Question 1

In perfectly competitive industries with identical firms,consumers always end up paying the entire burden of a per-unit tax on output in the long run.

Accepted Answer

A) True 
 B)False  True

Question 2

The economic benefit of a per-unit subsidy accrues disproportionately to the side of the market that is more price-inelastic.

Accepted Answer

A) True 
 B)False  True

Question 3

In most cases,the fact that one of the market curves is perfectly inelastic is not sufficient to conclude that a per-unit tax in that market is efficient.A tax on land rents is an exception.Can you explain why?

Accepted Answer

In goods markets,supply curves are never perfectly inelastic.In the short run,they are formed by the upward sloping marginal cost curves of firms,and in the long run they are determined by entry and exit (and thus tend to be fairly or completely elastic).The demand curve in goods markets arises from the consumer model where substitution and income effects are both included,and the inefficiency arises from the substitution effect.Thus,we would need a perfectly inelastic compensated demand curve for there to be no inefficiency on the consumer side.
 In labor and capital markets,the demand curve arises from firms -- and must be downward sloping because of diminishing marginal product in the short run and greater elasticity in the long run.The supply curves in those markets,on the other hand,arise from the consumer model where once again substitution and wealth effects are both included in market curves but only substitution effects are relevant for deadweight losses.
 The case of a land market is unique because the inelastic supply curve does not arise from the consumer model and therefore does not conflate income and substitution effects.When the tax is then passed entirely to land owners,there is no impact on consumers and thus no deadweight loss on the consumer side.And since there are no substitution effects on the supply side,there is no deadweight loss.

Question 4

Regardless of whether goods are inferior or normal,the deadweight loss from a per-unit tax is always greater the more price elastic the market demand curve for a good.

Accepted Answer

A) True 
 B)False

Question 5

Regardless of how price elastic labor demand curves are,employers are unaffected by wage taxes if labor supply is perfectly inelastic.

Accepted Answer

A) True 
 B)False

Question 6

The larger the wealth effect,the less likely it is that a wage tax will give rise to a Laffer curve that has a downward sloping portion.

Accepted Answer

A) True 
 B)False

Question 7

A wage tax in a labor market with a perfectly inelastic labor supply curve is efficient.

Accepted Answer

A) True 
 B)False

Question 8

If either the supply or the demand curve in a goods market is very elastic,a per-unit tax will end up not raising very much revenue.

Accepted Answer

A) True 
 B)False

Question 9

The burden of a per-unit tax will fall disproportionately on consumers when the supply curve is relatively more elastic than the demand curve.

Accepted Answer

A) True 
 B)False

Question 10

Suppose tastes for consumption now and consumption in the future have constant elasticity of substitution.It may then be the case that a tax on interest income is efficient even if savings (defined as current income not consumed)fall in response to the tax.

Accepted Answer

A) True 
 B)False

Question 11

If supply is perfectly elastic in a consumer goods market,a per unit tax will always be inefficient unless the market demand curve for consumers is perfectly inelastic.

Accepted Answer

A) True 
 B)False

Question 12

To identify the burden of a per-unit tax on consumers,we have to use the aggregate marginal willingness to pay curve whenever the underlying good is not quasilinear.

Accepted Answer

A) True 
 B)False

Question 13

The more inelastic the supply curve in a goods market,the smaller will be the deadweight loss from a per-unit tax in that market.

Accepted Answer

A) True 
 B)False

Question 14

In perfectly competitive markets with identical firms,the burden of a tax is shared by consumers and producers in the short run so long as market demand is not perfectly elastic.

Accepted Answer

A) True 
 B)False

Question 15

When the leisure demand curve is relatively inelastic,the bulk of the burden of a wage tax falls on workers.

Accepted Answer

A) True 
 B)False

Question 16

The statutory incidence of a tax is the same as the economic incidence of a tax whenever a tax is levied on a side of a market that is perfectly price-inelastic.

Accepted Answer

A) True 
 B)False

Question 17

Regardless of how price inelastic the supply curve,tax revenue from a per-unit tax rises the more price inelastic the demand curve is.

