ECON 202 Module 7
A proportional tax is a tax for which people with lower incomes A) pay a lower percentage of their incomes in tax than do people with higher incomes. B) pay the same percentage of their incomes in tax as do people with higher incomes. C) pay a higher percentage of their incomes in tax than do people with higher incomes. D) pay the same amount of taxes as people with higher incomes pay.
B
A price floor is the ________. A) upper limit on the price of a good B) lower limit on the price of a good C) minimum price that a seller accepts for a good D) maximum willingness to pay for a good
B
Does it matter whether buyers or sellers are legally responsible for paying a tax? A) Yes, the tax is more equitable if sellers pay the tax. B) No, the market price to consumers and net proceeds to sellers are the same independent of who pays the tax. C) Yes, the tax is more efficient if consumers pay the tax.
B
In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In an almost identical town of Meterville, parking costs $5 per hour (or $1.25 per 15 minutes). Which town will likely attract shoppers with higher incomes? A) Freedonia B) Meterville C) Indeterminate with the given information.
B
A ________ tax system is one in which tax rates increase with taxable base incomes. A) supplementary B) regressive C) progressive D) proportional
C
_________ tax rate effects decisions
Marginal
Amount of taxes paid on an additional dollar earned.
Marginal tax rate
Price ceilings cause: 1) Over-consumption 2) Shortages 3) Reductions in quality 4) 5) Search costs
Misallocation
Price ceilings cause: 1) Shortages 2) Reductions in quality 3) Search costs 4) Misallocation 5)
Over-consumption
Taxes that come directly out of your paycheck
Payroll taxes
________ taxes form transfer programs like social security.
Payroll taxes
Maximum price, above is illegal for producers to sell to consumers.
Price ceiling
The value of land and structures
Property taxes
Why do we have taxes? 1) Correcting market failures 2) Transfer payments 3) 4) Financing its own operations
Raising revenues
Percentage of your item that is added to the cost.
Sales tax
Price ceilings cause: 1) Reductions in quality 2) Over-consumption 3) 4) Misallocation 5) Shortages
Search costs
When sellers have more customers than goods
Shortage
Price ceilings cause: 1) 2) Misallocation 3) Search costs 4) Over-consumption 5) Reductions in quality
Shortages
With a tax on a luxury good, consumers pay ________ and producers receive ______.
a little more a lot less
The price ceiling must be set ______ the equilibrium price in order to have any impact.
below
Whenever the government places a tax,
less of the good will be consumed and produced.
The cost of time can increase with a
longer wait time.
A common example of a price floor is
minimum wage
It is much better to have an economic system where competition takes the form of _______, rather than _______.
money time
When the tax incidence falls on buyers, buyers pay _____ than before, and sellers receive ______ than before.
more less
When the tax incidence falls on suppliers, buyers pay _____ than before, and sellers receive ______ than before.
more less
The relatively inelastic side of the market bears
most of the tax incidence.
Governments often have laws against raising prices too much after a
natural disaster.
Whoever reacts less to the change in price from the tax wedge ends up
paying more of the tax.
Corporate income taxes are made up of
people
Only ones who can bear a tax
people
A rent control is an example of a
price ceiling
Maximum price
price ceiling
Maximum price allowed by law
price ceiling
Rent is a common example of a
price ceiling
In a price floor, ______ gain and _____ lose.
producers consumers
We have taxes to raise revenues in order to fund
programs that aren't easily funded by markets.
Local governments rely on ______ taxes.
property
We have taxes to transfer payments that
redistribute income
Commodity taxation raises ______ and creates ______ from trade.
revenue lost gains
We have taxes to finance the governments own operations, like
salaries for its workers
States use a mix of income taxes and _______ taxes
sales
Another way to reduce quality is to reduce
service.
When the tax incidence falls on buyers, the demand curve
shifts down
When the tax incidence falls on suppliers, the supply curve
shifts up
As a result from a price ceiling, there will be a
shortage
People want more than what is available in a
shortage
Who actually writes the check is
statutory incidence
Who pays the tax relies on the laws of
supply and demand.
A price floor creates a
surplus
When price controls happen, competition
takes other forms
A price floor is set when
the market price is too low.
With a luxury good, demand is elastic because
the rich could go somewhere else to buy their goods.
When the tax incidence falls on buyers, it reduces
their willingness to pay.
Government revenue is not part of Deadweight Loss because
those actions are not destroyed.
Paying in _____ is more wasteful.
time
The government spends over half of its budget on
transfer programs
Government revenue is called
transfers
Who actually pays the tax does not depend on who
writes the check to the government.
