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CHAPTER 19
1.1
[Tax rate (Total income – Non-taxable income) / Total income] x 100 = Average tax rate
(a) [0.20 (35,000 – 35,000) / 35,000] x 100 = 0
1.2 (a) Taxable income: 35,000 – 6,200 = $28,800
(b) Taxable income: 70,000 – 6,200 = $63,800
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Solutions to Problems 304
(c) Taxable income: 125,000 – 6,200 = $118,800
(d) Taxable income: 250,000 – 6,200 = $243,800
1.3 If viewed as a tax, the lottery would most likely be considered regressive. Data has shown that
1.4 The current federal income tax is a progressive tax. Tax rates increase as income increases, so
2.1 Taxes are ultimately paid by households. The corporate tax likely falls most heavily on owners of
2.2 (a) Disagree. The income and substitution effects work in opposite directions when net wages
(b) Disagree. Monopolies cannot pass any tax on profits on to consumers. The profit-maximizing
(c) Disagree. If the supply of labor is relatively elastic, the burden of a payroll tax falls largely on
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Solutions to Problems 305
2.3 If one thinks of the Social Security tax as payment for future entitlements, it would be correct to
list it as part of employee compensation. However, Congress could always change the law so that
2.4 (a) The per-unit payroll tax is the vertical distance between S0 and S1, which is $8.
2.5 (a) The equilibrium price is $8 and the equilibrium quantity is 2 units (the intersection of D and
(b) With the per-unit excise tax, the equilibrium price is $10, and the equilibrium quantity is 1
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Solutions to Problems 306
3.1 Disagree. Excess burdens come about because of distortions in behavior. If a good has a low
3.2 Use Figure 19.5 as a guide: The excess burden is the area of the triangle ABC. The area of a
3.3 Demand curve D1 is more elastic and therefore represents demand when consumers are relatively
4.1 (a) Disagree. Taxing for externalities does distort economic decisions, but in the case of a
(b) Agree. A distorting tax can improve economic welfare when other taxes are present that
(c) Disagree. An optimal system of excise taxes would impose the heaviest taxes on goods with
5.1 This will not lead to a voting paradox.When voting between ABC Bakery and Triple Threat, ABC
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Solutions to Problems 307
5.2 This will lead to a voting paradox. When voting between the new park and the new fire truck,
Floyd and Howard prefer the fire truck, so the fire truck will get the most votes. When voting
6.1 If the cost of one’s car is proportional to one’s income, then the tax would be proportional. If
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