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Exam 15: Taxation and Efficiency

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Question 21

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An income effect

A) is measured as the change in prices over time.
B) is not possible when people are unemployed.
C) requires interest rates to remain constant.
D) is the change in the quantity demand,due to the fact that real income changes when prices change.

E) All of the above
F) None of the above

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Question 22

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The marginal rate of substitution is

A) the slope of the utility curve.
B) the slope of the contract curve.
C) the slope of the utility possibilities curve.
D) none of the above.

E) None of the above
F) B) and C)

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Question 23

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The compensated demand curve

Taxes that create an excess burden are bad.

Which of the following would be an example of a lump-sum tax?

A lump sum tax can create an excess burden.

Equivalent variation is a method employed to measure excess burden.Comment on why a method such as compensating variation would not be appropriate for this analysis.

The slope of the production possibilities curve is the

Suppose that demand is perfectly inelastic.Supply is normal and upward sloping.What is the economic incidence of a unit tax placed on suppliers? Illustrate this with an appropriate diagram.

Suppose the inverse demand curve for good A is given by the equation P_A = 10 - Q_A/10,and the supply curve is perfectly elastic (horizontal)at $1.Good A is presently taxed at $2 per unit.Good B (which is independent of good A)has an inverse demand curve,P_B = 5 - Q_B/20,and is also perfectly elastic at $1.Good B is untaxed. (A)How much tax revenue is collected and what is the excess burden of the $2 tax on A? (B)How much revenue is collected if the tax on good A is reduced to $1 per unit and good B is taxed at $1 per unit? (C)What is the total excess burden of taxing both goods at $1 per unit? (D)Which tax system is preferable from the point of view of economic efficiency?

The VMP is the Value of Marginal Product.

A tax that causes the price that producers receive for a commodity to deviate from the buyer's price is

When a single tax is imposed,the excess burden is proportional to the compensated elasticity of demand and to the square of the tax rate.

The economic incidence of a unit tax is