Individual income taxes are paid
yearly
Why do we have taxes? 1) 2) Raising revenues 3) Transfer payments 4) Correcting market failures
Financing its own operations
A price is a signal wrapped up in an
incentive
Under a price ceiling, consumer surplus ________ and producer surplus _______.
increases decreases
A tax on suppliers
increases their costs
Price floors create: 1) Surpluses 2) Deadweight Loss 3) Wasteful increases in quality 4)
A misallocation of resources
The total amount of taxes paid divided by income
Average tax rate
A price ceiling does NOT lead to a deadweight loss if ________. A) the equilibrium market price lies above the price ceiling B) the equilibrium market price lies below the price ceiling C) the price elasticity of market supply is greater than 1 D) the price elasticity of market demand is greater than 1
B
When the government imposes price floors or price ceilings, A) everyone wins, goods and services distribution is more just, and there is a loss of economic efficiency. B) some people win, some people lose, and there is a loss of economic efficiency. C) some people win, some people lose, and there is an increase in economic efficiency. D) everyone wins, goods and services distribution is more just, and there is an increase in economic efficiency.
B
Which of the following is the average tax rate? A) the tax rate paid by the average taxpayer B) the total tax paid divided by total income C) the income range within which a tax rate applies D) the fraction of each additional dollar of income that must be paid in taxes
B
Which term refers to a legally established minimum price that firms may charge? A) a tariff B) a price floor C) a subsidy D) a price ceiling
B
Between 2000 and 2008, the price of oil increased from $30 per barrel to $140 per barrel, and the price of gasoline in the United States rose from about $1.50 per gallon to over $4.00 per gallon. Unlike in the 1970s when oil prices spiked, there were no long lines outside gas stations. Why? A) Government intervened to prevent lines. B) Government intervened to enact gasoline rations. C) There was no price control on gasoline at the time.
C
Rent control is an example of A) a price floor. B) a black market. C) a price ceiling. D) a subsidy for low-skilled workers.
C
Why do we have taxes? 1) Raising revenues 2) Transfer payments 3) Financing its own operations 4)
Correcting market failures
Do the people who are legally required to pay a tax always bear the burden of the tax? Briefly explain. A) No. Producers always bear the burden of the tax. B) No. Consumers always bear the burden of the tax. C) No. Those who are legally required to send a tax payment to the government never bear the burden of the tax. D) No. Whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government. E) Yes. Those who are legally required to send a tax payment to the government bear the burden of the tax.
D
In New York City, about 1 million apartments are subject to rent control by the local government. Rent control A) only applies to those apartments which are owned and rented out by the local government. B) is a price floor which sets a minimum rent for apartments. C) is a government policy which limits apartment rental to those people whose incomes are less than $50,000 per year. D) puts a legal limit on the rent that landlords can charge for an apartment.
D
In order to be binding, a price ceiling A) must lie above the free market equilibrium price. B) must be high enough for firms to earn a profit. C) must coincide with the free market equilibrium price. D) must lie below the free market equilibrium price.
D
In the United States, income taxes are ________. A) proportional B) regressive C) marginal D) progressive
D
To raise revenue, the government primarily uses
individual income taxes
Price floors create: 1) Wasteful increases in quality 2) 3) Surpluses 4) A misallocation of resources
Deadweight Loss
Who is the tax imposed on?
Statutory incidence
Price floors create: 1) Deadweight Loss 2) A misallocation of resources 3) 4) Wasteful increases in quality
Surpluses
A wedge between what the buyers pay and sellers receive.
Tax
The actual division of the burden of a tax between buyers and sellers.
Tax incidence
Which is more important in determining the impact of the tax system on economic behavior?
The marginal tax rate
Why do we have taxes? 1) Financing its own operations 2) 3) Raising revenues 4) Correcting market failures
Transfer payments
A tax on goods is a
commodity tax
Price controls do not eliminate
competition
When the demand for a product is less elastic than supply, _________ pay the majority of the tax on a product.
consumers
It doesn't matter whether the _______ or the ______ write a check to the government.
consumers producers
Time is always a
cost
With a luxury good, supply is inelastic because
it is not easy for the workers to produce a different good.
In a price floor, demand _____ and supply ______.
decreases increases
Some programs that aren't easily funded by markets, and are paid for by taxes:
defense and education
Search costs caused by price ceilings allow for
discrimination
Taxes ________ between prices paid by consumers and prices received by producers.
drive a wedge
The tax or ___________ has nothing to do with what the government says.
economic incidence
Deadweight loss is greater when supply and demand are more
elastic
The long run supply curve with price ceilings will be more
elastic (flatter).
