CHAPTER 17 MICRO QUIZ
As the election nears, the positions of the major presidential candidates tend to converge. This is an implication of: A) the Coase Theorem B) the median voter model C) political logrolling D) government failure
b Each candidate can reasonably expect to win the votes of individuals most aligned with their own position and farther away from their opponent's position. But the president is (essentially) elected by majority rule, so each candidate must attempt to win over the voters in the middle of the political spectrum to win.
Refer to the diagram, in which pre-tax supply and demand are given by S and D, respectively, and St reflects the imposition of an excise tax. Which of the following is not a predicted outcome of the tax? A) The tax is fully shifted onto consumers B) Total tax collection is equal to area ABCE C) An efficiency loss equal to area ECF D) Equilibrium quantity falls to G
A Price is initially established at point F, the intersection of S and D. After the imposition of the tax, consumers pay $B while sellers receive only $A net of the tax. The burden of the tax is split between buyers and sellers.
Suppose the supply of a particular good is perfectly elastic, and the demand is moderately inelastic. A $1.00 excise tax placed on the sellers of the product will do all of the following except: A) reduce the price sellers receive by $1.00 B) increase the price consumers pay by $1.00 C) reduce the quantity sold D) create an efficiency loss
A Under the stated conditions, all of the economic burden of the tax will fall on consumers, since any reduction in seller's price would result in a quantity of zero. The increase in the price consumers pay will reduce the quantity demanded, which results in an efficiency loss.
If someone earning $50,000 pays $10,000 in taxes and someone earning $80,000 pays $20,000 in taxes, then over this range the tax is: A) proportional B) progressive C) regressive D) retrograde
B A progressive tax takes a larger percentage of income as income increases. In this example, the tax rate on $50,000 is 20% while the tax rate on $80,000 is 25%.
The demand for gasoline is more elastic in the long run than the short run. All else equal, this implies that over time, an excise tax on gasoline will: A) increasingly be passed on to consumers B) increasingly be paid by sellers C) have a shrinking efficiency loss D) generate increasing tax revenues
B All else equal, the more elastic the demand, the greater the share of the tax paid by the seller, the larger the efficiency loss, and the smaller the tax revenue collected.
A cost-benefit analysis of five possible plans for renovating a city's opera house is as follows (all figures are in millions of dollars): A 30 40 B 40 55 C 50 63 D 60 70 E 70 75 Based on the cost-benefit analysis, the city should: A) not renovate the opera house B) proceed with plan B C) proceed with plan C D) proceed with plan D
B Comparing marginal cost and marginal benefit, plans C, D, and E all have total costs greater than total benefits. Plan B has the largest net benefit of $15 million.
Which of the following is an example of rent-seeking behavior? A) The rich pay a greater proportion of their income in taxes than the poor B) Lobbyists for U.S. automakers secure a tariff on imported automobiles C) The Congresswoman from California agrees to vote yes on a proposal advocated by the Congressman from South Carolina in exchange for a yes vote from him on another proposal D) Political candidates tend to move toward a centrist position as the election nears
B Rent-seeking is an appeal to government for special favors that come at others' expense.
Most states tax gasoline and use the proceeds to build and maintain highways. This tax best reflects: A) the ability-to-pay principle B) the benefits-received principle C) the comparative advantage principle D) the diminishing returns principle
B The benefits-received principle is a tax philosophy that suggests those who benefit from a government project should pay the taxes required to fund it.
Which of the following taxes is most likely to be regressive? A) Personal income tax B) Corporate income tax C) Payroll tax D) Excise tax on furs
C A regressive tax collects a larger proportion of the incomes of the poor than of the rich. The payroll tax applies to wage and salary income only, and then only up to a point. In 2006, the Social Security tax applies only to the first $94,200 of wage income. Wage and salary income is a greater percentage of total income for the poor than for the rich.
