96
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10) The figure above illustrates the market for antifreeze. Suppose the government decides to
impose an $8 sales tax on every gallon of antifreeze sold.
a. In the figure, illustrate the effect the tax has on the market for antifreeze.
b. What is the equilibrium price of a gallon of antifreeze before the tax? What is the price paid
by buyers after the tax?
c. What is the equilibrium quantity of antifreeze before the tax? What is the equilibrium
quantity after the tax?
d. What is the revenue collected by the government from this tax?
e. Do buyers or sellers bear the largest burden of the tax?
f. Illustrate the deadweight loss created by the tax.
97
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Skill: Level 3: Using models
Section: Checkpoint 8.1
Author: JC
AACSB: Analytical reasoning
98
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11) The figure above shows the market for gasoline. The government has imposed a tax on
gasoline.
a. What is the amount of the tax per gallon of gasoline?
b. How much tax revenue will government collect from this tax?
c. How much of the tax is paid by consumers? How much is paid by producers? Which is more
elastic, the supply or demand for gasoline?
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Author: SB
AACSB: Analytical reasoning
99
Copyright © 2011 Pearson Education, Inc.
12) The figure above shows the market for a life-saving drug. Suppose the government imposes a
$150 tax per dose on the drug. Show and describe the impact on the market. Who pays this tax?
Skill: Level 3: Using models
Section: Checkpoint 8.1
Author: CD
AACSB: Analytical reasoning
13) The figure above shows the market for tickets to the Super Bowl the day of the game.
Suppose the government imposes an entertainment tax of $100 per ticket.
a. What is the equilibrium price of a Super Bowl ticket before the tax? What is the price paid by
buyers after the tax? What is the price received by sellers after the tax?
b. What is the equilibrium quantity of tickets before the tax? What is the equilibrium quantity
after the tax?
c. Do buyers or sellers bear most of the incidence of the tax?
Skill: Level 3: Using models
Section: Checkpoint 8.1
Author: JC
AACSB: Analytical reasoning
101
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8.7 Essay: Income Tax and Social Security Tax
1) “In the United States, more tax revenue is collected through Social Security taxes than through
property taxes.” Is the previous statement correct or incorrect?
Skill: Level 2: Using definitions
Section: Checkpoint 8.2
Author: SB
AACSB: Reflective thinking
2) Ali earns $20,000 and pays $2,000 in taxes; Maria earns $40,000 and pays $4,000 in taxes. Is
this tax progressive, regressive, or proportional?
Skill: Level 2: Using definitions
Section: Checkpoint 8.2
Author: SA
AACSB: Analytical reasoning
3) “For the U.S. personal income tax, the average tax rate is greater than the marginal tax rate.”
Is the previous statement correct or incorrect?
Skill: Level 2: Using definitions
Section: Checkpoint 8.2
Author: SB
AACSB: Reflective thinking
4) What is the marginal tax rate? Average tax rate? Can these rates ever differ?
Skill: Level 2: Using definitions
Section: Checkpoint 8.2
Author: SB
AACSB: Reflective thinking
102
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5) Why are sales taxes, which require that everyone pay the same percentage tax, considered
regressive taxes?
Skill: Level 3: Using models
Section: Checkpoint 8.2
Author: JC
AACSB: Communication
6) If income tax rates on labor income are decreased, what is the effect on the labor supply and
the labor supply curve? What is the effect on the equilibrium quantity of labor hired?
Skill: Level 2: Using definitions
Section: Checkpoint 8.2
Author: JC
AACSB: Reflective thinking
7) Describe the effects of an increase in the tax on labor income.
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Author: SB
AACSB: Communication
8) If the supply of land is perfectly inelastic, what is the deadweight loss from a tax on land?
Skill: Level 3: Using models
Section: Checkpoint 8.2
Author: PH
AACSB: Reflective thinking
103
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9) What is the difference in the tax incidence between imposing the Social Security tax on
workers and imposing the same tax on employers?