Who pays the tax does depend on the relative ______ of demand and supply.
elasticities
when supply for a product is less elastic than the demand, ________ pay the majority of the tax on the product.
firms
Price floors create: 1) 2) Surpluses 3) A misallocation of resources 4) Deadweight Loss
Wasteful increases in quality
A gallon of milk costs $4 in Bonland. If the government fixes the price at $3.50, ________. A) a shortage of milk will occur in the market B) the quantity of milk supplied will increase C) there will be an excess supply of milk in the market D) the quantity demanded of milk will fall
A
A marginal tax rate is A) the fraction of each additional dollar of income that must be paid in taxes, while the average tax rate is the total tax paid divided by total income. B) the fraction of income that must be paid in taxes, while the average tax rate is the total tax paid divided by total income. C) a tax for which people with lower incomes pay a higher percentage of their income in tax than do people with higher incomes, while the average tax is a tax for which people with lower incomes pay a lowerlower percentage of their income in tax than do people with higher incomes.
A
A price floor set above the equilibrium price leads to a(n) ________. A) excess supply of goods in the market B) excess demand for goods in the market C) increase in social well-being D) positive externality
A
If a tax is imposed on each unit of a good purchased, ________. A) the demand curve shifts to the left B) the supply curve shifts to the left C) the supply curve shifts to the right D) the demand curve shifts to the right
A
In a city with rent-controlled apartments, all of the following are true except A) landlords have an incentive to rent more apartments than they would without rent control. B) it usually takes more time to find an apartment than it would without rent control. C) apartments usually rent for rates lower than the market rate. D) apartments are often in shorter supply than they would be without rent control.
A
In a progressive tax system, ________. A) the marginal tax rate exceeds the average tax rate B) the average tax rate equals the marginal tax rate C) the average tax rate exceeds the marginal tax rate D) the average tax rate is equal for all taxpayers
A
One reason governments impose taxes is to ________. A) redistribute funds via transfer payments B) increase the volume of exports C) reduce the number of transactions in an economy D) increase competition among producers
A
Price controls distribute resources in many unintended ways. In the following cases below, who will probably spend more time waiting in line to get scarce, price-controlled goods? Choose one from each pair: A) Retired people B) Working people
A
Rent control is an example of A) a price ceiling. B) a subsidy for low-skilled workers. C) a price floor. D) a black market.
A
The government of Lithasia has decided to set a minimum price for certain agricultural products in order to safeguard the interests of farmers. This is an example of a ________. A) price floor B) price ceiling C) Pigouvian tax D) Pigouvian subsidy
A
The government proposes a tax on imported champagne. Buyers will bear the entire burden of the tax if the A) demand curve for imported champagne is vertical. B) demand curve is downward sloping and the supply curve is upward sloping. C) demand curve for imported champagne is horizontal. D) supply curve for imported champagne is vertical.
A
The price of a gallon of gasoline in Bonland is $3.20. However, just before the election, the government decides to fix the price of gasoline at $2.80 per gallon. This is an example of a ________. A) price ceiling B) positive externality C) price floor D) negative externality
A
The term tax incidence refers to A) the actual division of the burden of a tax between buyers and sellers in a market. B) whether the burden of a tax rests more heavily on those with higher incomes or those with lower incomes. C) the amount of revenue government collects from a tax imposed on a good or service. D) the degree of progression of a tax.
A
When the government taxes a good or service, it A) affects the market equilibrium for that good or service. B) increases consumer surplus for the good or service. C) eliminates the deadweight loss associated with the good or service. D) increases producer surplus for the good or service.
A
Which job exists in part because time-sensitive wealthy individuals want to pay someone else to wait in line for them? A) Ticket scalpers B) Fast food employees C) Truck drivers D) Construction workers
A
With an increase in the demand for a good, if prices are not allowed to increase: A) There will be no incentive for firms to increase the quantity supplied of the good. B) a surplus will occur in the market. C) there will be an increase in overall efficiency in the market. D) social surplus will be maintained at maximum.
A
Suppose a price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia. What will be the likely effect on the market for sparkling wine in Vinyardia? A) Consumer surplus will increase. B) Deadweight loss will increase. C) Producer surplus will increase. D) Market efficiency will increase.
B
To affect the market outcome, a price ceiling A) must be set below the legal price. B) must be set below the equilibrium price. C) must be set below the black market price. D) must be set below the price floor.
B
True or False? The person or firm that pays a tax bears the burden of the tax.
False
If the sellers of a good are taxed for each unit sold, ________. A) the price that buyers need to pay falls B) a larger quantity of the good is sold C) a smaller quantity of the good is sold D) the price that sellers receive increases
C
In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In an almost identical town of Meterville, parking costs $5 per hour (or $1.25 per 15 minutes). Where will it be easier to find parking: in Freedonia or Meterville? A) Indeterminate with the given information. B) Freedonia C) Meterville
C
The actual division of the burden of a tax between buyers and sellers in a market is called A) tax bearer. B) tax liability. C) tax incidence. D) tax parity.