A cost-benefit analysis of five possible plans for renovating a city's opera house is as follows (all figures are in millions of dollars): A 30 40 B 40 55 C 50 63 D 60 70 E 70 75 Refer to the table. A five-member city council must decide by pairwise majority rule to proceed with only one of the five plans. Each of the plans has the full support of exactly one council member; the further the cost of the plan from each member's preferred option, the less she likes it. The outcome of this selection process will be: A) indeterminate, as predicted by the voting paradox B) plan B, as predicted by the median voter principle C) plan C, as predicted by the median voter principle D) plan D, as predicted by the median voter principle
C The member favoring plan C is the median voter. Those supporting D and E will vote with her to defeat both plans A and B, while those supporting A and B will vote with her in defeating plans D and E.
By law, the payroll tax is levied equally on workers and their employees, each paying 7.65%. In the aggregate, the supply of labor is essentially perfectly inelastic. Combining these two observations, we can conclude that the true burden of the tax: A) is equally shared by employers and workers B) falls mostly on employers C) falls fully on employers D) falls fully on workers
D Because labor supply is perfectly inelastic, the full burden of the tax falls on sellers—workers, in this case.
The two primary philosophies regarding the apportionment of the tax burden are: A) willingness to pay and benefits received B) inelastic supply and inelastic demand C) majority rule and the median voter D) benefits received and ability to pay
D Ideally, the tax burden will be directly related both to people's ability to pay the tax and the benefits received from the programs and projects that are funded by the tax.
Refer to the diagram, in which pre-tax supply and demand are given by S and D, respectively, and St reflects the imposition of an excise tax. The proportion of the total tax paid by consumers is: A) (A + B) / (A + B + F) B) (A + B + C) / (A + B + C + E + F) C) F / (E + F) D) (A + B) / (A + B + C)
D The total amount of the tax collected is A + B + C. Of this total, A + B is paid by consumers, while C is paid by sellers.
The overall U.S. federal tax system is moderately regressive. A) True B) False
FALSE The federal tax system overall—income, payroll, and excise taxes—is slightly progressive.
Consider the following observations regarding the markets for products A, B, C, and D: A: demand and supply are both relatively inelastic B: demand and supply are both relatively elastic C: demand is elastic and supply is inelastic D: demand is inelastic and supply is elastic In which market will the efficiency loss of an excise tax be the smallest? A) A B) B C) C D) D
a The efficiency loss of a tax arises because the tax reduces the quantity exchanged in the market below the efficient level. If both supply and demand are inelastic, there will be little reduction in quantity and little efficiency loss.
Suppose the only three members of society will receive marginal benefits from a proposed public project equal to $300, $500, and $800, respectively. However, each must pay taxes of $400 to pay for the total cost. In the absence of vote trading, a majority rule vote will: A) pass this project and resources will be allocated efficiently B) pass this project and resources will be overallocated to the project C) defeat this project and resources will be allocated efficiently D) defeat this project and resources will be underallocated to the project
a The people whose marginal benefits are $500 and $800 will vote for the project and their combined net benefits are $100 + $400 = $500. This net benefit exceeds the net loss of the voter who values the project at only $300.
Many states collect a substantial fee for fishing and hunting licenses, the proceeds of which are used to finance fish and wildlife management. This "tax" reflects: A) the benefits-received principle B) the ability-to-pay principle C) the bundled-choice principle D) negative incidence
a The tax is imposed on the users of the service, and is such is based on the benefits received.
An excise tax imposed on sellers is more likely to be shifted onto consumers: A) the more inelastic the supply B) the more inelastic the demand C) the more elastic the demand D) the higher the price of the product
b If demand is inelastic, consumers will not significantly reduce their consumption of the good in response to a higher price caused by the tax. Accordingly, firms will attempt to shift the tax onto consumers.
A public choice economist would most likely study: A) the impact of discrimination in labor markets B) the effect of logrolling on congressional decisions C) the effect of changes in the money supply on interest rates D) the relationship between technological change and economic growth
b Public choice theorists use the tools of economic analysis to study public decision making processes. Logrolling (vote trading) is one such decision making process.
