Microeconomics; Ning Li; Salisbury University; Chapter 7 & 9 (Not including 9A) Review

"either or" decisions

When faced with a choice between two activities, choose the one with the positive economic profit

True or False: The benefit of a tax is the revenue it raises for the government to pay for goods and services. This is _____. A. true B. false

A. True

True or False: The tax base is the measure or value that determines how much tax an individual or firm pays. This is _____. A. true B. false

A. True

Supply elasticity

A measure of the way in which quantity supplied responds to a change in price; responsiveness.

Sales Tax

A tax on a sale of merchandise or services.

Loss aversion

We emphasize losses more than gains

Externality principle

- The cost or benefit that affects a party who did not choose to incur that cost or benefit - Often occur when a product or service's price equilibrium cannot reflect the true costs and benefits of that product or service - Can be positive or negative

Implicit costs

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur.

True or False: The branch of economics that combines economic modeling with insights from human psychology is known as irrational economics. This is _____. A. True B. False

B. False

If the tax rate on the first $30,000 of income is 15%; on the next $30,000 is 20%; on all income above $60,000 is 30%, the marginal tax rate on income of $30,000 is _____%. *Hint* Which rate is effective on the last dollar of income?

15%; Remember, the marginal tax rate is the percentage of tax applied to your income for each tax bracket in which you qualify. In essence, the marginal tax rate is the percentage taken from your next dollar of taxable income above a pre-defined income threshold.

True or False: The explicit cost of a year of college for a football player who could play in the NFL is the salary that he could earn in the NFL. This is _____. A. True B. False

B. False

Tax Base

A form of wealth- such as income, property, goods, or services- that is subject to taxes

True or False: The incidence of an excise tax is entirely on consumers if the supply curve is perfectly inelastic. This is _____. A. true B. false

B. False

Deadweight loss

A loss of surplus due to mutually beneficial trades that stop happening.

Revenue vs. profit

Revenue: Cash from sales (or unit price) times quantity sold Profit: Revenue minus Total Cost

Federal Income Tax

A payroll deduction collected by employers by law and sent to the federal government to support governmental programs.

Regressive Tax

A tax for which the percentage of income paid in taxes decreases as income increases.

Proportional tax principle

A tax imposed so that the tax rate is fixed, with no change as the taxable base amount increases or decreases. The amount of the tax is in proportion to the amount subject to taxation. As a result, such a flat marginal rate is consistent with a progressive average tax rate. Example: Sales tax is an example because all consumers, regardless of income, pay the same fixed rate.

Excise tax

A tax on the production or sale of a good.

Property Tax

A tax on the value of a property.

Wealth Tax

A tax on the wealth of an individual.

The progressive tax principle

A tax that imposes a lower tax rate on low-income earners compared to those with a higher income, making it based on the taxpayer's ability to pay. That means it takes a larger percentage from high-income earners than it does from low-income individuals.

Lump-Sum Tax

A tax that is the same amount for every person.

Payroll tax

A tax that removes money directly from workers' paychecks.

If the elasticity of demand for gasoline is 0.4 and the elasticity of supply is 0.8, a $0.50 increase in the excise tax on gasoline will most likely: A. increase government revenue. B. decrease government revenue. C. cause government revenue to fluctuate randomly. D. not affect government revenue. *Hint* Will quantity sold change much when tax is increased with inelastic demand and supply curves?

A. Increase government revenue; Remember, both are INELASTIC, meaning we know for sure movement will happen.

An excise tax levied on producers shifts the: A. supply curve upward by the amount of the tax. B. demand curve downward by the amount of the tax. C. demand curve upward by the amount of the tax. D. supply curve downward by the amount of the tax.

A. Supply curve upward by the amount of the tax.

True or False: An excise tax is charged on each unit of a good sold. This is _____. A. true B. false

A. True

True or False: Deadweight loss is zero if demand or supply is perfectly inelastic. This is _____. A. true B. false

A. True

True or False: If demand is less elastic than supply, consumers pay most of the tax. This is _____. A. true B. false *Hint* Think about a demand curve that is relatively vertical and a supply curve that is relatively horizontal.

