overweight.
b.
loss from the elimination of mutually beneficial exchanges that results from the imposition
of a tax in a market.
c.
difference between the value consumers place on a good and the price they have to pay for
it.
d.
reduction in consumer welfare that occurs when the firms in a market make a profit.
100. The excess burden or deadweight loss of a tax refers to the
a.
increase in product price as a result of the tax.
b.
growth in government funded programs as a result of the revenue generated by the tax.
c.
loss of disposable income consumers suffer from the tax.
d.
reduction in gains from mutually beneficial exchanges that are eliminated as a result of the
tax.
101. Suppose an excise tax is imposed on two products X and Y, both of which have identical supply
elasticities. The demand for good X is highly elastic, while the demand for good Y is highly inelastic.
The deadweight loss (or excess burden) will be
a.
equal in both cases.
b.
larger for good X than good Y.
c.
larger for good Y than good X.
d.
zero in both cases.
102. The average tax rate is defined as
a.
the average number of times a circulating dollar is taxed during a year.
b.
the change in the tax rate as income increases.
c.
the change in the tax rate as income decreases.
d.
tax liability divided by taxable income.
103. Which tax rate measures the percent of your income paid in taxes?
a.
the marginal tax rate
b.
the average tax rate
c.
progressive tax coefficient
d.
the excise tax rate
104. If a household has $40,000 in taxable income and its tax liability is $20,000, the household’s average
tax rate is
a.
10 percent.
b.
25 percent.
c.
40 percent.
d.
50 percent
105. If a household has $40,000 in taxable income and its tax liability is $4,000, the household’s average tax
rate is
a.
10 percent.
b.
25 percent.
c.
40 percent.
d.
50 percent
106. The marginal tax rate is defined as
a.
tax liability divided by taxable income.
b.
tax liability multiplied by taxable income.
c.
the change in tax liability divided by the change in taxable income.
d.
the change in tax liability minus the change in taxable income.
107. If Sophia’s tax liability increases from $10,000 to $15,000 when her income increases from $30,000 to
$40,000, her marginal tax rate is
a.
33 percent.
b.
35 percent.
c.
50 percent.
d.
60 percent.
108. If Jayla’s tax liability increases from $10,000 to $16,000 when her income increases from $30,000 to
$40,000, her marginal tax rate is
a.
33 percent.
b.
35 percent.
c.
50 percent.
d.
60 percent.
109. If Aisha were to get a $3,000 bonus from her employer, which of the following tax rates would most
accurately reflect the percent of this additional income that she would owe in taxes?
a.
her marginal tax rate
b.
her average tax rate
c.
her progressive tax coefficient
d.
the rate of excess burden
110. Emma works full time during the day as an economist and faces a 90 percent marginal tax rate. If
Emma were to get an offer to work a second job in the evenings doing consulting work for a local
business for $10,000 per year, how much of this additional income would she be able to keep as net
pay after taxes?
a.
$1,000
b.
$4,000
c.
$6,000
d.
$10,000
111. Use the table below to choose the correct answer.
Income
Tax Liability
(dollars)
(dollars)
20,000
1,000
25,000
2,500
30,000
6,000
The marginal tax rate on income in the $25,000 to $30,000 range is
a.
10 percent.
b.
20 percent.
c.
50 percent.
d.
70 percent.
112. Use the table below to choose the correct answer.
Income
Tax Liability
(dollars)
(dollars)
20,000
2,000
25,000
3,000
30,000
4,500
The marginal tax rate on income in the $20,000 to $25,000 range is
a.
10 percent.
b.
12 percent.
c.
20 percent.
d.
30 percent.
113. An income tax is defined as regressive if
a.
the tax liability of those with higher incomes exceeds the tax liability of those with low
incomes.
b.
the tax liability of those with higher incomes is less than the tax liability of those with low
incomes.
c.
those with higher incomes pay a higher percentage of their incomes in taxes than those
with low incomes.
d.
those with higher incomes pay a lower percentage of their incomes in taxes than those
with low incomes.
114. A regressive tax
a.
taxes individuals with higher incomes at a higher rate than individuals with lower
incomes.
b.
takes a similar percentage of income at all income levels.
c.
takes a higher percentage of the income of those with lower incomes than for those with
higher incomes.
d.
taxes savings at a higher rate than consumption.
115. A tax for which the average tax rate decreases with income is defined as a
a.
regressive tax.
b.
proportional tax.
c.
neutral tax.
d.
progressive tax.
116. Which of the following examples illustrates a regressive income tax?
a.
