Deck 15: Taxation and Efficiency

Question 1

The marginal rate of substitution is

A)the slope of the contract curve.
B)the slope of the indifference curve.
C)the slope of the utility possibilities curve.
D)none of these answer options is correct.

Answer 1

the slope of the indifference curve.

Question 2

The Double Dividend Effect requires

A)two different taxes.
B)double credit on air miles.
C)Pigouvian taxes.
D)taxes on stock dividends.

Answer 2

Pigouvian taxes.

Question 3

The theory of excess burden does not apply to income or labour market taxation.

A)True
B)False
C)Uncertain

Answer 3

False

Question 4

The value of the marginal product of hours worked in the household sector is equal to

A)the change in the composition of the commodity bundle.
B)the price of each hour of work.
C)the price of additional output produced for each hour worked.
D)commodity prices.

Question 5

Which of the following would be an example of a lump-sum tax?

A)A retail sales tax
B)An admission fee
C)A compensated tax
D)A poll tax

Question 6

A tax that causes the price that producers receive for a commodity to deviate from the buyer's price is

A)inefficient.
B)a lump-sum tax.
C)always a unit tax.
D)efficient.

Question 7

Excess burden is larger with

A)a narrow tax.
B)no taxes.
C)a broader tax.
D)lump-sum taxes.

Question 8

Excess burden calculations typically assume many other distortions.

A)True
B)False
C)Uncertain

Question 9

Lump sum taxation is an attractive policy tool because it is efficient and equitable.

A)True
B)False
C)Uncertain

Question 10

Welfare loss of taxation

A)is also referred to as deadweight loss.
B)measures the impact of tax changes on welfare recipients.
C)is the change in the quantity demanded due to a change in taxation.
D)cannot be measured.

Question 11

A lump sum tax can create an excess burden.

A)True
B)False
C)Uncertain

Question 12

The marginal excess burden from raising one more dollar of tax revenue the average excess tax burden.

A)is less than
B)cannot be compared to
C)is greater than
D)is equal to

Question 13

There is no excess burden created by subsidies.

A)True
B)False
C)Uncertain

Question 14

A substitution effect

A)is due to the change in relative prices.
B)is known as the uncompensated response.
C)is known as excess burden.
D)is due to the loss of income because relative prices are unaffected.

Question 15

Equivalent variation means

A)finding an equivalent change in income that puts a person at the same utility as a change in price would.
B)equalizing excess burden across all markets.
C)finding equal tax rates that ensure quantity demanded does not change.
D)moving the same distance in either direction from a starting point on an indifference curve.

Question 16

An excess burden

A)is more taxation than consumers can bear.
B)is the change in the quantity demanded due to a change in taxation.
C)is measured as the tax burden based on income.
D)is the welfare loss above and beyond the tax revenue collected.

Question 17

Points on the same indifference curve are

A)points where utility is maximized.
B)points where costs are minimized.
C)never possible.
D)points where the person is indifferent between bundles.

Question 18

The logic of the double-dividend hypothesis may not hold because the Pigouvian tax exacerbates pre-existing distortions in the labour market.

A)True
B)False
C)Uncertain

Question 19

The compensated demand curve

A)shows how the quantity demanded changes when the price changes while simultaneously compensating the consumer so the consumer stays on the same indifference curve.
B)shows both the income and the substitution effects that occur when the price changes.
C)both of these answers are correct.
D)neither of these answers is correct.

Question 20

The differential taxation of inputs does not create an excess burden.

A)True
B)False
C)Uncertain

Question 21

Suppose the inverse demand curve for good A is given by the equation PA = 10 - QA/10, and the supply curve is perfectly elastic (horizontal)at $1. Good A is presently taxed at $2 per unit. Good B (which is independent of good A)has an inverse demand curve, PB = 5 - QB/20, and supply is also perfectly elastic at $1. Good B is untaxed.
(A)How much tax revenue is collected, and what is the excess burden of the $2 tax on A?
(B)How much revenue is collected if the tax on good A is reduced to $1 per unit and good B is taxe at $1 per unit?
(C)What is the total excess burden of taxing both goods at $1 per unit?
(D)Which tax system is preferable from the point of view of economic efficiency?

Question 22

Refer to the figure below. If the supply curve for labour can be written as L = w/2 - 3/2 and the initial wage was $10, how much excess burden is created if there is a tax on wages of $2?

Question 23

When a demand curve is vertical, the elasticity of demand is equal to

A)0.
B)-2.
C)-1.
D)1.

Question 24

Suppose you had to design an economic system for a country that had never existed before. What criteria would you consider to minimize the excess burden of the system of taxation?

Question 25

When a single tax is imposed, the excess burden is proportional to the compensated elasticity of demand and to the square of the tax rate.

A)True
B)False
C)Uncertain

Question 26

Taxes that create an excess burden are necessarily bad.

A)True
B)False
C)Uncertain

Question 27

Equivalent variation is a method employed to measure excess burden. Comment on why a method such as compensating variation would not be appropriate for this analysis.

Question 28

All taxes impose an excess burden.

A)True
B)False
C)Uncertain

Question 29

Refer to the figure below. If VMPmkt can be characterized by the equation VMPmkt = 50 - 2Hmkt, where Hmkt is the number of hours worked in the market, and VMPhome can be characterized by the equation VMPhome = 45 - 3Hhome, where Hhome is the number of hours worked at home, what is H* if there are a total of 40 hours to be worked between work and home?

Question 30

Is it possible to design a tax that does all of the following: i)leaves behaviour unchanged so that the quantity demanded of goods and services does not change, ii)creates no excess burden, iii)is not regressive, and iv)is welfare enhancing?

Question 31

Refer to the figure below. Suppose that the demand curve for barley can be characterized by the equation P = 100 - 2Qd. Suppose further that price was $10.00, and a $10.00 tax per pound of barley is imposed on the market.
(A)How many pounds of barley would be purchased at a price of $10.00? After tax?
(B)What is the amount of tax revenue generated by the tax?
(C)How much excess burden is generated by the tax?
(D)What is the amount of consumer surplus before and after the tax? What is the difference in consumer surplus? Is it equal to excess burden plus the tax revenue?