Econ 344Spring 2012
Problem Set #5
Assigned:Th. April5, 2012
Due:Th. April 12, 2012
Corresponding Chapters:Gruber, 18-24, 10,11140 pts. total
Part I Multiple Choices (2*25=50 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.
24.Tax ______is legal; tax ______is illegal.
a.avoidance; compliance
b.compliance; avoidance
c.evasion; avoidance
d.avoidance; evasion
e.None of the answers is correct.
25. If the government were to give every student a voucher to redeem at any school, it would be intervening through ______. If the government were to mandate no tuition costs more than $6,000/year without intervening in any other way, it would be intervening through______.
a.public provision; private provision
b.the price mechanism; the price mechanism
c.the quantity mechanism; the price mechanism
d.the price mechanism; the quantity mechanism
e.public provision; public provision
Part 2 (90 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.(14 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.
- Sketch her intertemporal budget constraint.
- 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.(14pts) 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) Suppose that the demand for apples is perfectly elastic and the government levies a tax on the producers of apples. Assume that the supply of apples is neither perfectly elastic nor perfectly inelastic.
- How will the price paid by consumers change? Is this change bigger or smaller than the price change that would result if the demand for apples were not perfectly elastic?
- How will the quantity of apples consumed change due to the tax? Is this change in quantity larger or smaller than the change that would result if the demand for apples were not perfectly elastic?
- Explain the significance of your answers in both part a and part b in terms of how the tax affects the welfare of consumers in the apple market
6.(16 pts.) Ch 20The market demand for stuffed rabbits is Qd = 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.Ch11. (18 pts) The town of Greenville has three families, each with one child, and each of which earns $20,000 per year (pre-tax). Each family is taxed $4,000 per year to finance thepublic school system in the town, which any family can then freely attend. Educationspending is $6,000 per student in the public schools. The three families differ in theirpreferences for education. Though families A and B both send their children to thepublic school, family B places a greater value on education than family A. Family Cplaces the greatest relative value on education and sends its child to private school.
a.Graph the budget constraints facing each of the three families and draw a possibleindifference curve which could correspond to the choice each family makes. Notethat family B’s indifference curve is steeper than Family A’s, reflecting theirgreater preference for education (even though they make the same choice).
The town is considering replacing its current system with a voucher system. Under the new system, each family would receive a $6,000 voucher for education,and families would still be able to send their children to the same public school. Since this would be more costly than the current system, they would also raisetaxes to $6,000 per household to pay for it.
b.Draw the budget constraint the families would face under this system.
Suppose that, when the new system is introduced, family A continues to sendtheir child to public school, but family B now sends their child to private school(along with family C’s child).
c.Explain how you know that family C is made better off and family A is made worseoff by the voucher policy.
d.Show, using diagrams, that family B could be made better or worse off by the
voucher policy.