Question 1

Most studies of tax incidence assume that taxes on labor income and other input services are borne entirely by the workers and other input owners that supply the services.This implies that the:

Accepted Answer

A) supply of those input services is very elastic. 
B) supply of those input services is of unitary elasticity. 
C) supply of those input services is perfectly inelastic. 
D) demand for those input services is perfectly elastic.

Question 2

The more price-elastic the demand of a taxed item, the lower the excess burden of a tax on the sale of that item.

Accepted Answer

A) True 
 B)False

Question 3

The current price of compact discs, which are traded in perfectly competitive markets, is $10.A $1 per unit tax is levied on the discs.Annual record sales decline from five million to four million as a result of the tax.Assuming that the income effect of the tax-induced price change is negligible, the excess burden of the tax will be:

Accepted Answer

A) $500,000 per year. 
B) $1 million per year. 
C) $2 million per year. 
D) $2.5 million per year.

Question 4

If a per unit tax is imposed but the quantity supplied and demanded does not change, then:

Accepted Answer

A) the demand is perfectly inelastic. 
B) the supply is perfectly inelastic. 
C) there is no deadweight loss. 
D) all of the these are correct.

Question 5

A lump-sum tax:

Accepted Answer

A) distorts market prices so that they do not simultaneously equal MSB and MSC. 
B) can result in price changes but does not prevent prices from simultaneously being equal to MSB and MSC. 
C) results in substitution effects that change prices. 
D) results in both substitution effects and income effects that change prices.

Question 6

A tax on land results in an income effect on landlords but no substitution effect.It then follows that the excess burden of a tax on land will be zero.

Accepted Answer

A) True 
 B)False

Question 7

The market supply of labor is perfectly inelastic.However, the income effect of tax-induced wage changes are believed to be substantial.It then follows that a tax on labor income will:

Accepted Answer

A) have zero excess burden. 
B) have positive excess burden. 
C) be paid entirely by workers as a reduction in net wages. 
D) both (b) and (c) are correct.

Question 8

If the compensated elasticity of supply of labor is zero, then a tax on labor earnings will have zero excess burden.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is true about a lump-sum tax?

Accepted Answer

A) It prevents efficiency from being attained in competitive markets. 
B) It causes substitution effects. 
C) It causes income effects. 
D) It causes both income effects and substitution effects.

Question 10

Lump-sum taxes can vary in amount based on income level.

Accepted Answer

A) True 
 B)False

Question 11

An income tax is an example of a price-distorting tax.

Accepted Answer

A) True 
 B)False

Question 12

The supply of new cars is perfectly elastic.A $400 per car tax is levied on buyers.As a result of the tax, the

Accepted Answer

A) price received by sellers will fall by $400. 
B) price paid by buyers, including the tax, will increase by $400. 
C) quantity of cars sold per year will be unchanged. 
D) excess burden of the tax will be zero.

Question 13

If the price elasticity of supply of labor is equal to 0.5 and the price elasticity of demand for labor is -2, then which of the following is likely to result from a tax on labor earnings?

Accepted Answer

A) The tax will be fully borne by workers. 
B) Some of the tax will be shifted to employers as market equilibrium wages increase. 
C) Market equilibrium wages will decline. 
D) There will be no effect on market equilibrium wages.

Question 14

A 10 percent tax is levied on the sale of soft drinks.This tax is collected from the sellers of the drinks.A critic of the tax argues that the sellers will shift the entire tax to the buyers and therefore be no worse off.Evaluate this argument by showing the market conditions that would have to prevail for the prediction to be correct.Indicate under what circumstances the tax will be shared by the buyers and the sellers of soft drinks.

Accepted Answer

The answer of A 10 percent tax is levied on...

Question 15

Currently, a 10 cent per gallon tax is levied on gasoline consumption.The tax is increased to 20 cents per gallon.The excess burden of the tax will:

Accepted Answer

A) remain the same. 
B) double. 
C) increase four times. 
D) decline.

Question 16

A consumer currently pays $500 a year in retail sales taxes.She would be better off if she paid the same amount annually as a lump-sum tax.

Accepted Answer

A) True 
 B)False

Question 17

A lump-sum tax only results in income effects.

Accepted Answer

A) True 
 B)False

Question 18

A lump-sum tax results in both income and substitution effects.

Accepted Answer

A) True 
 B)False

Question 19

Assuming that the income effects are negligible and that beer is sold in a competitive market, a tax of 10 cents per can of beer that causes a decline in sales of 10,000 cans per month will result in an excess burden of $1,000 per month.

Accepted Answer

A) True 
 B)False

Question 20

If a $10 per unit tax is levied on the output of a monopolist, more of that tax will be shifted to con?sumers than would be the case if the same good were produced by a competitive industry.

Accepted Answer

A) True 
 B)False

Exam 11: Taxation, Prices, Efficiency, and the Distribution of Income

Most studies of tax incidence assume that taxes on labor income and other input services are borne entirely by the workers and other input owners that supply the services.This implies that the:

The more price-elastic the demand of a taxed item, the lower the excess burden of a tax on the sale of that item.

If a per unit tax is imposed but the quantity supplied and demanded does not change, then:

A lump-sum tax:

A tax on land results in an income effect on landlords but no substitution effect.It then follows that the excess burden of a tax on land will be zero.

The market supply of labor is perfectly inelastic.However, the income effect of tax-induced wage changes are believed to be substantial.It then follows that a tax on labor income will:

If the compensated elasticity of supply of labor is zero, then a tax on labor earnings will have zero excess burden.

Which of the following is true about a lump-sum tax?

Lump-sum taxes can vary in amount based on income level.

An income tax is an example of a price-distorting tax.

The supply of new cars is perfectly elastic.A $400 per car tax is levied on buyers.As a result of the tax, the

If the price elasticity of supply of labor is equal to 0.5 and the price elasticity of demand for labor is -2, then which of the following is likely to result from a tax on labor earnings?

Currently, a 10 cent per gallon tax is levied on gasoline consumption.The tax is increased to 20 cents per gallon.The excess burden of the tax will:

A consumer currently pays $500 a year in retail sales taxes.She would be better off if she paid the same amount annually as a lump-sum tax.

A lump-sum tax only results in income effects.

A lump-sum tax results in both income and substitution effects.

Assuming that the income effects are negligible and that beer is sold in a competitive market, a tax of 10 cents per can of beer that causes a decline in sales of 10,000 cans per month will result in an excess burden of $1,000 per month.

If a $10 per unit tax is levied on the output of a monopolist, more of that tax will be shifted to con?sumers than would be the case if the same good were produced by a competitive industry.