyer pays ________ the tax. The tax is therefore ________.
A) elastic; all; inefficient
B) elastic; none; inefficient
C) elastic; all; efficient
D) inelastic; all; inefficient
E) inelastic; none; efficient
Topic: Taxes
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Application of knowledge
8.6 Essay: Taxes on Buyers and Sellers
1) When a tax is imposed on a good, the resulting rise in the equilibrium price is usually less than the amount of the tax itself. Why doesn't the equilibrium price rise by the full amount of the tax?
Topic: Tax incidence
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Written and oral communication
2) How does the elasticity of demand affect the incidence of a tax?
Topic: Tax incidence
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
3) Explain under what conditions a sales tax on a specific good would be paid entirely by buyers.
Topic: Tax incidence and the elasticity of demand
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
4) Which would be a better source of tax revenue for the government, a good with elastic or a good with an inelastic demand? Explain your reasoning.
Topic: Tax incidence and the elasticity of demand
Skill: Level 5: Critical thinking
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
5) Suppose the demand for saline solution is perfectly inelastic for contact lens wearers. If the government imposes a tax on saline solution, what occurs? Be sure to tell what happens to the price paid by the buyers and discuss the incidence of the tax.
Topic: Tax incidence and the elasticity of demand
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
6) Suppose the government decides to tax salt. The demand for salt is inelastic and the supply is quite elastic. Who bears most of the tax incidence and pays most of this tax?
Topic: Tax incidence and the elasticity of demand
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
7) Consider the market for dining at Mexican restaurants. Suppose the price elasticity of demand for Mexican food is 1.23 and the price elasticity of supply is 0.47. If the government imposes a tax on Mexican food, do buyers or sellers pay most of the tax? Why?
Topic: Tax incidence and the elasticity of supply
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
8) Is the deadweight loss from a sales tax on a product larger the more inelastic the demand for the good?
Topic: Taxes, deadweight loss
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Status: Old
AACSB: Reflective thinking
9) In the Village of Punjab, Sheryl owns a well, which is the only source of drinking water. The supply of water is perfectly inelastic at a quantity of 1,000 gallons of water per day. At a price of $2.00 per gallon, the quantity demanded per day is 1,000 gallons. The government imposes a $0.50 per gallon tax.
a. After the tax is imposed, what is the price paid by the villagers? What is the price received by Sheryl?
b. How much revenue does the government collect?
c. What fraction of the tax does Sheryl pay? What fraction is paid by the villagers?
a. Because the supply is perfectly inelastic, no matter what price Sheryl receives, she supplies 1,000 gallons of water per day. Because she supplied 1,000 gallons of water per day, the price paid by the villagers remains equal to $2.00, the price at which 1,000 gallons per day is the quantity demanded. Sheryl receives $1.50, the $2.00 paid by the villagers minus the $0.50 sent to the government as the tax.
b. The government receives $500 in tax revenue.
c. Sheryl pays 100 percent of the tax because the price she receives falls by the full amount of the tax. The villagers pay none of the tax because the price they pay does not change.
Topic: Tax incidence and the elasticity of supply
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
10) The figure above illustrates the market for antifreeze. Suppose the government decides to impose an $8 sales tax on every gallon of antifreeze sold.
a. In the figure, illustrate the effect the tax has on the market for antifreeze.
b. What is the equilibrium price of a gallon of antifreeze before the tax? What is the price paid by buyers after the tax?
c. What is the equilibrium quantity of antifreeze before the tax? What is the equilibrium quantity after the tax?
d. What is the revenue collected by the government from this tax?
e. Do buyers or sellers bear the largest burden of the tax?
f. Illustrate the deadweight loss created by the tax.
a. The tax shifts the supply curve, as illustrated above.
b. Before the tax, the price was $4 per gallon. After the tax, buyers pay $10 per gallon.
c. Before the tax the equilibrium quantity was 8,000 gallons of antifreeze. After the tax, the quantity is 4,000 gallons of antifreeze.
d. The government collects $32,000 in tax revenue per week.
e. Buyers bear the largest incidence of the tax because the price they pay rises by $6, from $4 per gallon to $10 per gallon.
f. The deadweight loss is equal to the area of the darkened triangle in the figure.
Topic: Tax incidence
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
11) The figure above shows the market for gasoline. The government has imposed a tax on gasoline.
a. What is the amount of the tax per gallon of gasoline?
b. How much tax revenue will government collect from this tax?
c. How much of the tax is paid by buyers? How much is paid by sellers? Which is more elastic, the supply or demand for gasoline?
a. The tax is $1.50 per gallon, the amount by which the supply curve has been shifted upward.
b. The government collects in tax revenue 6,000 gallons per day times $1.50 tax per gallon or $9,000.
c. Buyers pay $1 of the tax, as the price they pay rises from $1.50 to $2.50 per gallon. Sellers pay $0.50 of the tax, as the price they receive falls from $1.50 to $1.00 per gallon. The supply is more elastic because sellers pay a smaller fraction of the tax than do buyers.