I earn $500 and pay $50 in taxes; you earn $1,000 and pay $90 in taxes.
b.
I earn $500 and pay $50 in taxes; you earn $1,000 and pay $100 in taxes.
c.
I earn $500 and pay $50 in taxes; you earn $1,000 and pay $110 in taxes.
d.
I earn $500 and pay $50 in taxes; you earn $1,000 and pay $125 in taxes.
117. Many economists believe a general sales tax (particularly on items such as food) takes a larger
proportion of income from low-income households than from high-income households. If this is true, a
general sales tax is a
a.
regressive tax.
b.
proportional tax.
c.
neutral tax.
d.
progressive tax.
118. An income tax is progressive if the
a.
tax rate decreases as income increases.
b.
percentage of income paid in taxes increases as income increases.
c.
percentage of income paid in taxes stays the same regardless of the size of income.
d.
dollar amount paid in taxes increases with income.
119. A progressive tax
a.
is one that taxes those with higher incomes at a higher rate than those with lower incomes.
b.
takes a similar percentage in the form of taxes from those with higher incomes as it does
from those with lower incomes.
c.
takes a higher percentage of income in the form of taxes from those with lower incomes
than from those with higher incomes.
d.
is any tax in which the dollar amount of taxes paid increases with income.
120. A tax for which the average tax rate rises with income is defined as a
a.
regressive tax.
b.
proportional tax.
c.
neutral tax.
d.
progressive tax.
121. A progressive tax is defined as a tax for which the
a.
average tax rate rises as income increases.
b.
average tax rate falls as income increases.
c.
average tax rate remains constant at all levels of income.
d.
dollar tax liability of those with higher income is more than the dollar tax liability of those
with lower income.
122. Which of the following examples illustrates a progressive income tax?
a.
I earn $500 and pay $50 in taxes; you earn $1,000 and pay $100 in taxes.
b.
I earn $500 and pay $50 in taxes; you earn $1,000 and pay $50 in taxes.
c.
I earn $500 and pay $50 in taxes; you earn $1,000 and pay $80 in taxes.
d.
I earn $500 and pay $50 in taxes; you earn $1,000 and pay $125 in taxes.
123. An income tax is proportional if
a.
the tax liability of high-income earners exceeds the tax liability of those with low incomes.
b.
the tax liability of high-income earners is less than the tax liability of those with low
incomes.
c.
high-income earners pay a higher percentage of their incomes in taxes than those with low
incomes.
d.
everyone pays the same percentage of their income in the form of income taxes.
124. A tax for which the average tax rate remains constant at all levels of income is defined as a
a.
regressive tax.
b.
proportional tax.
c.
neutral tax.
d.
progressive tax.
125. A proportional tax is defined as a tax for which the
a.
average tax rate rises as income increases.
b.
average tax rate falls as income increases.
c.
average tax rate remains constant at all levels of income.
d.
dollar tax liability of those with higher income is the same as the dollar tax liability of
those with lower income.
126. Which of the following examples illustrates a proportional income tax?
a.
I earn $5,000 and pay $500 in taxes; you earn $10,000 and pay $1,000 in taxes.
b.
I earn $5,000 and pay $500 in taxes; you earn $10,000 and pay $500 in taxes.
c.
I earn $5,000 and pay $500 in taxes; you earn $10,000 and pay $800 in taxes.
d.
I earn $5,000 and pay $500 in taxes; you earn $10,000 and pay $1,200 in taxes.
127. Use the table below to choose the correct answer.
Income
Tax
(dollars)
(dollars)
10,000
4,000
20,000
5,000
30,000
6,000
For the income range illustrated, the tax shown here is
a.
regressive.
b.
proportional.
c.
progressive.
d.
progressive up to $20,000 but regressive beyond that.
128. Use the table below to choose the correct answer.
Income
Tax
(dollars)
(dollars)
10,000
2,000
20,000
4,000
40,000
8,000
The tax schedule shown here is
a.
regressive.
b.
proportional.
c.
progressive.
d.
proportional up to $20,000 and regressive beyond that.
129. Use the table below to choose the correct answer.
Income
Tax
(dollars)
(dollars)
10,000
1,000
20,000
4,000
30,000
9,000
For the income range illustrated, the tax shown here is
a.
regressive.
b.
proportional.
c.
progressive.
d.
regressive up to $20,000 but progressive beyond that.
130. The Laffer curve illustrates the relationship between
a.
supply and demand.
b.
tax rates and tax revenues.
c.
opportunity cost and inflation.
d.
tax liability and taxable income.
