Microeconomics Test #3

Which would benefit a taxpayer more: A $1,000 tax credit or a $5,000 tax deduction? Assume the taxpayer is in the 35% tax bracket (her marginal tax rate is 35%) and calculate the reduction in her tax liability in either case.

$5,000 Tax Deduction

Imagine your friend, Sally, operates an apple orchard where she grows "honey dew" apples. Assume that the industry is perfectly competitive. She discovers that she can increase her production of apples by 500 pounds per year if she plants an additional acre of trees. It will cost her an additional $1,000 per year to manage this extra acre. Planting the additional acre will increase her annual profits if the price of apples is:

. Any price greater than $2.00 per pound

Firms in monopolistically-competitive industries can increase profits in the short run by:

. Differentiating their products

Which of the following taxes are proportional?

. Indiana state income tax

The long-run profit squeeze tends to reduce economic profits to zero in perfectly competitive industries due to:

. The free entry and exit of competing firms

Based on the recent US data presented in class

. The real growth rate of an economy (g) equals 2-3%, while the real return on investment in capital (r) equals 7-8%

Suppose an industry consists of 7 firms. One has 25% market share, another has 18% market share, a third has 15%, a fourth has 12% and the remaining three have 10% market share each. The four-firm concentration ratio is:

70

Oligopoly

A market structure in which a few large firms dominate a market

What can a firm that operates in a monopolistically competitive market do to increase its profit?

Advertise the distinctiveness of its product

Amy: P=$2.00 Amy: P=$2.25 Zack: P=$2.00 $9,000, $9,000 $17,000, $5,000 Zack: P=$2.25 $5,000, $17,000 $15,000, $15,000 What is Amy's "dominant strategy" in this case? Explain, using profit figures from the table above.

Amy chooses the low price ($2.00) regardless of what Zack chooses: o Amy's profit = $9,000 (> $5,000) if Zack chooses the low price ($2.00) o Amy's profit = $17,000 (> $15,000) if Zack chooses high price ($2.25)

In a perfectly-competitive industry, profit is measured by comparing price to:

Average Cost

In a perfectly-competitive industry, the shut-down point is determined by comparing price to:

Average variable Cost

Monopoly profits are protected by:

Barriers to entry

In the framework developed by Thomas Piketty and presented in class, g represents the growth rate of an economy (GDP) and r is the return on investment in capital. Piketty suggests that if r > g, then:

Divergence occurs

"A $10,000 income tax deduction reduces a taxpayer's income tax liability by $10,000"

False

Which of the following taxes are progressive?

Federal income tax

What are the three characteristics of an oligopoly?

Few firms, differentiated product (or sometimes identical), and high barriers to entry

consider the six ethical frameworks suggested by Jeffrey Sachs in his book, The Age of Sustainable Development (2015) and presented in class. Which of the six ethical frameworks do you find most helpful when thinking about the distribution of income and wealth. Why?

I would choose human rights because everyone has the right to have a standard life but the people who is rich they will always be like that. At the same time, poor people can use this right to demand a better life than the one they have. Maybe they won't be rich but they will have a place to eat and live.

Based on your answers to Questions 1 and 2 above, is the federal income tax progressive, proportional or regressive? Explain, including average tax rate calculations in your response.

If income = $18,000 Average tax rate = $1,962.50/18,000 = 0.1090278 = 11% The $18,000 income earner pays only 11% of income in taxes If income = $90,000 Average tax rate = $15,679.50/$90,000 = 0.1742167 = 17% The $90,000 income earner pays 17% of income in taxes The federal income tax is progressive, since the average tax rate is higher for higher income earners

In 2019 the highest quintile earned 51.9% of U.S. household income while the lowest quintile earned 3.1%. In your opinion, should U.S. household incomes be distributed more equally than this, less equally than this or about the same as they are? Provide a compelling reason for your opinion.

In my opinion I think that the people who most support the community should receive more money such as doctors, teachers, etc. We should stop giving so much money to people who already have and start giving to people who do not have the same luck since many young people want to study at school but do not have enough money to pay for their studies. Teachers should also receive more money since they are a great contribution to our community.

