Corresponding Chapters:Gruber, 18-24140 Pts. Total
Econ 344 Fall 09
Problem Set #5
Assigned:Th. Nov. 12, 2009
Due:Th. Nov. 19, 2009
Corresponding Chapters:Gruber, 18-24140 pts. total
Part I Multiple Choices (2*23=46 points)
1.All things equal, producers bear more of a tax when supply is ______. All things equal, consumers bear more of a tax when demand is ______.
a.unit elastic; unit elastic
b.elastic; elastic
c.inelastic; inelastic
d.elastic; inelastic
e.inelastic; elastic
2.A tax levied on producers is fully shifted to consumers when:
a.demand is perfectly elastic.
b.demand is perfectly inelastic.
c.supply is perfectly inelastic.
d.both a and c are true.
e.both b and c are true.
3.Horizontal equity incorporates the notion that
a.those earning higher incomes should pay more in taxes.
b.those earning equal incomes should pay the same in taxes.
c.taxes paid should be unassociated with income levels.
d.there should be no excess burden created by a tax.
4.Vertical equity incorporates the notion that
a.those earning higher incomes should pay more in taxes.
b.those earning equal incomes should pay the same in taxes.
c.taxes paid should be unassociated with income levels.
d.there should be no excess burden created by a tax.
5.Which of the following statements is true?
a.The degree of equity of an income tax system depends on marginal tax rates.
b.The degree of equity of an income tax system depends on average tax rates.
c.The degree of efficiency of an income tax system depends on marginal tax rates.
d.All of the above statements are true.
e.Both b and c are true.
6.Suppose that the government were to impose a $3 tax on high-speed Internet connections. The law states that $2/connection is to be paid to the government by the producer and the remaining $1 is to be paid by the consumer. Which of the following statements regarding the tax is true?
a.It shifts the supply of high-speed Internet connections to the left.
b.It shifts the supply of high-speed Internet connections to the right.
c.It shifts the demand for high-speed Internet connections to the left.
d.Both a and c are true.
e.Both b and c are true.
7.In a labor market in which demand is inelastic and supply is elastic, who bears a tax levied on the firms?
a.only the workers
b.only the firms
c.both the workers and the firms, although the workers bear more of the tax
d.both the workers and the firms, although the firms bear more of the tax
e.more information needed to answer the question
8.Tax expenditures are revenues that
a.are always recouped during tax season.
b.only apply to large corporations.
c.are needed to get full exemptions.
d.are forgone due to preferential tax treatment.
9.A tax credit
a.is not the same as a tax deduction.
b.is another phrase for a tax deduction.
c.is never calculated on federal tax returns.
d.only applies to the EITC.
10.A tax system in which the average tax rates fall as income rises is a ______tax system; the way in which the average tax rate changes as income rises is a measure of ______equity.
a.regressive; vertical
b.regressive; horizontal
c.progressive; vertical
d.progressive; horizontal
e.proportional; horizontal
11.There is a 20% tax on the first $15,000 of income, a 30% tax on income above $15,000 until $30,000, and a 40% tax on all income above $30,000. What is the marginal tax rate for someone making $35,000?
a.14.29%
b.20%
c.30%
d.31.7%
e.40%
12.Assume that the nominal rate of interest is 10% and that the inflation rate is 10%. The tax rate on interest from savings is 25%, and in the first period, Wes has $100 in savings. After taxes, what will Wes's nominal savings be one year from now?
a.$10
b.$105
c.$107.50
d.$110
e.none of the above
13.Which of the following is true regarding the Earned Income Tax Credit (EITC)?
a.Single mothers who marry are always penalized by the EITC program.
b.The EITC creates a marriage penalty because its formula is different for two-parent
families than for single-parent families.
c.Single mothers who marry sometimes receive an EITC "marriage bonus."
d.Both a and b are true.
e.Both b and c are true.
14.When government borrowing decreases private investment by raising the market interest rate, this is known as
a.the Director’s Law.
b.crowding out.
c.positive economics.
d.the Ramsey Rule.
e.random error.
15.Suppose that the government were to eliminate taxes on interest from savings. Which of the following statements is NOT consistent with economic theory?
a.people would save more as a result
b.people would save less as a result
c.The substitution effect of the policy induces people to save less
d.Allof the above statements are not consistent with economic theory
e.Both a and b are not consistent with economic theory
16.A tax on consumption for those who are nonsavers
a.is equivalent to a tax on income.
b.causes income gains to increase dramatically
c.would be preferred to a tax on wealth
d.makes it difficult to tell what the result for the nonsavers would be.
