Exam 4
In 2011, the average American paid approximately how much to the federal government in taxes?
$10,500
A consumer is currently spending all her available income on two goods: music CDs and DVDs. At her current consumption bundle, she is spending twice as much on CDs as she is on DVDs. If the consumer has $120 of income and is consuming 10 CDs and 2 DVDs, what is the price of a CD?
$8
Which of the following statements is necessarily true regarding a point along a budget line? a. it implies an individual has spent her entire income b. it implies an individual is as happy as possible given her income c. it implies an individual no longer faces tradeoffs between both goods d. it implies an individual would be better off consuming a different bundle of goods
A. it implies an individual has spent her entire income
When government receipts exceed total government spending during the fiscal year, the difference is ...
a budget surplus
Why do some policymakers support a consumption tax rather than an earnings tax?
a consumption tax would would encourage people to save earned income
Which tax system requires higher-income taxpayers to have lower tax rates, even though they pay a larger amount of tax when compared to lower-income taxpayers?
a regressive tax
A budget constraint illustrates the...
consumption bundles that a consumer can afford
What factors can make a tax system inefficient?
large dead weight loss, high administrative burdens/costs, system is unable to raise the same amount of revenue at a lower cost
One tax system is less efficient than another if it...
raises the same amount of revenue at a higher cost to taxpayers
State and local governments a. are funded entirely by their own tax base b. receive the majority of their tax revenues from corporate income taxes c. are generally not responsible for collecting sales tax d. receive some of their fund from the federal government
receive some of their funds from the federal government
The tax that generates the most revenue for state and local government is the
sales tax
If income decreases and prices are unchanged, the consumer's budget constraint...
shifts inward
Suppose Reta is planning for retirement in a two-period world. In the first period Reta is young and earns $1 million, and in the second period Reta is old and retired and earns nothing. The interest rate is initially 10%, but then it falls to 7%. After the interest rate falls, the...
substitution effect will induce Reta to consume more when she is young
Vertical equity and horizontal equity are associated with...
the ability-to-pay principle of taxation
A consumption tax is a tax on...
the amount of income that people spend
All points on a demand curve are optimal consumption points. A. true B. false
true
Suppose that the government taxes income in the following fashion: 30% of the first $20,000, 50% of the next $30,000, and 60% of all income over $50,000. Ted earns $40,000 and Robin earns $60,000. Which of the following statements is correct? a. Ted's marginal tax rate is 60%, and his average tax rate is 50%. b. Ted's marginal tax rate is 50%, and his average tax rate is 40%. c. Robin's marginal tax rate is 50%, and her average tax rate is 45%. d. Robin's marginal tax rate is 60%, and her average tax rate is 40%.
b. Ted's marginal tax rate is 50%, and his average tax rate is 40%.
Scenario: suppose the price of hot wings is $10, the price of beer $1, and the consumer's income is $50. In addition, suppose the consumer's budget constraint illustrates hot wings on the horizontal axis and beer on the vertical axis. if the price of beer doubles tow $2, the the...
budget constraint intersects the vertical axis at 25 beers
As more units of an item are purchased, everything else equal, marginal satisfaction from consuming additional units will tend to...
decrease but at at different rates for different people
Taxes create dead weight losses because they...
distort incentive
Consumers will always consume more of a good if their income increases. A. true B. false
false
The equity of a tax system concerns whether the tax burden is distributed equally among the population.
false
the ability-to-pay principle claims that a person should pay taxes according to...
how well that person can shoulder the tax burden
Explain how an increase in the wage can potentially decrease the amount that a person wants to work.
income dominates and people will work less as wage increases
In the United States, the marginal tax rate on individual federal income tax...
increases as income increases
The largest source of revenue for the federal government is the...
individual income tax
Citizens expect the government to provide various goods and services making taxes...
inevitable
When considering household savings, the relative price between consuming when young and consuming when old is the...
interest rate that individuals can earn on their private savings
Under a regressive tax system, the marginal tax rate for high income taxpayers is
lower than the marginal tax rate for low income taxpayers
The most efficient tax possible is a...
lump-sum tax
The rate at which a consumer is willing to exchange one good for another while maintaining a constant level of satisfaction is called the...
marginal rate of substitution
A consumer chooses an optimal point where the...
marginal rate of substitution equals the relative price ratio
When two goods are perfect substitutes, the...
marginal rate of substitution is constant
Pepsi and pizza are normal goods. When the price of pizza falls, the substitution effect by itself will cause a...
movement along the indifference curve so that the consumer buys less Pepsi
When considering her budget, the highest indifference curve that a consumer can reach is the...
one that is tangent to the budget constraint
Dead weight losses occur in markets in which...
the government imposes a tax
The slope of the budget constraint is all of the following except...
the marginal rate of substitution
The dead weight loss of a tax is...
the reduction in economic welfare of taxpayers that exceeds the revenue raised by the government
The labor supply curve slopes upward if...
the substitution effect on leisure is greater than the income effect
An excise tax is a tax on a specific good, like gasoline. a. true b. false
true
If a consumer experiences a decrease in income, the new budget constraint will have the same slope as the old budget constraint. A. true B. false
true
The marginal rate of substitution is the slope of the indifference curve. a. true b. false
true
the marginal tax rate serves as a measure of the extent to which the tax system discourages people form working.
true
If the tax code exempts the first $20,000 of income from taxation and then taxes 25 percent of all income above that level, then a person who earns $50,000 has an average tax rate of _____ percent and a marginal tax rate of _____ percent.
15, 25
Suppose the government imposes a tax of 20% on the 1st $50,000 of income and 30% on all income above $50,000. What is the Marginal tax rate when income is $60,000?
30%
INCOME TAX RATES $0 to $50,000 20% $50,001 to $100,000 40% Over $100,000 60% What is the average tax rate for a person who makes $120,000?
35%
Which of the following statements s not correct? A. a gasoline tax can be an example of a tax that uses the benefits principle B. a progressive tax attempts to achieve vertical equity C. a progressive tax can be an example of the ability-to-pay principle. D. a regressive tax attempts to achieve vertical equity.
D. a regressive tax attempts to achieve vertical equity
Which of the following is a characteristic of a more efficient tax system? A. the system minimizes dead weight loss B. the system raises the same amount of revenue at a lower cost C. the system minimizes administrative burdens D. all the above are correct
D. all of the above are correct
Why is the burden of a tax to taxpayers greater than the revenue received by the government?
dead weight loss
The benefits principle is used to justify...
gasoline taxes