Which of the following federal taxes is most progressive? A) Corporate income tax B) Personal income tax C) Social security tax D) Medicare tax
b The corporate income tax and the Medicare tax are approximately proportional, and the Social Security tax is regressive. The marginal and average tax rates of the personal income tax rise with income, making the tax progressive.
According to public choice theorists, which of the following circumstances will most likely lead to approval of a given public project? A) Immediate costs and benefits B) Delayed costs and benefits C) Immediate benefits and delayed costs D) Delayed benefits and immediate costs
c Because they regularly face reelection, politicians are likely to favor projects whose benefits are immediate and costs delayed.
Consider the following observations regarding the markets for products A, B, C, and D: A: demand and supply are both relatively inelastic B: demand and supply are both relatively elastic C: demand is elastic and supply is inelastic D: demand is inelastic and supply is elastic In which market will the largest portion of an excise tax be borne by sellers? A) A B) B C) C D) D
c The incidence of an excise tax falls most heavily on the group that does not change its quantity in response to a price change. In this example, if consumers cut back their purchases while sellers continue to offer approximately the same quantity, sellers will bear the burden of the tax.
Suppose that product X is taxed at a constant rate of 10%. However, high-income individuals spend a greater proportion of their income on X than low-income individuals. The tax on product X is: A) regressive B) proportional C) progressive D) elastic
c The tax is progressive because the average tax paid as a percentage of income rises as income rises.
Political office holders must typically take stands on and make decisions regarding hundreds of different issues, but voters typically vote for one of only two candidates. This problem reflects: A) the voting paradox B) the Coase Theorem C) limited and bundled choices D) pork-barrel politics
c Voters are faced with choosing among a very limited number of candidates, each of whom represents a bundle of stands on various issues.
Sellers will bear the largest burden of an excise tax if: A) both demand and supply are elastic B) both demand and supply are inelastic C) demand is elastic and supply is inelastic D) demand is inelastic and supply is elastic
c With elastic demand, buyers respond to any attempt by sellers to increase price by purchasing substantially less. At the same time, inelastic supply means that sellers are willing to supply about the same amount even when faced with declining prices. Combining these two, sellers will bear most of the burden of a tax.
The alleged inefficiency of public bureaucracies arises primarily because: A) the voting paradox leads to too little public output B) special interests work to assure the passage of projects whose costs exceed their benefits C) public sector workers have less training than their private sector counterparts D) competitive pressures of the market are largely absent
d In the private sector, the market imposes a simple test of profitability—inefficient firms are unlikely to survive. No such test of efficiency exists in the public sector.
Examples of government failure include all of the following except: A) rent-seeking behavior B) logrolling C) bundled choices D) tax incidence
d Tax incidence refers to the economic (as opposed to legislative) burden of a tax. Rent-seeking behavior, logrolling, and bundled choices may all result in economically inefficient outcomes.
The city council composed of six people is considering three different park expansion proposals. Two council members prefer a bigger park to any smaller park; two others prefer a smaller park to anything bigger. The final two prefer a moderate-size park to either extreme. The final outcome of the vote will: A) depend on which pair of alternatives is voted on first B) be the largest park C) be the smallest park D) be the moderate size park
d The rankings of the council members are such that the voting paradox cannot occur, since those who prefer the moderate park will vote with those who favor the bigger park to defeat the small park and with those who favor the smaller park to defeat the larger park. The moderate size park will win any vote against either extreme.
The paradox of voting suggests that: A) public goods will be overproduced B) public goods will be underproduced C) logrolling will lead to rent-seeking outcomes D) majority rule voting may be incapable of rank ordering public projects consistently
d When faced with a choice of three projects, each may win when paired against one of the other alternatives. In this case, the final outcome depends on the order in which each is paired against the other. For example, Project A beats B but loses to C; B beats C but loses to A; and C beats A but loses to B.
All else equal, the more elastic the demand and supply of the good being taxed, the greater the efficiency loss of an excise tax. A) True B) False
true The efficiency loss of a tax arises because the tax reduces the quantity exchanged in the market below the efficient level. The more elastic the supply and demand, the more the tax reduces the quantity below the efficient level.