ECON EXAM 3 REVIEW

The income tax requires that taxpayers pay 10 percent on the first $50,000 of income and 20 percent on all income over $50,000. Andy paid $9,000 in taxes. What were his marginal and average tax rates?

A. 20 percent and 13 percent, respectively

Suppose the government imposes a tax of 20 percent on the first $50,000 of income and 30 percent on all income above $50,000. What is the average tax rate when income is $60,000?

A. 21.7 percent

Refer to Scenario 12-5. Which Senator is advocating taxes based on the benefits principle?

A. Senator Filch

Which of the following goods is rival in consumption and excludable?

A. a DVD

In which of the following tax systems do taxes increase as income increases?

A. both proportional and progressive

which of the following is an example of an externality?

A. cigarette smoke that permeates an entire restaurant B. a flu shot that prevents a student from transmitting the virus to her roommate C. a beautiful flower garden outside of the local post office D. ALL OF THE ABOVE ARE CORRECT

which of the following is a way to address an externality problem?

A. command and control solution B. corrective tax C. corrective subsidy D. ALL OF THE ABOVE

Negative externalities lead markets to produce

A. greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels.

Incentives to work and save are reduced when

A. income taxes are higher.

because of the free-rider problem,

A. private markets tend to undersupply public goods.

An externality is

A. results in an equilibrium that does not maximize the total benefits to society

Since air pollution creates a negative externality,

A. social welfare will be enhanced when some, but not all air pollution is eliminated.

The deadweight loss of a tax is

A. the reduction in economic welfare of taxpayers that exceeds the revenue raised by the government.

The goal of requiring licenses for hunting and fishing is

A. to reduce the use of a common resource.

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other?

B. $4,500; $3,500

Refer to Scenario 12-4. The taxpayer faces a marginal tax rate of

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

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government will sell 40 pollution permits for $75 each. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. Neither firm produces any less output, but they both conform to the law. It is likely that between the cost of permits and the cost of additional pollution abatement,

B. Firm A will spend $4,000.

Two firms, A and B, each currently dump 20 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm 10 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from each other, we would expect that

B. Firm B will no longer pollute, and Firm A will not reduce its pollution at all.

Suppose that the Town of Mapledale is considering hiring an additional firefighter. The expected benefit is estimated to be worth $5 for each of Mapledale's 15,000 residents. What should the city do?

B. Hire the firefighter if the cost of the new firefighter is less than $75,000.

Mary and Cathy are roommates. Mary assigns a $30 value to smoking cigarettes. Cathy values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem?

B. Mary pays Cathy $16 so that Mary can smoke.

Mike Miller is the town manager of Medfield, a town with 50,000 residents. At a recent town meeting, several citizens proposed building a large public swimming pool in the center of town for all of the residents to enjoy. A survey of all 50,000 residents revealed that the pool would be worth $50 to each of them. The cost to build the swimming pool is $1,000,000. Which of the following is the most efficient option?

B. The pool should be built and paid for by the town government and paid for with a tax on the residents because all residents would benefit from it but some residents would not donate if they were asked.

an overcrowded beach is an example of

B. a Tragedy of the Commons.

A quota is

B. a limit on quantity of imports.

When the social cost curve is above a product's supply curve,

B. a negative externality exists in the market.

which of the following is NOT a characteristic of pollution permits?

B. allowing firms to trade their permits reduces the total quantity of pollution beyond the initial allocation.

Refer to Scenario 12-4. The taxpayer faces

B. an average tax rate of 22.0 percent when her income is $50,000.

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

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

Which of the following goods is excludable but not rival in consumption?

B. fire protection in a small town

The average tax rate measures the

B. fraction of income paid in taxes.

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

B. increases as income increases.

A tariff on a product...

B. increases quantity supplied.

When the government intervenes in markets with externalities, it does so in order to

B. protect the interests of bystanders.

A free rider is a person who

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

The concept that people should pay taxes based on the benefits they receive from government services is called

B. the benefits principle.

Public schools, parks, libraries, and roads are paid for largely through tax revenue because

B. these goods create a free-rider problem.

Tax incidence refers to

B. who bears the tax burden

which of the following is a difference between corrective taxes and tradable pollution permits?

B. with a corrective tax the gov. sets the price of pollution; with tradable pollution permits, demand and supply set the price of pollution.

When the government taxes labor earnings we can expect people to

B. work less and enjoy more leisure.

Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20 percent on all income above $40,000. What are the tax liability and the marginal tax rate for a person whose income is $50,000?

D. $6,000 and 20 percent, respectively

Which of the following quotations illustrates the Tragedy of the Commons?

C. "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."

Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20 percent on all income above $40,000. What are the tax liability and the marginal tax rate for a person whose income is $30,000?