Accepted Answer

A) True 
 B)False

Question 18

The consumer-side deadweight loss from a per-unit tax in the goods market arises from solely from the fact that output falls under the tax.

Accepted Answer

A) True 
 B)False

Question 19

If demand is linear,tax revenue rises at a constant rate as per unit taxes increase.

Accepted Answer

A) True 
 B)False

Question 20

Under which of the following scenarios does an increase in the wage tax cause a drop in employment but no deadweight loss?
a.
When the wealth effect for workers is larger than the substitution effect.
b.
When the wealth effect for workers is smaller than the substitution effect.
c.
When the wealth effect for workers is equal to the substitution effect.
d.
It is possible under any of these scenarios.
e.
There is no scenario under which this is possible.

Accepted Answer

E
As long as there are substitution effe

Exam 19: Distortionary Taxes and Subsidies

In perfectly competitive industries with identical firms,consumers always end up paying the entire burden of a per-unit tax on output in the long run.

The economic benefit of a per-unit subsidy accrues disproportionately to the side of the market that is more price-inelastic.

In most cases,the fact that one of the market curves is perfectly inelastic is not sufficient to conclude that a per-unit tax in that market is efficient.A tax on land rents is an exception.Can you explain why?

Regardless of whether goods are inferior or normal,the deadweight loss from a per-unit tax is always greater the more price elastic the market demand curve for a good.

Regardless of how price elastic labor demand curves are,employers are unaffected by wage taxes if labor supply is perfectly inelastic.

The larger the wealth effect,the less likely it is that a wage tax will give rise to a Laffer curve that has a downward sloping portion.

A wage tax in a labor market with a perfectly inelastic labor supply curve is efficient.

If either the supply or the demand curve in a goods market is very elastic,a per-unit tax will end up not raising very much revenue.

The burden of a per-unit tax will fall disproportionately on consumers when the supply curve is relatively more elastic than the demand curve.

Suppose tastes for consumption now and consumption in the future have constant elasticity of substitution.It may then be the case that a tax on interest income is efficient even if savings (defined as current income not consumed)fall in response to the tax.

If supply is perfectly elastic in a consumer goods market,a per unit tax will always be inefficient unless the market demand curve for consumers is perfectly inelastic.

To identify the burden of a per-unit tax on consumers,we have to use the aggregate marginal willingness to pay curve whenever the underlying good is not quasilinear.

The more inelastic the supply curve in a goods market,the smaller will be the deadweight loss from a per-unit tax in that market.

In perfectly competitive markets with identical firms,the burden of a tax is shared by consumers and producers in the short run so long as market demand is not perfectly elastic.

When the leisure demand curve is relatively inelastic,the bulk of the burden of a wage tax falls on workers.

The statutory incidence of a tax is the same as the economic incidence of a tax whenever a tax is levied on a side of a market that is perfectly price-inelastic.

Regardless of how price inelastic the supply curve,tax revenue from a per-unit tax rises the more price inelastic the demand curve is.

The consumer-side deadweight loss from a per-unit tax in the goods market arises from solely from the fact that output falls under the tax.

If demand is linear,tax revenue rises at a constant rate as per unit taxes increase.

Introduction

A Consumers Economic Circumstances

Economic Circumstances in Labor and Financial Markets

Tastes and Indifference Curves

Different Types of Tastes

Doing the Best We Can

Income and Substitution Effects in Consumer Goods Markets

Wealth and Substitution Effects in Labor and Capital Markets

Demand for Goods and Supply of Labor and Capital

Consumer Surplus and Deadweight Loss

One Input and One Output: a Short-Run Producer Model

Production With Multiple Inputs

Production Decisions in the Short and Long Run

Competitive Market Equilibrium

The Invisible Hand and the First Welfare Theorem

General Equilibrium

Choice and Markets in the Presence of Risk

Elasticities, Price-Distorting Policies, and Non-Price Rationing

Prices and Distortions Across Markets

Externalities in Competitive Markets

Asymmetric Information in Competitive Markets

Monopoly

Strategic Thinking and Game Theory

Oligopoly

Product Differentiation and Innovation in Markets

Public Goods

Governments and Politics

What Is Good Challenges From Psychology and Philosophy

Filters