Ch 20 ECON 332

Suppose that a government imposes a massive $6 tax on each pack of cigarettes. Supply is given by Q = 30 + 5P and demand is given by Q = 48 - P. What is the deadweight loss caused by the tax? $10 $15 $20 $30 None of the answers is correct.

$15

Which of the following statements about the Laffer curve is true? It is possible to be at a point where reducing tax rates increases tax revenues. It is possible to be at a point where increasing tax rates increases tax revenues. Government can always increase tax revenues by adjusting tax rates. All of the above statements are true. Both a and b are true.

Both a and b are true.

The elasticity rule states that goods with high elasticities should be taxed _______; the broad base rule states that _________. at a lower rate; income should be taxed at the same rate as commodities at a higher rate; income should be taxed at the same rate as commodities at the same rate as goods with low elasticities; a wide variety of commodities should be taxed at a moderate rate at a higher rate; a wide variety of commodities should be taxed at a moderate rate None of the answers is correct.

None of the answers is correct.

Assume that all people have identical utility functions that exhibit diminishing marginal utility and that as people are taxed more, they work less. Which of the following statements about the optimal income tax system is true? The marginal utility of the last dollar of income for each person is equal. Each person is taxed so that the utility levels of everyone are equal. The marginal revenue raised from taxing each person is equal across people. None of the statements is true. Both a and c are true.

None of the statements is true.

Which of the following statements about the calculation of deadweight loss is true? The appropriate elasticity of demand to use is that which reflects only substitution effects. The appropriate elasticity of demand to use is that which reflects both income and substitution effects. The deadweight loss caused by the first dollar of a $5 tax exceeds the deadweight loss caused by the fifth dollar of a $5 tax. Both b and c are true. None of the statements is true.

The appropriate elasticity of demand to use is that which reflects only substitution effects.

In general, which of the following statements about the marginal deadweight loss of a tax is true? The loss increases as the tax rate increases. The loss decreases as the tax rate increases. The loss decreases, then increases, as the tax rate increases. The loss increases, then decreases, as the tax rate increases. The loss is constant and does not change as the tax rate changes.

The loss increases as the tax rate increases.

value of additional government revenues

The value of having another dollar in the government's hands relative to its next best use in the private sector

What is the goal of optimal commodity taxation? to minimize deadweight loss for a given government revenue requirement to maximize government revenues for a given level of deadweight loss to tax only those commodities for which there are negative externalities to find the combination of taxes such that no consumer is made worse off than another None of the answers is correct.

to minimize deadweight loss for a given government revenue requirement

Ramsey Rule

to minimize the deadweight loss of a tax system while raising a fixed amount of revenue, taxes should be set across commodities so that the ratio of the marginal deadweight loss to marginal revenue raised is equal across commodities

tax-benefit linkages

direct ties between taxes paid and benefits received

preexisting distortions

market failures, such as externalities or imperfect competition, that are in place before any government intervention

Assume that all individuals have the same utility function that exhibits diminishing marginal utility. Assume that society's social welfare function is utilitarian, with each individual's utility being weighted equally. Finally, assume that the total level of income in society is fixed and thus independent of the tax rate. Which of the following statements is true under this model? Everyone has the same post-tax income. The average tax rate is negative below the average income level. The marginal income tax above the average income level is 50%. All of the above statements are true. Both a and b are true.

Both a and b are true.

In a labor market, suppose that the government levies a payroll tax on employers to fund a workers' compensation program to form a tax-benefit linkage. Which of the following statements is true if workers value the benefit of the workers' compensation less than the cost to the employers? The wages of the workers fall. There is a deadweight loss. More information is necessary to determine if there is a deadweight loss. None of the statements is true. Both a and b are true.

Both a and b are true.

Which of the following statements is true when a good is taxed? There is a deadweight loss. The new equilibrium quantity is lower than the optimal amount. Producers produce more than the optimal amount of the good. Answers a, b, and c are true. Both a and b are true.

Both a and b are true.

Which of the following statements is true when there is a deadweight loss caused by a tax? Some efficient trades are not being made. Some inefficient trades are being made. The extent to which there is a deadweight loss is determined by the extent to which consumers and producers change their behavior to avoid the tax. Answers a, b, and c are true. Both a and c are true.

Both a and c are true.

Suppose that a country wants to subsidize some goods in an optimal way. Which of the following statements is true? The country should subsidize commodities with high elasticities of demand more than commodities with low elasticities of demand. The country should subsidize commodities with low elasticities of demand more than commodities with high elasticities of demand. Subsidies for commodities with high elasticities of demand result in larger deadweight losses than do subsidies for commodities with low elasticities of demand. Both a and c are true. Both b and c are true.

Both b and c are true.

Suppose that there are only two people in an economy. Under the current income tax system, the marginal revenue of a 1% tax increase on Harry is $50 while the marginal revenue of a 1% tax increase on Sally is $30. The marginal utility of Harry is 30 utils while the marginal utility of Sally is 20 utils. Which of the following should be done to make the tax system optimal without affecting total government revenues? Harry should be taxed more and Sally should be taxed less. Sally should be taxed more and Harry should be taxed less. The tax system is currently optimal. More economic information is necessary to answer the question. The answer depends on whether or not Harry has met Sally.

Harry should be taxed more and Sally should be taxed less.