A. True

True or False: The tax wedge is the difference between the price paid by consumers and the price received by the producers. This is _____. A. true B. false

A. True

Which of the principles of tax fairness is BEST illustrated by a gasoline tax used to maintain highways? A. benefits principle B. ability-to-pay principle C. proportional tax principle D. progressive tax principle

A. benefits principle

A tax based on the benefits principle: A. collects more revenue from those who benefit more from the government-provided good or service. B. does not distort incentives. C. will collect the same amount from every taxpayer. D. will collect more revenue from wealthier tax payers.

A. collects more revenue from those who benefit more from the government-provided good or service.

The revenue collected by the government from an excise tax is the: A. tax rate times the number of units bought and sold. B. number of units bought and sold divided by the tax rate. C. area of the tax wedge. D. entire area between the demand and supply curves. *Hint* If a tax is $5 and 200 units are sold, how much would revenue be.

A. tax rate times the number of units bought and sold.

The revenue collected by the government from an excise tax is the: A. tax rate times the number of units bought and sold. B. number of units bought and sold divided by the tax rate. C. area of the tax wedge. D. the entire area between the demand and supply curves. *Hint* If a tax is $5 and 200 units are sold, how much would the revenue be?

A. tax rate times the number of units bought and sold.

Earned Income Tax Credit

Also known as the EITC, a refundable federal income tax credit for low - to moderate - income working individuals and families, even if they did not earn enough money to be required to file a tax return.

Marginal Tax Rate

Amount of tax payable on the next dollar earned.

What does a perfectly inelastic demand curve look like?

An economic condition in which a change in the price of a product or a service has no impact on the quantity demanded or supplied because the elasticity of demand or supply is equal to zero. Perfectly vertical.

Tax incidence

An economic term for the division of a tax burden between buyers and sellers; is related to the price elasticity of supply and demand. When supply is more elastic than demand, the tax burden falls on the buyers.

Principle of Bounded Rationality

Assumes people have the time and cognitive ability to process only a limited amount of information on which to base decisions.

If an excise tax of $100 is imposed on the bicycle producers, the incidence of the tax is a: A. $100 burden for consumers. B. $50 burden for consumers and a $50 burden for producers. C. $75 burden for consumers and a $25 burden for producers. *Hint* Producers will not pay all of the tax when both supply and demand are sloped. You can't see the graph, but it is like an X in which equilibrium point is at $250 selling 5 bikes.

B. $50 burden for consumers and a $50 burden for producers.

True or False: A firm's revenue is the same as its economic profit. This is _____. A. True B. False

B. False

True or False: As a percentage of GDP, taxes in Europe are lower than in the United States. This is _____. A. true B. false

B. False

True or False: Doubling the excise tax rate on a good or service will double the amount of tax revenue collected for the government. This is _____. A. true B. false

B. False

True or False: Most economic models assume that people act irrationally. This is _____. A. True B. False *Hint* Would it be easier for economists to set up models based on people act rationally or irrationally?

B. False

True or False: The ability-to-pay principle is based on the assumption that everyone has the same ability to pay. This is _____. A. true B. false

B. False

True or False: The benefits principle is based on the assumption that everyone receives the same benefit from government-provided goods and services. This is _____. A. true B. false

B. False

True or False: An excise tax causes a deadweight loss due to the amount of revenue that is collected for the government. This is _____. A. true B. false *Hint* Remember deadweight loss is a loss of surplus due to mutually beneficial trades that stop happening.

B. False!

True or False: The incidence of a tax is a measure of how much government revenue is collected by the tax. This is _____. A. true B. false *Hint* If there is a $1 tax on gas, the tax incidence might be $0.50 on consumers and $0.50 on producers.