Topic: Tax incidence
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
12) The figure above shows the market for a life-saving drug. Suppose the government imposes a $150 tax per dose on the drug. Show and describe the impact on the market. Who pays this tax?
The tax decreases the supply and shifts the supply curve leftward. As shown in the figure, the vertical difference between the old supply curve and the new one is the amount of the tax, $150 per dose. The price of the drug rises from $150 per dose before the tax to $300 per dose after the tax. The quantity remains constant, at 8,000 does per month. Because demand is perfectly inelastic, the price rose by the full amount of the tax so buyers pay the entire tax.
Topic: Tax incidence and the elasticity of demand
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
13) The figure above shows the market for tickets to the Super Bowl the day of the game. Suppose the government imposes an entertainment tax of $100 per ticket.
a. What is the equilibrium price of a Super Bowl ticket before the tax? What is the price paid by buyers after the tax? What is the price received by sellers after the tax?
b. What is the equilibrium quantity of tickets before the tax? What is the equilibrium quantity after the tax?
c. Do buyers or sellers bear most of the incidence of the tax?
a. The equilibrium price before the tax is $200 for a ticket. After the tax, buyers still pay $200 per ticket. Sellers, however, receive only $100 (= $200 price paid by a buyer minus the $100 tax) per ticket.
b. Before the tax, the equilibrium quantity was 80,000 tickets. After the tax the quantity is still 80,000 tickets.
c. Sellers bear the entire tax incidence because they pay all the tax and buyers pay none of the tax. In other words, the price that a buyer pays does not change-it remains equal to $200. Hence buyers pay none of the tax. However, the price received by sellers falls from $200 per ticket to $100. Hence sellers pay the full amount of the $100 tax, which was to be expected because the supply of tickets is perfectly inelastic.
Topic: Tax incidence and the elasticity of supply
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Analytical thinking
8.7 Essay: Income Taxes and Social Security Taxes
1) "In the United States, more tax revenue is collected through Social Security taxes than through property taxes." Is the previous statement correct or incorrect?
Topic: Eye on the U.S. economy, taxes in the United States today
Skill: Level 2: Using definitions
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
2) If income tax rates on labor income are decreased, what is the effect on the labor supply and the labor supply curve? What is the effect on the equilibrium quantity of labor hired?
Topic: Tax on labor income
Skill: Level 2: Using definitions
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
3) Describe the effects of an increase in the tax on labor income.
Topic: Tax on labor income
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Status: Old
AACSB: Written and oral communication
4) If the supply of land is perfectly inelastic, what is the deadweight loss from a tax on land?
Topic: Tax on land and unique resources
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
5) What is the difference in the tax incidence between imposing the Social Security tax on workers and imposing the same tax on employers?
Topic: Tax incidence
Skill: Level 1: Definition
Section: Checkpoint 8.2
Status: Old
AACSB: Reflective thinking
6) In a labor market before any taxes are imposed, the equilibrium wage rate is $10.00 an hour and 10,000 people are employed. The government imposes a 20 percent income tax on workers' incomes. What is the wage rate that workers need to receive so that they can earn $10.00 per hour after the tax is paid? Suppose that after the tax is imposed, the wage rate rises to $12.00 an hour and that only 8,000 workers are employed. How is the tax incidence split between workers and firms?
With a wage rate of $12.00, workers pay taxes of ($12.00) × (0.20) = $2.40. Workers take home $12.00 - $2.40 = $9.60 per hour. The workers' after-tax wage has fallen from $10.00 an hour to $9.60 an hour, so workers pay $0.40 of the tax. Firms had been paying $10.00 per hour and after the tax is imposed pay $12.00 per hour, so firms pay $2.00 of the tax.
Topic: Tax on labor income
Skill: Level 3: Using models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
7) The figure above shows a labor market in which an income tax has been imposed.
a. How many hours of labor were employed before the tax was imposed?
b. How many hours of labor are employed after the tax?
c. What was the wage rate employers paid and that workers received before the tax?
d. What is the wage rate employers pay and that workers receive after the tax?
e. What accounts for the difference between what employers pay and what workers receive?
a. 40 hours of labor were employed before the tax.
b. 37 hours of labor are employed after the tax.
c. Employers paid $10.75 and workers received $10.75.
d. Employers pay $12 and workers receive $10.
e. The difference is the result of the $2 tax.