Which of the following preexisting distortions will cause the deadweight loss of a tax to be larger than it would otherwise be? Monopoly A negative consumption externality A negative production externality All of the above Both a and c

Monopoly

Assume that all people have identical utility functions that exhibit diminishing marginal utility and that, as people are taxed more, they work less. Which of the following statements about the optimal income tax system is true? The marginal utility of the last dollar of income for each person is equal. Each person is taxed so that utility levels of everyone are equal. The marginal revenue raised from taxing each person is equal across all people. None of the above statements is true. Both a and c are true.

None of the above statements is true.

Which of the following statements about the Laffer curve is true? As the tax rate rises from 0% to 100%, tax revenues rise at a constant rate. As the tax rate rises from 0% to 100%, tax revenues fall and then rise. As the tax rate rises from 0% to 100%, tax revenues fall at a constant rate. As the tax rate rises from 0% to 100%, tax revenues rise but at a diminishing rate. None of the statements is true.

None of the statements is true.

Which of the following statements is generally true? The average producer surplus per unit increases as more units are sold. The average consumer surplus per unit decreases as more units are sold. The average consumer surplus per unit does not change as more units are sold. Both a and b are true None of the above statements are true.

The average consumer surplus per unit decreases as more units are sold.

The Ramsey rule makes which of the following statements? The deadweight loss per dollar of tax revenue generated from commodity taxes should be equal to the deadweight loss per dollar of tax revenue generated from income taxes. The ratio of the price elasticity of demand to the tax should be equal across commodities. The per unit tax should be equal across commodities. The deadweight loss per dollar of tax revenue associated with an additional dollar of taxes on that commodity should be equal across commodities. None of the above statements is made.

The deadweight loss per dollar of tax revenue associated with an additional dollar of taxes on that commodity should be equal across commodities.

Which of the following statements is true when a good is taxed? The deadweight loss is greater when the tax is levied on consumers than when it is levied on producers. The deadweight loss is greater when the tax is levied on producers than when it is levied on consumers. The marginal benefit of the last unit produced exceeds the marginal cost of producing the unit. Both a and c are true. Both b and c are true.

The marginal benefit of the last unit produced exceeds the marginal cost of producing the unit.

Assume that all people have identical utility functions that exhibit diminishing marginal utility and that, as people are taxed more, they work less. If there are no taxes, which of the following statements is true? The marginal utility of high-income people is equal to the marginal utility of low-income people. The marginal revenue achieved by a 1% tax increase on high-income people is higher than the marginal revenue achieved by a 1% tax increase on low-income people. The ratio of marginal utility to marginal revenue is equal for high- and low-income people. All of the above statements are true. Both b and c are true.

The marginal revenue achieved by a 1% tax increase on high-income people is higher than the marginal revenue achieved by a 1% tax increase on low-income people.

In a labor market, suppose that the government levies a payroll tax on employers to fund a workers' compensation program to form a tax-benefit linkage. Which of the following statements necessarily implies that the establishment of the program causes a deadweight loss? The demand curve shifts to the right. The new level of labor is the same as the pre-intervention level of labor. The new level of labor exceeds the pre-intervention level of labor. The supply curve shifts to the left. None of the statements implies that the program causes a deadweight loss.

The new level of labor is the same as the pre-intervention level of labor.

n a labor market, suppose that the government levies a payroll tax on employers to fund a workers' compensation program to form a tax-benefit linkage. These actions result in which of the following shifts? The supply curve to the left Both the supply and demand curves to the left The supply curve to the right The supply curve to the right and the demand curve to the left The supply curve to the left and the demand curve to the right

The supply curve to the right and the demand curve to the left

Suppose that there are only two people in an economy. Under the current income tax system, the marginal revenue of a 1% tax increase on Tyrone is $100, while the marginal revenue of a 1% tax increase on Vanessa is $30. The marginal utility of Tyrone is 150 utils while the marginal utility of Vanessa is 45 utils. Which of the following actions would make the tax system optimal without affecting total government revenues? Tyrone should be taxed more and Vanessa should be taxed less. Vanessa should be taxed more and Tyrone should be taxed less. The tax system is currently optimal. More information is needed to answer the question. None of the above actions would make the system optimal.

The tax system is currently optimal.

Which of the following preexisting distortions would cause the deadweight loss of a tax to be smaller than it would otherwise be? a positive consumption externality a negative production externality monopoly Answers a, b, and c are correct. Both a and c are correct.

a negative production externality monopoly

Suppose that the elasticities of demand for apples, bananas, and peaches are -0.9, -1.6, and -0.8, respectively. Assume that all else is identical in these three products and that an identical tax is levied on each good. Rank the products from highest to lowest in terms of the deadweight loss caused by the tax. apples, bananas, peaches peaches, bananas, apples apples, peaches, bananas bananas, apples, peaches bananas, peaches, apples

bananas, apples, peaches

optimal commodity taxation

choosing the tax rates across goods to minimize deadweight loss for a given government revenue requirement

Optimal Income Taxation

choosing the tax rates across income groups to maximize social welfare subject to a government revenue requirement

In a labor market, suppose that the government levies a payroll tax on employees to fund a workers' compensation program to form a tax-benefit linkage. The payroll tax shifts the _________; the implementation of the workers' compensation program shifts the ___________. demand curve to the left; supply curve to the right demand curve to the left; supply curve to the left demand curve to the right; supply curve to the right supply curve to the left; supply curve to the right demand curve to the left; demand curve to the left

supply curve to the left; supply curve to the right

deadweight lose is caused by individuals and firms making inefficient consumption and production choices the avoid

taxation

As demand and supply elasticities rise

the dead weight lose of taxation grows.

The marginal deadweight loss of a tax:

the increase in dead weight lose per unit increase in the tax