91
Copyright © 2011 Pearson Education, Inc.
9) The figure above shows the impact of an income tax. The revenue collected by the
government equals area
A) bce.
B) feba.
C) fed.
D) acf.
E) None of the above answers is correct.
Skill: Level 4: Applying models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
10) The imposition of ________ shifts the labor demand curve downward.
A) a sales tax
B) an income
C) a social security tax on workers
D) a social security tax on employers
E) Both answers C and D are correct.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
11) ________ tax is progressive if the ________.
A) An income; average tax rate is constant as income increases
B) An income; average tax rate increases with income
C) Any; average tax rate is constant as income increases
D) Any; average tax rate decreases as income increases
E) A social security; tax is imposed on employers rather than workers
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
92
Copyright © 2011 Pearson Education, Inc.
12) To levy a tax based on the benefits principle to pay for a bridge, the government
A) would impose an income tax instead of a social security tax on workers.
B) would impose a social security tax on workers instead of an income tax.
C) needs to know each person’s benefit from the bridge.
D) needs to be able to calculate the deadweight loss of a tax.
E) cannot impose the tax on anyone who uses the bridge.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
13) Which of the following taxes guarantees vertical equity?
i) income tax
ii) social security tax on workers
iii) social security tax on employers
A) i only
B) i and ii
C) ii and iii
D) iii only
E) None of the above taxes guarantees vertical equity.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
8.6 Essay: Taxes on Buyers and Sellers
1) When a tax is imposed on a good, the resulting rise in the equilibrium price is usually less than
the amount of the tax itself. Why doesn’t the equilibrium price rise by the full amount of the tax?
Skill: Level 3: Using models
Section: Checkpoint 8.1
Author: SB
AACSB: Communication
93
Copyright © 2011 Pearson Education, Inc.
2) How does the elasticity of demand affect the incidence of a tax?
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Author: MR
AACSB: Reflective thinking
3) Explain under what conditions a sales tax on a specific good would be paid entirely by buyers.
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Author: TS
AACSB: Reflective thinking
4) Which would be a better source of tax revenue for the government, a good with elastic or a
good with an inelastic demand? Explain your reasoning.
Skill: Level 5: Critical thinking
Section: Checkpoint 8.1
Author: SB
AACSB: Reflective thinking
5) Suppose the demand for saline solution is perfectly inelastic for contact lens wearers. If the
government imposes a tax on saline solution, what occurs? Be sure to tell what happens to the
price paid by the buyers and discuss the incidence of the tax.
Skill: Level 3: Using models
Section: Checkpoint 8.1
Author: JC
AACSB: Reflective thinking
94
Copyright © 2011 Pearson Education, Inc.
6) Suppose the government decides to tax salt. The demand for salt is inelastic and the supply is
quite elastic. Who bears most of the tax incidence and pays most of this tax?
Skill: Level 3: Using models
Section: Checkpoint 8.1
Author: JC
AACSB: Reflective thinking
7) Consider the market for dining at Mexican restaurants. Suppose the price elasticity of demand
for Mexican food is 1.23 and the price elasticity of supply is 0.47. If the government imposes a
tax on Mexican food, do consumers or producers pay most of the tax? Why?
Skill: Level 3: Using models
Section: Checkpoint 8.1
Author: CD
AACSB: Reflective thinking
8) Is the deadweight loss from a sales tax on a product larger the more inelastic the demand for
the good?
Skill: Level 2: Using definitions
Section: Checkpoint 8.1
Author: MR
AACSB: Reflective thinking
95
Copyright © 2011 Pearson Education, Inc.
9) In the Village of Punjab, Sheryl owns a well, which is the only source of drinking water. The
supply of water is perfectly inelastic at a quantity of 1,000 gallons of water per day. At a price of
$2.00 per gallon, the quantity demanded per day is 1,000 gallons. The government imposes a
$0.50 per gallon tax.
a. After the tax is imposed, what is the price paid by the villagers? What is the price received by
Sheryl?
b. How much revenue does the government collect?
c. What fraction of the tax does Sheryl pay? What fraction is paid by the villagers?
Skill: Level 3: Using models
Section: Checkpoint 8.1
Author: SA
AACSB: Analytical reasoning