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

Question 1

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.

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

A lump-sum tax:

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.

Answer 3

can result in price changes but does not prevent prices from simultaneously being equal to MSB and MSC.

Question 4

The excess burden of a tax on interest income is $5 billion per year.Total interest income per year is $50 billion.The tax currently collects $15 billion in revenue per year.The efficiency-loss ratio of the tax is therefore 0.33.

Question 5

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

Question 6

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.

Question 7

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

Question 8

Clothing is sold in perfectly competitive markets where no externalities prevail.An excise tax on clothing will result in a market price for clothing that equals the marginal social benefit and mar?ginal social cost of service.

Question 9

A lump-sum tax only results in income effects.

Question 10

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

Question 11

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

Question 12

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.

Question 13

A lump-sum tax can distort prices and affect consumption behavior.

Question 14

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

Question 15

A study indicates that taxes in the United States reduce the Gini coefficient for the nation by 10 percent.This implies that taxes make the income distribution more equal.

Question 16

If the market supply of labor services is perfectly inelastic, a tax on labor income will reduce the net wages received by workers by the full amount of the tax per labor hour.

Question 17

Lump-sum taxes do not prevent prices from equaling the marginal social cost and benefit of any goods and services.

Question 18

If the tax on the sale of gasoline is doubled from 20 cents per gallon to 40 cents per gallon, the excess burden of the tax will quadruple.

Question 19

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:

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

Question 20

A payroll tax results in a difference between the gross wages paid by employers and the net wages received by workers.

Question 21

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?

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 22

Other things being equal, the more inelastic the demand for a taxed good, the

A)greater the portion of the tax paid by sellers.
B)greater the excess burden of the tax.
C)greater the portion of the tax paid by buyers.
D)less the portion of a tax on sellers that can be shifted to buyers.

Question 23

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

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 24

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

Question 25

The efficiency-loss ratio relative to tax is:

A)the deadweight loss less the tax revenue.
B)the deadweight loss divided by the tax revenue reduced by one.
C)the excess burden divided by the tax revenue.
D)none of these are correct.

Question 26

Housing construction is generally believed to be an industry of constant costs.In the long run, which of the following is true if a $10 per square foot tax on housing construction is collected directly from builders?

A)The incidence of the tax will be borne by builders.
B)The excess burden of the tax will be zero.
C)The quantity of new construction supplied will be unaffected.
D)The tax will be fully shifted to buyers of new construction.

Question 27

The demand for medical care is very inelastic.If a 10 percent tax is levied on the sale of medical services and is collected from medical-care providers, then:

A)the incidence of the tax is likely to be borne entirely by medical-care providers.
B)most of the tax is likely to be shifted to those who purchase medical care.
C)the market equilibrium price of medical care will fall.
D)the excess burden of the tax is likely to be very high.

Question 28

Most studies show that the price elasticity of demand for gasoline is -0.2.If the price elasticity of supply is 2, then a tax on gasoline will:

A)cause the market equilibrium price of gasoline to fall.
B)cause the market equilibrium price paid by buyers to rise.
C)cause the net price received by sellers to fall.
D)both (b) and (c) are correct.

Question 29

The elasticity of supply of land is zero.A tax on land results only in an income effect to landlords.It then follows that a 10 percent tax on land rents will:

A)have a positive excess burden.
B)be paid entirely by landlords.
C)have zero excess burden.
D)both (b) and (c) are correct.

Question 30

Differential tax incidence measures the effect:

A)that a tax and the expenditures it finances have on the distribution of income.
B)that one tax alone has on the distribution of income.
C)on the distribution of income of substituting one tax for another while holding the size and composition of the budget fixed.
D)on the distribution of income of substituting one tax for another while changing the kinds of government services financed.

Question 31

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:

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 32

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.

Question 33

A $0.30 per unit tax is imposed on a good that reduces the quantity supplied and demanded by 1000 units.What is the deadweight loss (ignore price elasticities)?

A)$300.00
B)$100.00
C)$150.00
D)Cannot be determined.

Question 34

Explain why the excess burden of a lump-sum tax will always be zero.Why is the payroll tax not a lump-sum tax? Show how a payroll tax affects the wages paid by employers and received by workers, assuming that it is withheld from their paychecks.Assuming that the supply of labor is not perfectly inelastic, show how the excess burden can be measured.

Question 35

Suppose an economy is comprised of only two markets: one for food and the other for housing.A tax on food used to finance transfer payments is likely to:

A)decrease the price of food.
B)increase the price of housing.
C)decrease the price of housing.
D)have no effect on either the price of food or housing.

Question 36

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:

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 37

Viewed from origin, a price distorting tax creates a new budget line with a ______ slope relative to the budget line without the tax.

A)less steep
B)more steep
C)similar
D)varying

Question 38

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

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 39

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

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 40

If a lump-sum tax is imposed, the slope of the new budget line relative to the budget line prior to the tax:

A)remains unchanged.
B)increases.
C)decreases.
D)can increase and decrease in different regions.