B. False!

True or False: The wealth tax in the United States, which takes the form of an estate tax, raises MORE revenue than the federal income tax. This is _____. A. true B. false

B. False! (Which is dumb asf this is why we have so many problems).

Which of the following taxes is the largest source of revenue for state and local governments? A. payroll tax B. sales tax C. income tax D. property tax *Hint* State and local governments generally do not collect payroll taxes. This is generally a federal tax.

B. Sales tax

Which of the following principles of tax fairness is most well illustrated by the Earned Income Tax Credit? A. the benefits principle B. the ability-to-pay principle C. the proportional tax principle D. the progressive tax principle

B. The ability-to-pay principle

Which of the following principles of tax fairness are the most well illustrated by the Social Security system? A. the progressive tax principle B. the benefits principle C. the proportional tax principle D. the ability-to-pay principle

B. The benefits principle

Which of the following type of taxes is the most well illustrated by the historical whiskey tax on small distillers? A. the progressive tax B. the proportional tax C. the lump-sum tax D. the regressive tax *Hint* The tax for small distillers were paid by the gallon.

B. The proportional tax

According to the benefits principle of tax fairness: A. people who engage in harmful activities such as smoking should pay more tax. B. those who benefit from public spending should bear the burden of the tax that pays for that spending. C. those who can afford to pay more tax should bear most of the burden of all taxes. D. monopolists should pay for the market failures they cause. *Hint* An example of the benefits principle would be those who are taxed for a public park should be able to use the park.

B. Those who benefit from public spending should bear the burden of the tax that pays for that spending.

Deciding whether to take 15 or 18 hours this semester is an example of a(n) _____ decision. A. implicit B. "either-or" C. "how much" D. insignificant

C. "How Much"

If the government imposes a $2 excise tax on soft drinks, and demand is relatively inelastic while supply is relatively elastic: A. consumers will stop buying soft drinks. B. consumers' and producers' burdens will be equal. C. consumers will pay more of the $2 tax than producers. D. producers will pay more of the $2 tax than consumers.

C. Consumers will pay more of the $2 tax than producers.

Which of the following taxes is the largest source of revenue for the federal government? A. sales tax B. payroll tax C. income tax D. property tax

C. Income Tax

Which of the following are two principles of tax fairness? A. the externality principle and the market failure principle B. marginal analysis and opportunity costs C. the benefits principle and the ability-to-pay principle D. the efficiency principle and the equity principle

C. The benefits principle and the ability-to-pay principle

For producers to bear most of the burden of the tax: A. the supply curve must be horizontal. B. supply and demand must be equally elastic. C. the supply curve must be relatively less elastic than the demand curve. D. the supply curve must be relatively more elastic than the demand curve.

C. The supply curve must be relatively less elastic than the demand curve.

Jennie is selling doughnuts as a fundraiser for the Humane Society. If the marginal benefit from selling the last box of doughnuts was $5 and the marginal cost of that box was $2, Jennie should: A. decrease the price of the doughnuts in order to increase total revenue. B. sell fewer doughnuts. C. sell more doughnuts. D. increase the price of the doughnuts in order to increase total revenue.

C. sell more doughnuts.

Opportunity Cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another.

Sunk Costs

Costs that have already been incurred and cannot be recovered; Not just monetary.

An excise tax causes the largest change in the quantity transacted when demand: A. and supply are both inelastic. B. is elastic and supply is inelastic. C. is inelastic and supply is elastic. D. and supply are both elastic.

D. And supply are both elastic.

If the tax rate on income is 15% of the first $20,000, 20% the second $20,000, and 30% of all income over $40,000, the tax is: A. regressive. B. proportional. C. lump-sum. D. progressive.

D. Progressive

An excise tax imposed on consumers will cause demand to shift _____, thereby _____ the equilibrium quantity. A. upward; decreasing B. upward; increasing C. downward; increasing D. downward; decreasing *Hint* Would a tax on consumers shift supply or demand?