131. The Laffer curve indicates that
a.
when tax rates are low, a decrease in tax rates is likely to increase tax revenues.
b.
when tax rates are high, an increase in tax rates is likely to a decrease in tax revenues.
c.
tax revenue will always increase when tax rates are increased.
d.
tax revenue will always decrease when tax rates are lowered.
132. According to the Laffer curve,
a.
an increase in tax rates will always cause tax revenues to increase.
b.
when marginal tax rates are high, an increase in tax rates is likely to cause tax revenues to
increase.
c.
when marginal taxes are low, an increase in tax rates will probably cause tax revenues to
decline.
d.
when marginal tax rates are high, a reduction in tax rates may increase tax revenue.
133. Suppose the federal excise tax rate on gasoline is increased by 50 percent. Which of the following is
the most likely impact on the tax revenue derived from the federal gas tax?
a.
Tax revenues will increase by less than 50 percent.
b.
Tax revenues will increase by 50 percent.
c.
Tax revenues will increase by more than 50 percent.
d.
The revenue from the gasoline tax will go to zero.
134. About 35,000 general aviation multiengine airplanes are licensed to operate in the United States. If an
additional $1,000-per-year tax was levied on each plane to raise general revenue, economic thinking
suggests the
a.
annual revenue from this tax would be less than $35,000,000.
b.
annual revenue from this tax would be $35,000,000.
c.
annual revenue from this tax would be more than $35,000,000.
d.
number of airplanes would increase dramatically.
135. Approximately 50,000 luxury boats (priced $100,000 or more) are currently produced each year.
Using the economic way of thinking, how much revenue would the government actually generate with
a $10,000 excise tax on luxury boats?
a.
$500 million
b.
less than $500 million
c.
more than $500 million
d.
approximately $5 billion
136. When the top marginal tax rates were lowered substantially during the 1980s, the inflation-adjusted
income tax revenue collected from the top 1 percent of all income earners
a.
declined sharply.
b.
remained approximately constant.
c.
increased substantially.
d.
did none of the above.
137. Data from the effects of the substantial tax rate reductions in the 1980s
a.
cast serious doubt on the Laffer curve as a guide for tax policy.
b.
are consistent with the principles illustrated in the Laffer curve.
c.
generally reject the idea that lower tax rates can lead to higher tax revenue.
d.
support an “inverted Laffer curve” in which reducing tax rates for those with high incomes
leads to lower tax revenue.
138. A payment the government makes to either the buyer or seller, usually on a per-unit basis, when a
good or service is purchased or sold is called a
a.
black market.
b.
interest rate.
c.
subsidy.
d.
tax.
139. A subsidy is defined as
a.
a payment that must be made to the government whenever a good or service is sold.
b.
the number of trades that are eliminated from a market when a tax is imposed.
c.
the difference between total revenue and total cost for a business firm.
d.
a payment to either the buyer or seller of a good or service, usually on a per-unit basis,
when a good or service is purchased.
140. In the supply and demand model, a subsidy granted to buyers is illustrated by
a.
a downward shift in the demand curve, by the per unit amount of the subsidy.
b.
an upward shift in the demand curve, by the per unit amount of the subsidy.
c.
a downward shift in the supply curve, by the per unit amount of the subsidy.
d.
an upward shift in the supply curve, by the per unit amount of the subsidy.
141. The benefit of a subsidy will go primarily to sellers when the
a.
demand for the product is highly inelastic and supply is relatively elastic.
b.
demand for the product is highly elastic and the supply is relatively inelastic.
c.
subsidy is legally (statutorily) granted to the seller of the product.
d.
subsidy is legally (statutorily) granted to the buyer of the product.
142. A $25 government subsidy paid directly to buyers of jeans will result in
a.
a downward shift in the demand curve for jeans by $25.
b.
an upward shift in the demand curve for jeans by $25.
c.
a downward shift in the supply curve for jeans by $25.
d.
an upward shift in the supply curve for jeans by $25.
143. In the supply and demand model, a subsidy granted to sellers is illustrated by
a.
a downward shift in the demand curve, by the per unit amount of the subsidy.
b.
an upward shift in the demand curve, by the per unit amount of the subsidy.
c.
a downward shift in the supply curve, by the per unit amount of the subsidy.
d.
an upward shift in the supply curve, by the per unit amount of the subsidy.
144. A $10 per unit government subsidy paid directly to sellers of heaters will result in
a.
a downward shift in the demand curve for heaters by $10.
b.
an upward shift in the demand curve for heaters by $10.
c.
a downward shift in the supply curve for heaters by $10.
d.
an upward shift in the supply curve for heaters by $10.