Skill: Level 1: Definition
Section: Checkpoint 8.2
Author: SB
AACSB: Reflective thinking
10) The table above gives the taxable income and the amount of tax paid.
a. Is this income tax progressive, regressive, or proportional?
b. If the taxable income is $25,000, what is the average tax rate?
c. If taxable income increases from $25,000 to $30,000, what is the marginal tax rate?
Skill: Level 3: Using models
Section: Checkpoint 8.2
Author: PH
AACSB: Analytical reasoning
104
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11) Adam, Aaron, and Fatima earn, respectively, $30,000, $50,000 and $100,000 per year. The
amount of state income taxes they pay on their income depends on which state they choose to
live in. The table above shows how much they would pay in taxes in each state.
a. Is the tax in State A progressive, regressive or proportional?
b. Is the tax in State B progressive, regressive or proportional?
c. Is the tax in State C progressive, regressive or proportional?
Skill: Level 3: Using models
Section: Checkpoint 8.2
Author: SA
AACSB: Analytical reasoning
12) If the marginal tax rate is 20 percent, and Pearl earns an extra $100, how much must Pearl
pay in additional taxes?
Skill: Level 3: Using models
Section: Checkpoint 8.2
Author: MR
AACSB: Analytical reasoning
105
Copyright © 2011 Pearson Education, Inc.
13) In a labor market before any taxes are imposed, the equilibrium wage rate is $10.00 an hour
and 10,000 people are employed. The government imposes a 20 percent income tax on workers’
incomes. What is the wage rate that workers need to receive so that they can earn $10.00 per
hour after the tax is paid? Suppose that after the tax is imposed, the wage rate rises to $12.00 an
hour and that only 8,000 workers are employed. How is the tax incidence split between workers
and firms?
Skill: Level 3: Using models
Section: Checkpoint 8.2
Author: TS
AACSB: Analytical reasoning
106
Copyright © 2011 Pearson Education, Inc.
14) The figure above shows a labor market in which an income tax has been imposed.
a. How many hours of labor were employed before the tax was imposed?
b. How many hours of labor are employed after the tax?
c. What was the wage rate employers paid and that workers received before the tax?
d. What is the wage rate employers pay and that workers receive after the tax?
e. What accounts for the difference between what employers pay and what workers receive?
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Author: SB
AACSB: Analytical reasoning
107
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15) The figure above shows the capital market.
a. Before the government takes any action, what is the interest rate and quantity of capital?
b. Suppose the government imposes a tax of 25 percent on the income from capital. After the
tax, what is the equilibrium interest rate and quantity of capital? What is the after-tax interest
rate?
c. In the figure, darken the area that equals the deadweight loss from the tax.
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Author: SB
AACSB: Analytical reasoning
16) Suppose we acquire the technology necessary to colonize the moon and 3 billion acres are
made available to the general population. The figure above represents the supply and demand for
land on the moon.
a. Suppose the government imposes a $1,000 dollar per acre tax on land income. What is the
before-tax rent and what is the after-tax rent?
b. How much is the deadweight loss associated with this tax?
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Author: SB
AACSB: Analytical reasoning
109
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8.8 Essay: Fairness and the Big Tradeoff
1) What are the two conflicting principles of fairness that apply to a tax system? Briefly explain
each.
Skill: Level 1: Definition
Section: Checkpoint 8.3
Author: CD
AACSB: Communication
2) “The only fair tax is a progressive tax.” Comment on this assertion.
Skill: Level 3: Using models
Section: Checkpoint 8.3
Author: MR
AACSB: Communication
3) What are the similarities and differences between horizontal and vertical equity?
Skill: Level 1: Definition
Section: Checkpoint 8.3
Author: SA
AACSB: Communication
110
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4) What is the difference between vertical equity and horizontal equity?
Skill: Level 1: Definition
Section: Checkpoint 8.3
Author: CD
AACSB: Communication