Based on analysis presented in class from the Congressional Budget Office (CBO) and Bloomberg Economics, the 2017 Tax Reform will:

Increase the federal deficit by reducing government tax receipts

If a perfectly-competitive firm discovers that the marginal revenue earned from selling one additional unit is significantly more than the marginal cost of producing that unit, it can increase its profit by:

Increasing the output level by at least one unit

Based on a Harvard study, the video showed American's perception of the wealth distribution, and contrasted this to what is actually the case as well as what they thought would be ideal. According to the video, the actual US wealth distribution is:

Less equally distributed than what people perceive, and even less equally distributed than what people would consider ideal

What are the three characteristics of a monopolistically-competitive industry?

Many firms, differentiated product, and low (few or none) barriers to entry

In a perfectly-competitive industry, the profit-maximizing output is determined by comparing price to:

Maringal Cost

According to the analysis of the 2017 Tax Reform presented in class:

Most households benefited from a reduction in their tax liabilities in 2018

The "dominant strategy" in the one-time pricing scenario ("prisoner's dilemma") explains why:

Oligopolists tend not to collude with each other

Consider the U.S. airline industry. It is dominated by American, Delta, Southwest and United Airlines. Each firm spends considerable time and money advertising the superiority of its services. The costs of establishing a nationwide network of flights to many airports is extremely high. Which market structure best characterizes this industry?

Oligopoly

What are the three characteristics of a monopoly?

One firm, unique product and very high barriers to entry

Which U.S. household income "quintile(s)" (fifths) have experienced increases in the share of total income they received in 2019 (compared to 1980)?

Only the highest quintile

Which U.S. household income "quintile(s)" (fifths) have experienced decreases in the share of total income they received in 2019 (compared to 1980)?

Only the lowest, second lowest, middle and second highest quintiles

The US Patent Office grants exclusive legal rights to sell unique products in the form of:

Patents

A four-firm concentration ratio measures

Percentage of total profits made by the four largest firms in a specific market

Which type of tax makes the income distribution more equal by reducing the after-tax incomes of high-income earners by a greater percentage than low-income earners?

Progressive Tax

What can a firm that operates in a perfectly competitive market do to increase its profit?

Reduce its production costs

Which of the following taxes are regressive?

Social security tax Indiana state sales tax

The 2017 Tax Reform law had a significant impact on marginal tax rates. Compared to the marginal tax rates in 2016:

Some marginal tax rates were reduced for 2018, while others remained the same

calculate the federal income tax liability (taxes paid) in 2020 for a single individual earning $90,000 in taxable income. Write down the exact number, rounded to the nearest cent. Do not include the dollar sign nor other punctuation or words.

Tax liability = ($9,875)(0.10) + ($40,125 - $9,875)(0.12) + ($85,525 - $40,125)(0.22) + ($90,000 - $85,525)(0.24) = = $987.50 + $3,630 + $9,988 + $1,074 = = $15,679.50 The correct answer is: 15679.5

Suppose the typical firm in a perfectly competitive industry is earning positive economic profits. The long-run equilibrium adjustment process will involve:

The entry of new firms and a decrease in price

According to the OECD video, how does the US compare to its peers, both in the level of inequality as well as its change over time?

US income inequality is higher than most OECD countries, and is rising

Match each nation below with the income ratio between rich and poor:

United States → 14 to 1, Japan → 10 to 1, Chile → 27 to 1, Norway → 6 to 1

What are the three characteristics of a perfectly-competitive industry?

Very many firms, identical product and no (or very low) barriers to entry

What are the three characteristics of a "perfectly competitive" industry?

Very many firms, standardized product, no (or low) barriers to entry

Which of the following industries would likely have the lowest four-firm concentration ratio?

Wheat

Was this video helpful to you in understanding the distribution of wealth globally? If yes, why? If not, why not

Yes, because it shows clearly how the rich people always gets richer and poor people will be poorer. It really shows the reality of whats happening with the wealth of the world. Big corporations always gets billions and billions of dollars

Consider the Kuznets curve. According to Simon Kuznets, as an economy develops:

d. Inequality rises at first, but later falls

tax liability

first taxes x 10 + individual taxes- first (the number of the cathegory)

5 th quintile contains

highest 20% (high income)

Calculate the federal income tax liability (taxes paid) in 2020 for a single individual earning $18,000 in taxable income. Write down the exact number, rounded to the nearest cent. Do not include the dollar sign nor other punctuation or words.

tax liability = ($9,875)(0.10) + ($18,000 - $9,875)(0.12) = = $987.50 + $975.00 = $1,962.50 The correct answer is: 1962.5

1 st quintile contains

the poorest 20% of the population (low income)

profit formula

π = TR - TC = PQ - TC