17.A wealth tax can be justified because it
a.helps to correct certain (inevitable) problems that arise in the administration of an income tax
b.the higher an individuals wealth, the greater his or her ability to pay, other things- including income – being the same
c.reduces the concentration of wealth, which is desirable socially and politically
d.are payments for benefits that wealth holders receive from government
e.all of the above
18.A capital gain is best defined as which of the following descriptions?
a.The accumulation of assets that comes from increased savings
b.The difference between an asset’s purchase price and sale price
c.The portion of investment earnings that is not taxed
d.The portion of investment earnings that is taxed
e.Investment earnings on non-cash assets
19.Which of the following statements would be true if government were to tax land instead of the assets on land?
a.Market values could no longer be used for taxation
b.Market values could now replace arbitrary assessments in determining the amount of the tax
c.Landowners no longer would face a disincentive to improve the buildings on their land
d.Both and c are true
e.Both b and c are true
20.The substitution effect of child care expenditures induces parents to______. The income effect of child care expenditures induces parents to______.
a.Work more, work more
b.Work no more or less (there is no substitution effect); work more
c.Work more, work less
d.Work less; work less
e.Work less, work more
21.If a tax is efficient, it will necessarily be equitable.
a.True.
b.False.
c.Uncertain.
22. One advantage of a consumption tax is that there are fewer problems with inflation.
a.True.
b.False.
c.Uncertain.
23.Interest deductibility does not provide an incentive for debt finance.
a.True.
b.False.
c.Uncertain.
Part 2 (96 pts)
1.(6 pts) Which would a taxpayer in the 36% tax bracket prefer: a $2,000 tax exemption or a $700
tax credit? What if the taxpayer were in the 28% tax bracket?
2.(6pts)Your textbook (Ch. 24) highlights a debate that has been going on for some years. The issue is whether there should be a corporation tax, given that corporations are nothing more than groups of people. Should there be a corporation tax? Why or why not?
3.(16 pts) Jennifer lives in two periods. In the first period, her income is fixed at $20,000; in the second, it is $28,000. She can borrow and save at the market interest rate of 8 percent.
(A)Sketch her intertemporal budget constraint.
(B)Suppose that Jennifer is unable to borrow at any rate of interest, although she can still save at 8 percent. Sketch her intertemporal budget constraint.
4.(16pts) Refer to Figure 21.2 in your textbook. Suppose that the total number of hours (T) is 720 and the wage rate is $10. Suppose further that all income is spent on consumption, so that the vertical axis is also total consumption.
(A) Sketch this graph.
(B) Sketch the graph if a 5% consumption tax is imposed.
(C) Can you say conclusively that a consumption tax will lower hours worked?
5.(16pts)The government of Tortunia increased its income tax rates by 20% in all tax brackets. The effect of this tax rate increase on total tax revenues works through several pathways. Describe whether you expect the higher tax rate to raise or lower tax revenues
through each of the following pathways:
a.The direct effect of the tax rate increase
b.The effects of the tax rate increase on personal income
c.The effects of the tax rate increase on tax evasion or tax avoidance
6.(16 pts.) Ch 20The market demand for stuffed rabbits is Q = 2,600-20P, and the government intends to place a $4 per bunny tax on stuffed rabbit purchases. Calculate the excess burden (deadweight loss) of this tax when:
a.Supply of stuffed rabbits is Q= 400.
b.Supply of stuffed rabbits is Q = 12P.
c.Explain why the dead weight loss calculations differ between a and b.
7.(20 pts) tax levied on consumers.
In an effort to reduce alcohol consumption, the government is considering a $1 tax on each gallon sold to be collected at retail (the tax is levied on consumer). Suppose the supply curve for liquor is upward sloping and its equation is Q = 30,000P (where Q is the number of gallons of liquor and P is the price per gallon). The demand curve for liquor is Q = 500,000 – 20,000P.
- Sketch an illustration of the equilibrium and show the effect of the new $1 tax.
- What is the tax revenue generated.
- What share of the burden is borne by consumers and by producers?
- On your graph, identify the excess burden of the $1 tax on consumers.
- Using algebra, calculate the excess burden generated by the tax.
- Compare the losses of both consumer and producer surplus to tax revenues