145. When a government subsidy is granted to the buyers of a product, sellers can end up capturing some of
the benefit because
a.
the market price of the product will fall in response to the subsidy.
b.
the market price of the product will rise in response to the subsidy.
c.
the market price of the product will not change in response to the subsidy.
d.
buyers will reduce their demand for the product.
146. When a government subsidy is granted to the sellers of a product, buyers can end up capturing some of
the benefit because
a.
the market price of the product will fall in response to the subsidy.
b.
the market price of the product will rise in response to the subsidy.
c.
the market price of the product will not change in response to the subsidy.
d.
producers will reduce the supply of the product.
147. The actual benefit of a government subsidy is determined primarily by
a.
the elasticities of demand and supply.
b.
the legal (or statutory) assignment of the subsidy
c.
the number of exchanges that are made possible as a result of the subsidy.
d.
whether the subsidy is paid by cash or check.
148. If a $50 subsidy is legally (statutorily) granted to the sellers of weed eaters and as a result the price of
weed eaters to consumers falls by $30, the actual benefit of the subsidy
a.
goes completely to buyers of weed eaters.
b.
goes completely to sellers of weed eaters.
c.
is $30 to buyers and $20 to sellers.
d.
is $20 to buyers and $30 to sellers.
149. If the federal government began granting a subsidy of 10 cents per apple to apple growers and as a
result the price of apples to consumers falls by 8 cents,
a.
the actual benefit of this subsidy goes mostly to consumers.
b.
the actual benefit of this subsidy goes mostly to producers.
c.
the actual benefit of this subsidy would be shared equally by producers and consumers.
d.
nobody would benefit from the subsidy.
150. A subsidy on a product will generate more actual benefit for consumers (and less for producers) when
a.
the supply of the product is relatively inelastic.
b.
the supply of the product is relatively elastic.
c.
the demand for the product is relatively elastic.
d.
either a or c is true.
151. A subsidy on a product will generate more actual benefit for producers (and less for consumers) when
a.
the supply of the product is relatively inelastic.
b.
the supply of the product is relatively elastic.
c.
the demand for the product is relatively inelastic.
d.
either b or c is true
152. The more elastic the supply of a product, the more likely that the actual benefit of a subsidy granted of
the product will
a.
go to sellers.
b.
go to buyers.
c.
go equally to both buyers and sellers.
d.
do none of the above.
153. The more inelastic the demand for a product, the more likely that the actual benefit of a subsidy
granted on the product will
a.
go to sellers.
b.
go to buyers.
c.
go equally to both buyers and sellers.
d.
do none of the above.
154. Which of the following generalizations about the benefit of a subsidy is correct?
a.
The more inelastic the supply of a product, the larger the portion of the benefit will be to
buyers.
b.
The more inelastic the demand for a product, the larger the portion of the benefit will be to
buyers.
c.
The more elastic the supply of a product, the smaller the portion of the benefit will be to
buyers.
d.
The distribution of the benefit of a subsidy is not affected by the elasticity of the supply
and demand for the product for which the subsidy is granted.
155. The benefit of a subsidy will go primarily to buyers when the
a.
demand for the product is highly inelastic and supply is relatively elastic.
b.
demand for the product is highly elastic and the supply is relatively inelastic.
c.
subsidy is legally (statutorily) granted to the seller of the product.
d.
subsidy is legally (statutorily) granted to the buyer of the product.
156. Suppose that the federal government grants a 50 cent per gallon subsidy to buyers of gasoline and that
the demand for gasoline is highly inelastic while the supply is highly elastic. Under these
circumstances, the benefit of the subsidy
a.
will go primarily to producers.
b.
will go primarily to consumers.
c.
will be split equally between consumers and producers.
d.
cannot be determined because the actual benefit of a subsidy is not influenced by the
elasticities of supply and demand.
157. When government gives a subsidy to buyers of good X, the benefits of the subsidy flow to
a.
the buyers of good X only.
b.
the sellers of good X only.
c.
the buyers and sellers of good x equally.
d.
both the buyers and sellers of good x, and the distribution of the benefits will be dependent
on the elasticity of demand and the elasticity of supply.
158. If the supply of health care services is highly inelastic, programs that subsidize the cost of purchasing
medical services will
a.
lead to higher prices for medical services.
b.
lead to lower prices for medical services.
c.
not affect the price of medical services.
d.
help the buyers of medical services more than the sellers of those services.
Figure 4-1