Question 1

The supply of new cars is perfectly elastic. A $400 per car tax is levied on buyers. As a result of the tax,

Accepted Answer

When supply is perfectly elastic, the entire tax burden falls on buyers, increasing the price they pay by the full amount of the tax.

Question 2

The market supply of labor is perfectly inelastic. However, the income effect of tax-induced wage changes are believed to be substantial. Then it follows that a tax on labor income will:

Accepted Answer

A tax on labor income will have positive excess burden and be paid entirely by workers as a reduction in net wages.

Question 3

Differential tax incidence measures the effect:

Accepted Answer

Differential tax incidence measures the change in the distribution of income caused by substituting one tax for another while holding the size and composition of the budget fixed. It compares the burden of one tax with another and sees how it affects the different income groups. So, option C is the correct answer as it explains the actual meaning of differential tax incidence. The other options either do not define differential tax incidence accurately, or they are too narrow in their scope.

Question 4

Most studies show that the price elasticity of demand for gasoline is -0.2. If the price elasticity of supply is 2, then a tax on gasoline will:

Accepted Answer

A tax on gasoline will increase the price paid by buyers and decrease the net price received by sellers due to the inelastic demand and elastic supply.

Question 5

Most studies of tax incidence assume that taxes on labor income and other input services are borne entirely by the workers and other input owners that supply the services. This implies that the:

Accepted Answer

The assumption that taxes on labor income and other input services are borne entirely by the workers and other input owners implies that the supply of those input services is perfectly inelastic. This means that the quantity supplied does not change in response to changes in price, including the imposition of a tax, leading to the burden being fully absorbed by the suppliers.

Question 6

If a lump-sum tax is imposed, the slope of the new budget line relative to the budget line prior to the tax:

Accepted Answer

The slope of the budget line is determined by the ratio of the prices of the two goods. A lump-sum tax does not change the relative prices of the two goods, so it does not change the slope of the budget line.

Question 7

Housing construction is generally believed to be an industry of constant costs. In the long run, which of the following is true if a $10 per square foot tax on housing construction is collected directly from builders

Accepted Answer

In the long run, the tax on housing construction will be passed on to buyers of new construction in the form of higher house prices. The burden of the tax will ultimately fall on the consumers of new homes, not the builders. Therefore, choice D is correct. Choice A is incorrect because the builders will be able to pass on the tax to the buyers. Choice B is also incorrect because any tax creates a deadweight loss or excess burden, and this tax is no exception. Choice C is also incorrect because the tax will increase the cost of building homes, which will reduce the quantity of new construction supplied.

Question 8

Viewed from origin a price distorting tax creates a new budget line with a ______ slope relative to the budget line without the tax.

Accepted Answer

A price distorting tax shifts the original budget line to a higher price level, causing the new budget line to have a steeper slope than the original one. This is true as the consumer will have to give up more of one good to afford the same quantity of another good due to the increased price caused by the tax. Therefore, the correct choice is B, more steep.

Question 9

Currently, a 10-cent per gallon tax is levied on gasoline consumption. The tax is increased to 20 cents per gallon. The excess burden of the tax will:

Accepted Answer

When the tax on gasoline consumption is doubled from 10 cents per gallon to 20 cents per gallon, the excess burden of the tax will increase four times. This is because the excess burden of a tax is directly proportional to the square of the tax rate. Doubling the tax rate will lead to a four-fold increase in the excess burden.

Question 10

The demand for medical care is very inelastic. If a 10-percent tax is levied on the sale of medical services and is collected from medical-care providers, then:

Accepted Answer

The inelastic nature of the demand for medical care means that consumers are unlikely to reduce their consumption of medical services in response to a price increase caused by the tax. Therefore, it is likely that healthcare providers will be able to shift most of the tax burden onto their customers. The market equilibrium price of medical care is unlikely to fall significantly due to the inelastic demand. The excess burden of the tax could be high, but this is not stated in the question.

Question 11

Which of the following is true about a lump-sum tax

Accepted Answer

A lump-sum tax causes income effects because it reduces the income available to individuals, regardless of their level of consumption or production. It does not cause substitution effects because it does not change the relative prices of goods or services. It also does not prevent efficiency in competitive markets.

Question 12

If a per unit tax is imposed, but the quantity supplied and demanded does not change then:

Accepted Answer

If a per unit tax is imposed and the quantity supplied and demanded does not change, it indicates that both demand and supply are perfectly inelastic, leading to no deadweight loss.

Question 13

Suppose an economy is comprised of only two markets: one for food and the other for housing. A tax on food used to finance transfer payments is likely to:

Accepted Answer

A tax on food will increase the cost of producing and selling food. As a result, suppliers will supply less food at a higher price. With fewer goods in the market, there is a reduction in the demand for complementary goods such as housing. Consequently, the price of housing will decrease.

Question 14

The efficiency-loss ratio relative to tax is:

Accepted Answer

The efficiency-loss ratio relative to tax is calculated as the excess burden (or deadweight loss) divided by the tax revenue. This ratio measures the cost of the tax in terms of economic efficiency lost per unit of revenue raised.

Question 15

The elasticity of supply of land is zero. A tax on land results only in an income effect to landlords. Then it follows that a 10-percent tax on land rents will:

Accepted Answer

A tax on land with perfectly inelastic supply (elasticity of supply is zero) cannot be shifted to others, so landlords bear the full tax burden. Since the supply is perfectly inelastic, there is no change in quantity supplied, resulting in zero excess burden.

Question 16

Explain why the excess burden of a lump-sum tax will always be zero. Why is the payroll tax not a lump-sum tax Show how a payroll tax affects the wages paid by employers and received by workers, assuming that it is withheld from their paychecks. Assuming that the supply of labor is not perfectly inelastic, show how the excess burden can be measured.

Accepted Answer

The answer of Explain why the excess burden of a...

Question 17

If the price elasticity of supply of labor is equal to 0.5 and the price elasticity of demand for labor is -2, then which of the following is likely to result from a tax on labor earnings

Accepted Answer

The lower elasticity of labor supply means that workers are less responsive to changes in their wages (i.e. they are less likely to work more or less based on changes in wage rates). On the other hand, the high elasticity of labor demand means that employers are more sensitive to changes in labor costs (i.e. they are more likely to hire or fire workers based on changes in wage rates). When a tax is imposed on labor earnings, workers will take home less after-tax income, which may cause some of them to reduce their labor supply. However, because the elasticity of labor supply is low, they will not reduce their labor supply by a lot. Therefore, employers will bear some of the burden of the tax by paying higher wages, resulting in an increase in equilibrium wages.

Question 18

Other things being equal, the more inelastic the demand for a taxed good,

Accepted Answer

When demand is inelastic, buyers are less sensitive to price changes, so they bear a larger portion of the tax burden.

Question 19

A $0.30 per unit tax is imposed on a good that reduces the quantity supplied and demanded by 1000 units. What is the deadweight loss ignore price elasticities)

Accepted Answer

The deadweight loss from a tax is calculated as 1/2 x (change in quantity) x (tax per unit), so in this case the deadweight loss would be:
1/2 x 1000 x $0.30 = $150.00

Quiz 11: Taxation, Prices, Efficiency, and the Distribution of Income