C
The average tax rate is calculated as A) the change in total tax paid divided by the change in income. B) total income divided by the total tax paid. C) total tax paid divided by total income. D) the change in income divided by the change in total tax paid.
C
The deadweight loss of taxation on a good is higher if ________. A) there is only one seller in the market B) a progressive tax system is practiced C) the demand or the supply of the good is relatively price elastic D) a low rate of tax is imposed on the sale of the good
C
When the demand for a product is more elastic than the supply A) firms pay the entire tax on the product. B) consumers pay the entire tax on the product. C) firms pay the majority of the tax on the product. D) consumers pay the majority of the tax on the product.
C
Which of the following is true of a progressive tax system? A) All households pay the same amount of taxes irrespective of their income. B) All households pay the same percentage of their income as taxes. C) High income households pay a higher percentage of their income as taxes. D) Low income households pay a higher percentage of their income as taxes.
C
Scenario: There are 4 households in a locality. The annual income of the first household is $20,000, the annual income of the second household is $47,000, the annual income of the third household is $50,000, and the annual income of the fourth household is $71,000. Refer to the scenario above. If the first household pays 20% of its income as tax, the second household pays 17.5% of its income as tax, the third household pays 13% of its income as tax, and the fourth household pays 10% of its income as tax, income taxes are ________ in nature. A) cardinal B) ordinal C) progressive D) regressive
D
Scenario: There are 4 households in a locality. The annual income of the first household is $20,000, the annual income of the second household is $47,000, the annual income of the third household is $50,000, and the annual income of the fourth household is $71,000. Refer to the scenario above. If the local government has a progressive tax system, which family pays the largest amount as tax? A) The first household B) The second household C) The third household D) The fourth household
D
Tax incidence indicates A) who is not legally required to send a tax payment to the government. B) the burden of a tax on producers. C) who is legally required to send a tax payment to the government. D) the burden of a tax on consumers. E) the actual division of the burden of a tax.
D
The burden of a tax falls entirely on buyers if ________. A) the price elasticity of demand is greater than 1 B) the income elasticity of demand is high C) the price elasticity of supply is unitary elastic D) the price elasticity of demand is zero (perfectly inelastic)
D
The incidence of a per-unit tax on a good is identical for buyers and sellers of the good if: A) the market demand curve is horizontal. B) the market supply curve is flatter than the market demand curve. C) the elasticity of market demand exceeds the elasticity of market supply. D) the buyers and sellers of the good are equally sensitive to price changes.
D
Which of the following tax rates has the greatest effect on people's willingness to work, save, and invest? A) The average and the marginal tax rates have the same effect. B) Neither the average tax rate nor the marginal tax rate affects those decisions. C) The average tax rate. D) The marginal tax rate.
D
Why do some consumers tend to favor price controls while others tend to oppose them? A) Price ceilings generate surpluses. Consequently, consumers who obtain the product at a lower price win, but consumers who obtain the product at a higher price lose. B) Price ceilings generate shortages. Consequently, consumers surplus increases, but producer surplus decreases. C) Price floors generate shortages. Consequently, the consumers who obtain the product at a lower price win, but other consumers will lose because they would like to purchase the product but are unable to because of a shortage. D) Price ceilings generate shortages. Consequently, the consumers who obtain the product at a lower price win, but other consumers will lose because they would like to purchase the product but are unable to because of a shortage.
D
"Rent controls, government farm programs, and other price ceilings and price floors are bad." This is an example of a A) positive statement. The statement is concerned with what is. B) positive statement. The statement is concerned with what should be. C) normative statement. The statement is concerned with what is. D) normative statement. The statement is concerned with what should be.
D
True or False? The actual division of a tax between buyers and sellers in a market is the excess burden of the tax.
False
True or False? The division of the burden of a tax between buyers and sellers in a market is called tax allocation.
False
True or False? For a given supply curve, the deadweight loss from the imposition of a tax is smaller if demand is more elastic.
False
Require that a price be no more than a certain level.
Price ceiling
Which is more common? Price floors or Price ceilings?
Price ceilings
Regulations of prices
Price controls
Minimum price
Price floor
Require that a certain price must be no less than a certain level.
Price floor
Price ceilings cause: 1) Misallocation 2) 3) Over-consumption 4) Search costs 5) Shortages
Reductions in quality
What does a reduction in quality mean? (Landlord example)
They won't keep the apartments as nice because they can't charge extra for it.
True or False? A price ceiling is a legally determined maximum price that sellers may charge.
True
True or False? Rent control is an example of a price ceiling.
True
True or False? If the government wants to minimize the welfare loss of a tax, it should tax goods with more inelastic demands or supplies.
True
True or False? When the demand for a product is less elastic than the supply, consumers pay the majority of the tax on the product.
True