C. $3,000 and 10 percent, respectively

Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20 percent on all income above $40,000. What is the average tax rate when income is $50,000?

C. 12 percent

Bert faces a progressive tax structure that has the following marginal tax rates: 0 percent on the first $10,000, 10 percent on the next $10,000, 15 percent on the next $10,000, 25 percent on the next $10,000, and 50 percent on all additional income. If Bert earns $75,000, what is his average tax rate?

C. 30 percent

Karen's cat causes Danny to sneeze. Karen values her cat's companionship at $300 per year. The cost to Danny of tissues and her allergy medication is $350 per year. Based on the Coase theorem,

C. Danny should pay Karen $325 to give away her cat.

Abe owns a dog; the dog's barking annoys Abe's neighbor, Jenny. Suppose that the benefit of owning the dog is worth $200 to Abe and that Jenny bears a cost of $400 from the barking. Assuming Abe has the legal right to keep the dog, a possible private solution to this problem is that

C. Jenny pays Abe $300 to give the dog to his parents who live on an isolated farm.

Refer to Scenario 12-5. Which Senator is advocating taxes based on a person's ability to pay?

C. Senators Fudge and Malfoy only

The Tragedy of the Commons will be evident when a growing number of sheep grazing on the town commons leads to a destruction of the grazing resource. To correct for this problem, the town could

C. auction off a limited number of sheep-grazing permits.

The Mansfield Public Library has a large number of books that anyone with a library card may borrow. Anyone can obtain a card for free. Because the number of copies of each book is limited, not everyone can have the same book at the same time. What type of good would the library books be classified as in this case?

C. common resources

The resources that a taxpayer devotes to complying with the tax laws are a type of

C. deadweight loss.

The notion that similar taxpayers should pay similar amounts of taxes is known as

C. horizontal equity.

Economists play an important role in the complex debates over tax policy by

C. shedding light on the tradeoff between efficiency and equity in tax policy.

a major difference between tariffs and import quotas is that

C. tariffs raise revenue for the gov., but import quotas create surplus for those who get the licenses to import.

Part of the administrative burden of a tax is

C. the hassle of filling out tax forms that is imposed on taxpayers who comply with the tax.

The largest source of federal revenue in the United States is:

C. the individual income tax

Which of the following is a common resource?

C. timber in a public forest

Refer to Scenario 12-4. At what level of income would the taxpayer's marginal tax rate be 30 percent and her average tax rate be 25 percent?

D. $80,000

Which of the following is an example of a tax based on the benefits principle?

D. A toll road

Suppose Tyler values a basketball at $20. Jacqui values a basketball at $25. The pre-tax price of a basketball $10. The government imposes a tax of $5 on each basketball, and the price rises to $15. The deadweight loss from the tax is

D. $0

Athos, Porthos,and Aramis each like to take fencing lessons. The price of a fencing lesson is $11. Athos values a lesson at $16, Porthos at $14, and Aramis at $12. Suppose that if the government taxes fencing lessons at $2 each, the price will rise to $13. A consequence of the tax is that consumer surplus shrinks by

D. $5 and tax revenues increase by $4, so there is a deadweight loss of $1.

The privately-owned school system in Smalltown has a virtually unlimited capacity. It accepts all applicants and operates on both tuition and private donations. Although every resident places value on having an educated community, the school's revenues have suffered lately due to a large decline in private donations from the elderly population. Since the benefit that each citizen receives from having an educated community is a public good, which of the following would not be correct?

D. The private market is the best way to supply education.

Under which of the following scenarios would a park be considered a common resource?

D. Visitors can enter the park free of charge, but frequently all of the picnic tables are in use.

If the government decides to build a new highway, the first step would be to conduct a study to determine the value of the project. The study is called a

D. cost-benefit analysis.

The Tragedy of the Commons for sheep grazing on common land can be eliminated by the government doing each of the following except

D. subsidizing sheep flocks.

The greatest difficulty with cost-benefit analysis of a public project is determining

D. the value or benefit of the project.

A cost-benefit analysis of a highway is difficult to conduct because analysts

D. will have difficulty estimating the value of the highway.

Because taxes distort incentives, they typically result in

a. deadweight losses. b. reductions in consumer surplus. c. reductions in producer surplus. D. ALL OF THE ABOVE ARE CORRECT

Who pays a corporate income tax?

a. owners of the corporation b. customers of the corporation c. workers of the corporation D. ALL OF THE ABOVE ARE CORRECT

Refer to Scenario 12-5. Which Senator is advocating for taxes based on horizontal equity?

c. Senator Malfoy

Which of the following goods is rival in consumption and excludable?

c. a box of sparklers