Study

Kelly has decided to start his own business giving sailing lessons. To purchase equipment for the business, Kelly withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is Kelly's annual opportunity cost of the financial capital that has been invested in the business?

$170

Suppose a country imposes a lump-sum tax of $5,000 on each individual in the country. What is the marginal income tax rate for an individual who earns $40,000 during the year?

0%

Scenario 12-4 A taxpayer faces the following tax rates on her income: 20 percent of the first $40,000 of her income; 30 percent of all her income above $40,000. 16. Refer to Scenario 12-4. The taxpayer faces a marginal tax rate of

20 percent when her income rises from $30,000 to $30,001.

Vertical equity refers to a tax system in which individuals with similar incomes pay similar taxes. True or False?

False

Which of the following tax systems could not be structured to satisfy conditions of vertical equity?

a lump-sum tax

Employing a lawyer to draft & enforce a private contract between parties wishing to solve an externality problem is an example of

a transaction cost

If we want to gauge the sacrifice made by a taxpayer, we should use the

average tax rate

Governments can improve market outcomes for

both public goods and common resources.

Ahmet owns 10 acres of land. Ahmet sells the land to a real estate developer who builds a subdivision with 20 houses. The land is an example of a good that is

both rival in consumption and excludable.

Producers have little incentive to produce a public good because

c. there is a free-rider problem.

The parable called the Tragedy of the Commons applies to goods and services such as

clean air and clean water.

Before considering any public project, the government should

conduct a cost-benefit analysis and compare the total cost and total benefits of the project.

Vertical equity states that taxpayers with a greater ability to pay taxes should

contribute a larger amount than those with a lesser ability to pay.

3. In the absence of taxes, Carlos would prefer to purchase a large fishing boat with a 75 hp motor. The government has recently decided to place a tax on boats with 75 hp motors or higher. If Carlos decides to purchase a smaller boat with a 50 hp motor as a result of the tax, which of the following statements is correct? a. Other people who choose to purchase large boats will incur the cost of the deadweight loss of the tax. b. There are no deadweight losses as long as some people still choose to purchase large boats. c. The deadweight loss will decrease as a result of an increases in Carlos's consumer surplus. d. Carlos is worse off, and his loss of welfare is part of the deadweight loss of the tax.

d. Carlos is worse off, and his loss of welfare is part of the deadweight loss of the tax.

Negative externalities lead markets to produce

greater than efficient output levels & positive externalities lead markets to produce smaller than efficient output levels

Horizontal equity in taxation refers to the idea that people

in equal conditions should pay equal taxes.

In the United States, the marginal tax rate on individual federal income tax

increases as income increases.

Most economists prefer corrective taxes to regulation as a way to correct the problem of pollution because the market-based solution

is less costly to society

A result of welfare economics is that the equilibrium price of a product is considered to be the best price because it

maximizes the combined welfare of buyers & sellers

Both public goods and common resources are

nonexcludable.

A free rider is a person who

receives the benefit of a good but avoids paying for it.

A supply curve can be used to measure producer surplus because it reflects

sellers costs

Vertical equity and horizontal equity are associated with

the ability-to-pay principle of taxation.

Private companies are most likely to invest in medical research if

they will produce a specific product for which they may receive a patent.

Without government intervention, public goods tend to be

under-produced and common resources tend to be over-consumed.

A sellers opportunity cost measures the

value of everything she must give up to produce a good

Many charities like the Sierra Club are established to deal with externalities. True or false?

True

Which of the following tax structures is potentially consistent with the concept of vertical equity?

Any of these tax structures are potentially consistent with vertical equity

Which of the following statements is not correct? A. Tradable pollution permits have an advantage over corrective taxes if the government is uncertain as to the optimal size of the tax necessary to reduce pollution to a specific level B. Both corrective taxes and tradable pollution permits provide market-based incentives for firms to reduce pollution C.Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix the price of pollution D. Both corrective taxes & tradable pollution permits reduce the cost of environmental protection & thus should increase the public's demand for a clean environment

C

Which of the following statements is correct? a. Equity is more important than efficiency as a goal of the tax system. b. Efficiency is more important than equity as a goal of the tax system. c. Both equity and efficiency are important goals of the tax system. d. Neither equity nor efficiency is an important goal of the tax system.

C Both equity and efficiency are important goals of the tax system.

Government intervention cannot improve the allocation of resources for goods that do not have prices attached to them. True or False/

False

If the cost of producing tables increases causing the price of tables to increase, consumer surplus in the table market will

Decrease

Aristotle writes, "What is common to many is taken least care of, for all men have greater regard for what is their own than for what they possess in common with others." In this statement, Aristotle is referring to the free-rider problem that occurs when a person receives the benefit of a good without paying for it. True of False?

False

If the marginal cost of producing the tenth unit of output is $2.50, and if the average total cost of producing the tenth unit of output is $3, then at ten units of output, average total cost is rising. True or false?

False

Suppose that coal producers create a negative externality equal to $5 per ton of coal. What is the relationship between the equilibrium quantity of coal and the socially optimal quantity of coal?

They are equal

A city finances a performing arts center by adding a $2.75 tax to each ticket sold. This is an example of taxation via the benefits principle. True or False?

True

According to the Coase theorem, if private parties can bargain without cost, then the private market will solve the problem of externalities. True or false?

True

Accounting profit is greater than or equal to economic profit. True of False?

True

The cost of producing an additional unit of a good is not the same as the average cost of the good. True or false?

True

Imagine a 2,000-acre park with picnic benches, trees, and a pond. Suppose it is publicly owned, and people are invited to enjoy its beauty. When the weather is nice, it is difficult to find parking, and the trash cans overflow with food wrappers on summer afternoons. Otherwise, it is a great place. The park is a common resource because

if too many people use it, one person's use diminishes other peoples' use.

If a sawmill creates too much noise for local residents,

the government can raise economic well-being through noise-control regulations

Efficiency in a market is achieved when

the sum of producer surplus & consumer surplus is maximized