Topic: Tax on labor income
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
8) The figure above shows the capital market.
a. Before the government takes any action, what is the interest rate and quantity of capital?
b. Suppose the government imposes a tax of 25 percent on the income from capital. After the tax, what is the equilibrium interest rate and quantity of capital? What is the after-tax interest rate?
c. In the figure, darken the area that equals the deadweight loss from the tax.
a. The interest rate before the tax is 6 percent and the quantity of capital is $30 billion.
b. The tax shifts the supply curve as shown. The equilibrium interest rate is 8 percent and the quantity of capital is $20 billion. The after-tax interest rate equals 6 percent.
c. The deadweight loss is the dark triangle.
Topic: Tax on capital income
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
9) Suppose we acquire the technology necessary to colonize the moon and 3 billion acres are made available to the general population. The figure above represents the supply and demand for land on the moon.
a. Suppose the government imposes a $1,000 dollar per acre tax on land income. What is the before-tax rent and what is the after-tax rent?
b. How much is the deadweight loss associated with this tax?
a. The before-tax rent is $3,000 per acre per year. The after-tax rent is $2,000 per acre per year.
b. The deadweight loss is zero. Because the equilibrium quantity does not change as a result of the tax, no deadweight loss or excess burden is created.
Topic: Tax on land and unique resources
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Status: Old
AACSB: Analytical thinking
8.8 Essay: Fairness and the Big Tradeoff
1) What are the two conflicting principles of fairness that apply to a tax system? Briefly explain each.
Topic: Tax fairness
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Written and oral communication
2) "The only fair tax is a progressive tax." Comment on this assertion.
Topic: Tax fairness
Skill: Level 3: Using models
Section: Checkpoint 8.3
Status: Old
AACSB: Written and oral communication
3) What are the similarities and differences between horizontal and vertical equity?
Topic: Horizontal and vertical equity
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Written and oral communication
4) What is the difference between vertical equity and horizontal equity?
Topic: Horizontal and vertical equity
Skill: Level 1: Definition
Section: Checkpoint 8.3
Status: Old
AACSB: Written and oral communication
5) Ali earns $20,000 and pays $2,000 in taxes; Maria earns $40,000 and pays $4,000 in taxes. Is this tax progressive, regressive, or proportional?
Topic: Personal income tax
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Analytical thinking
6) "For the U.S. personal income tax, the average tax rate is greater than the marginal tax rate." Is the previous statement correct or incorrect?
Topic: Personal income tax
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
7) What is the marginal tax rate? Average tax rate? Can these rates ever differ?
Topic: Marginal tax rate and average tax rate
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Status: Old
AACSB: Reflective thinking
8) Why are sales taxes, which require that everyone pay the same percentage tax, considered regressive taxes?
Topic: Regressive tax
Skill: Level 3: Using models
Section: Checkpoint 8.3
Status: Old
AACSB: Written and oral communication
9) The table above gives the taxable income and the amount of tax paid.
a. Is this income tax progressive, regressive, or proportional?
b. If the taxable income is $25,000, what is the average tax rate?
c. If taxable income increases from $25,000 to $30,000, what is the marginal tax rate?
a. The income tax is progressive.
b. If taxable income is $25,000, the average tax rate is 6 percent.
c. If taxable income increases from $25,000 to $30,000, the marginal tax rate is 10 percent.
Topic: Progressive tax
Skill: Level 3: Using models
Section: Checkpoint 8.3
Status: Old
AACSB: Analytical thinking
10) Adam, Aaron, and Fatima earn, respectively, $30,000, $50,000 and $100,000 per year. The amount of state income taxes they pay on their income depends on which state they choose to live in. The table above shows how much they would pay in taxes in each state.
a. Is the tax in State A progressive, regressive or proportional?
b. Is the tax in State B progressive, regressive or proportional?
c. Is the tax in State C progressive, regressive or proportional?
a. Taxes in State A are proportional, because all three pay 10 percent of their income in taxes.
b. Taxes in State B are progressive, because Adam's tax rate is 10 percent, Aaron's tax rate is 15 percent, and Fatima's tax rate is 20 percent.
c. Taxes in State C are regressive, because Adam's tax rate is 10 percent, Aaron's tax rate is 8 percent, and Fatima's tax rate is 7 percent.
Topic: Progressive, regressive, proportional taxes
Skill: Level 3: Using models
Section: Checkpoint 8.3
Status: Old
AACSB: Analytical thinking
11) If the marginal tax rate is 20 percent, and Pearl earns an extra $100, how much must Pearl pay in additional taxes?
Topic: Marginal tax rate
Skill: Level 3: Using models
Section: Checkpoint 8.3
Status: Old
AACSB: Analytical thinking
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Foundations of Microeconomics 9e | Test Bank with Answer Key by Robin Bade
By Robin Bade