Exam 16: Efficient and Equitable Taxation

One of the conditions mentioned in our formulation of the Ramsey Rule is that goods be unrelated in consumption.Do you think this is a reasonable assumption? If this condition does not hold,will the Ramsey Rule still work?

Choosing optimal user fees for government produced services is similar to choosing optimal taxes.

Ms.Mahmood is a retired schoolteacher whose pension income is $25,000 per year.She also receives Social Security income of $5,000 per year.Mr.Little is a young man who does not choose to work.He inherited $600,000 from his Aunt Clara,which he invested in a bond fund that provides a 5 percent return,generating $30,000 income per year.If we are concerned about the equity of taxation,should we consider these two people as equals and tax them equally? Explain why or why not.

Average cost pricing is found

Tax avoidance is

If a tax is efficient,it will necessarily be equitable.

A natural monopoly has

The Ramsey Rule implies that goods be __________ in consumption.

Suppose the demand for good X can be represented by the following equation: X_d = 22 - (1/4)P.Furthermore,suppose that the demand for good Y can be represented by Y_d = 50 - P. (A)Find the elasticity of demand for both good X and good Y when the price is $10. (B)Suppose that an ad valorem tax is placed on both goods.Good Y is taxed at a rate of 5%.To ensure that the inverse elasticity rule holds,what must be the rate at which good X is taxed? Reminder: Elasticity at a given price is found using the formula ε = -(1/S)(P/X),where S is the slope of the demand curve,X is the quantity demanded,and P is the price.

"For goods that are unrelated in consumption,efficiency requires that tax rates be inversely proportional to elasticities." This is the definition of

A linear income tax schedule is known as

In 2009,President Obama proposed raising the income tax on those making over $250,000 per year.Discuss the merits of this plan.

Consider a monopolist that has a total cost curve of TC = 110Q - (0.25)Q².The market demand equation is Q_d = 155 - P. (A)What are the total revenue,marginal revenue,marginal cost,equilibrium quantity,equilibrium price,and profits for the monopolist in this market? (B)Suppose the government instructs the firm to produce using average cost pricing.What are the equilibrium quantity,equilibrium price,and profits? (C)Suppose further that the government wants the firm to produce where supply equals demand.What will be the equilibrium quantity,equilibrium price,and profits?

A situation in which the government cannot implement an optimal tax policy because the policy is inconsistent with the government's incentives over time is known as

It is easier to under-report income in industries that deal with a lot of cash.

Natural monopolies have U-shaped cost curves.

Optimal commodity taxation would

The idea of two individuals being equally well off in the absence and existence of taxation is

Tax evasion is

Changing tax regimes can sometimes be difficult and lead to inequities.