D. downward; decreasing

The profit-maximizing principle of marginal analysis says that the optimal quantity is the: A. largest quantity at which total benefit is positive. B. smallest quantity at which marginal benefit becomes negative. C. quantity that minimizes total cost. D. largest quantity at which marginal benefit is at least as great as marginal cost.

D. largest quantity at which marginal benefit is at least as great as marginal cost.

An excise tax causes deadweight loss because: A. after the tax, the quantity demanded is less than the quantity supplied. B. after the tax, the quantity demanded is greater than the quantity supplied. C. consumer and producer surplus both increase as a result of the tax. D. the tax prevents mutually beneficial transactions from occurring.

D. the tax prevents mutually beneficial transactions from occurring.

How do you find the marginal tax rate on income?

Divide the difference in tax by the amount of income from the investment, and you'll get the economic marginal tax rate from investing.

Efficiency principle

Equilibrium price and quantity are efficient if sellers pay all the costs of production and buyers receive all the benefits of their purchase.

What is GDP?

Gross Domestic Product - the total value of all final goods and services produced within a country in a year.

Profit Maximizing Principle of Marginal Analysis

If a firm chooses to maximize its profits, it must choose that level of output where Marginal Cost (MC) is equal to Marginal Revenue (MR) and the Marginal Cost curve is rising. In other words, it must produce at a level where MC = MR.

Would a tax on producers shift the supply or the demand?

In general, an excise tax will decrease the quantity of the item that consumers demand. This occurs for the simple reason that an excise tax increases the price of the product, making it less attractive to consumers.

Explicit costs

Input costs that require an outlay of money by the firm.

"How much" decision

Made using marginal analysis, which involves comparing the benefit to the cost of doing an additional unit of an activity. The marginal cost of producing a good or service is the additional cost incurred by producing one more unit of that good or service.

Will the same amount of people buy the good when the tax is doubled?

No way!

What happens when demand is more elastic than supply?

Producers bear most of the cost of the tax.

What does a perfectly elastic demand curve look like?

Represented by a straight horizontal line and shows that the market demand for a product is directly tied to the price.

Income Tax

Tax paid to the state, federal, and local governments based on income earned over the past year.

Capital

The account used to summarize the owner's equity in a business.

Marginal Benefit (MB)

The additional benefit received from the consumption of the next unit of a good or service.

Where is consumer surplus on a graph?

The area above the price and below demand curve

Where is producer surplus on a graph?

The area below the price and above the supply curve

Net benefit

The difference between the marginal benefit and the marginal cost of an option.

Tax Wedge

The difference between the pretax and post-tax returns to economic activity.

How to calculate marginal benefit

The formula for marginal benefit is the change in total benefit divided by the change in quantity or: Change in TB / Change in Q = MB.

Mental accounting

The habit of mentally assigning dollars to different accounts so that some dollars are worth more than others.

Benefits Principle

The idea that people should pay taxes based on the benefits they receive from government services.

Ability to pay principle

The idea that taxes should be levied on a person according to how well that person can shoulder the burden.

Demand elasticity

The measure of responsiveness relating to a change in quantity demanded to a change in price.

Implicit cost of capital

The opportunity cost of the capital used by a business—the income the owner could have realized from that capital if it had been used in its next best alternative way

Equity Principle

The principle of distributing resources in a social dilemma to individuals according to merit and in proportion to their input; medicare is an example.

Marginal Analysis

The study of the costs and benefits of doing a little bit more of an activity versus a little bit less.

What happens when supply is more elastic than demand?

The tax burden falls on the buyers.

Market Failure Principle

This occurs whenever the individuals in a group end up worse off than if they had not acted in perfectly rational self-interest. - Such a group either incurs too many costs or receives too few benefits.

Economic profit

Total revenue minus total cost, including both explicit and implicit costs.

Accounting profit

Total revenue minus total explicit cost