Econ 344
Homework #4
Assigned:Thurs., Oct. 18, 2007
Due:Thurs., Oct. 25, 2007
Part I.Multiple Choice (3*13=39 pts)
1.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.
2.General equilibrium refers to:
a.examining markets without specific information.
b.finding equilibrium from general information.
c.pricing goods at their shadow price.
d.All of the above.
e.None of the above.
3.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
4.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.
5.Which of the following would be an example of a lump-sum tax?
a.a compensated tax
b.a retail sales tax
c.a head tax
d.an admission fee
6.The Ramsey rule makes which of the following statements?
a.The deadweight loss per dollar of tax revenue generated from commodity taxes should be equal to the deadweight loss per dollar of tax revenue generated from income taxes.
b.The ratio of the price elasticity of demand to the tax should be equal across commodities.
c.The per unit tax should be equal across commodities.
d.The deadweight loss per dollar of tax revenue associated with an additional dollar of taxes on that commodity should be equal across commodities.
e.None of the above statements is made.
7.Optimal commodity taxation would
a.put a tax on leisure time, which is currently untaxed.
b.have thesmallest amount of excess burden possible for a given amount of tax revenue.
c.optimize tax rates on the wealthiest Americans.
d.eliminate tax evasion in the United States.
e.do all of the above.
8.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.
9.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.
10.The Ramsey Rule implies that goods be ______in consumption.
a.unrelated
b.equal
c.opposite
d.moderate
11.Neutral taxation is taxing different commodities at the same tax rate.
a.True.
b.False.
c.Uncertain.
12.Optimal user fees are paid only by the consumers of the good or service produced.
a.True.
b.False.
c.Uncertain.
13.If a tax is efficient, it will necessarily be equitable.
a.True.
b.False.
c.Uncertain.
Part II. Short Essay (70 pts)
1.(18 pts.) Which of the following is likely to impose a large or small excess burden? (Explain your logic.)---from Ch15 Rosen #1
Ch15 1.a.Since land is fixed in supply, we expect no excess burden when it is taxed. The supply curve is inelastic.
- There are fairly good substitute for cell phones. Therefore, their demand is quite elastic, and a tax on them will have a substantial excess burden, relative to the size of revenues collected.
- Without knowing exactly what “high-tech” means, it is likely that many companies could relabel themselves as high-tech in order to receive the subsidy. Thus, the supply is quite elastic, and there will be substantial excess burden.
D&e Substitutes are available, there will be substantial excess burden
f. tax on blue berries---substitutes are available –substantial excess burden
2.(12 pts.) The 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:
Ch.16#1 (inverse elasticity rule application)
3.(11 pts.) According to one estimate, the elasticity of demand for basic cable service is -.51, and the elasticity of demand for direct broadcast satellites is -7.40. Suppose that a community wants to raise a given amount of revenue by taxing cable service and direct satellite TV dishes.
If the community’s goal is to raise the money as efficiently as possible, what should be the ratio of the cable tax to the satellite tax?
Briefly discuss the assumptions behind your calculation
Assuming that all other commodities (except for cable and satellite television) were untaxed, then optimal tax policy suggests the commodities should be taxed according to the inverse elasticity rule. Goolsbee and Petrin (2004) find that the elasticity of demand for basic cable service is -0.51, and the demand for direct broadcast satellites is -7.40. Applying the inverse elasticity rule would imply that:
(tBASIC/tSATELLITE)=(ηSATELLITE/ηBASIC)=(7.40/0.51)=14.5
Thus, tax rates on basic cable should be 14.5 times higher than tax rates on satellite television because basic cable is inelastically demanded, while demand for satellite television is highly elastic. Among the assumptions that go into the inverse elasticity rule are that goods are neither complements nor substitutes, and that the elasticities are the Hicksian compensated elasticities rather than the Marshallian uncompensated elasticities. In this case, it is likely that the first of these assumptions is false – basic cable and satellite television are likely substitutes for each other. The Hicksian and Marshallian demand elasticities are likely to be close to each other because the income effects are likely to be small for this commodity.
- (20 pts.) Based on #8, Ch 15 in Rosen, p. 350 with the 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?
a.Before-tax equilibrium: P = $10 and Q = 300,000
After-tax equilibrium: P = $10.60 and Q = 288,000
Consumers pay $10.60 and producers receive $9.60.
Excess Burden = ½(12,000)($0.60) + ½(12,000)($0.40) = $6,000.
- 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