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chapter:
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Taxes
Krugman/Wells
CHECK YOUR UNDERSTANDING
©2009  Worth Publishers
Check Your Understanding 7-1
Question 1
Consider the market for butter, shown in the accompanying
figure. The government imposes an excise tax of $.30 per
pound on butter.
1a) After the $.30 per pound tax, what is the price paid
by consumers post-tax?
1. $1.00
2. $0.90
3. $1.30
4. $1.20
1b) After the $.30 per pound tax, what is the price
received by producers post-tax?
1. $1.00
2. $0.90
3. $1.30
4. $1.20
1c) How many millions of pounds of butter are sold?
1. 12
2. 10
3. 9
4. 6
1d) How much of the incidence of the tax falls on the
consumer?
1. $0.30
2. $0.20
3. $0.10
4. 0
1e) How much of the incidence of the tax falls on the
producer?
1. $0.30
2. $0.20
3. $0.10
4. 0
Check Your Understanding 7-1
Questions 2 - 5
2) The demand for economics textbooks is very inelastic, but the
supply is somewhat elastic. Consumers will bear most of the
burden of an excise tax on textbooks.
1.
2.
True
False
3) When a substitute for a good is readily available to consumers,
but it is difficult for producers to adjust the quantity of the good
produced, then the burden of a tax on the good falls more heavily
on producers.
1.
2.
True
False
4) The supply of bottled water is very inelastic, but the demand for
it is somewhat elastic. Consumers will bear most of the burden of
an excise tax on bottled water.
1.
2.
True
False
5) Other things equal, consumers would prefer to face a less elastic
supply curve for a good or service when an excise tax is imposed.
1.
2.
True
False
Check Your Understanding 7-2
Question 1*
Consider the market for butter, shown in the accompanying
figure. The government imposes an excise tax of $.30 per
pound on butter, raising the price to $1.20.
NEW
CHECK YOUR UNDERSTANDING
1a*) Consider the market for butter, shown in the accompanying
figure. The government imposes an excise tax of $.30 per
pound on butter, raising the price to $1.20 and decreasing quantity
to 9 million pounds.
How much revenue does the government receive from the tax?
1. $300,000
2. $2 million
3. $2.7 million
4. $3 million
NEW
CHECK YOUR UNDERSTANDING
1b*) Consider the market for butter, shown in the accompanying
figure. The government imposes an excise tax of $.30 per
pound on butter, raising the price to $1.20 and decreasing quantity
to 9 million pounds.
How much deadweight loss is caused by the tax?
1. $50,000
2. $100,000
3. $150,000
4. $300,000
NEW
CHECK YOUR UNDERSTANDING
Check Your Understanding 7-2
Question 1
The accompanying table shows five consumers’ willingness to
pay for one can of diet soda as well as five producers’ cost of
selling one can of diet soda. The government is considering a
tax of $0.40 per can of soda.
1a) Without the excise tax, what is the equilibrium price
and quantity of soda transacted?
1. $0.70, 1
2. $0.50, 2
3. $0.40, 4
4. $0.30, 5
1b) The excise tax raises the price paid by consumers to $0.60 and
lowers the price received by producers post-tax to $0.20. With the
tax, what is the quantity of soda transacted?
1. 1
2. 2
3. 4
4. 5
1c) How much consumer surplus is lost as a result of
the tax?
1. $1.00
2. $0.70
3. $0.50
4. $0.40
1d) How much producer surplus is lost as a result of the
tax?
1. $1.00
2. $0.70
3. $0.50
4. $0.40
1e) How much government revenue does the excise tax
create?
1. $1.00
2. $0.80
3. $0.50
4. $0.40
1f) What is the deadweight loss from the imposition of
this excise tax?
1. $0.80
2. $0.50
3. $0.40
4. $0.20
Check Your Understanding 7-2
Question 2
2a) You would expect a tax on gasoline to have a
________ deadweight loss.
1.
2.
Small
Large
2b) You would expect a tax on milk chocolate bars to have
a ________ deadweight loss.
1.
2.
Small
Large
Check Your Understanding 7-3
Question 1
Assess each of the following taxes in terms of the
benefits principle versus the ability-to-pay principle.
Assess each of the following taxes in terms of the benefits principle versus
the ability-to-pay principle.
1a) A federal tax of $500 for each new car purchased that finances
highway safety programs.
1.
2.
3.
4.
Performs well according to both the benefits
principle and the ability-to-pay principle.
Performs well according to the benefits principle,
but not the ability-to-pay principle.
Performs well according to the ability-to-pay
principle but not the benefits principle.
Does not perform well according to either the
benefits or ability-to-pay principle.
Assess each of the following taxes in terms of the benefits principle
versus the ability-to-pay principle.
1b) A local tax of 20% on hotel rooms that finances local government
expenditures.
1.
2.
3.
4.
Performs well according to both the benefits
principle and the ability-to-pay principle.
Performs well according to the benefits principle,
but not the ability-to-pay principle.
Performs well according to the ability-to-pay
principle but not the benefits principle.
Does not perform well according to either the
benefits or ability-to-pay principle.
Assess each of the following taxes in terms of the benefits principle
versus the ability-to-pay principle.
1c) A local tax of 1% of the assessed value of homes that finances
local schools.
1.
2.
3.
4.
Performs well according to both the benefits principle
and the ability-to-pay principle.
Performs well according to the benefits principle, but
not the ability-to-pay principle.
Performs well according to the ability-to-pay principle
but not the benefits principle.
Does not perform well according to either the benefits
or ability-to-pay principle.
Assess each of the following taxes in terms of the benefits principle
versus the ability-to-pay principle.
1d) A 1% sales tax on food that pays for government food safety
regulation and inspection programs.
1.
2.
3.
4.
Performs well according to both the benefits
principle and the ability-to-pay principle.
Performs well according to the benefits principle,
but not the ability-to-pay principle.
Performs well according to the ability-to-pay
principle but not the benefits principle.
Does not perform well according to either the
benefits or ability-to-pay principle.
Check Your Understanding 7-4
Question 1
An income tax taxes 1% of the first $10,000 of income and
2% on all income above $10,000.
An income tax taxes 1% of the first $10,000 of income and
2% on all income above $10,000.
1a) What percentage of their income does a person with $5000 in
income pay?
1. 5%
2. 4%
3. 2%
4. 1%
An income tax taxes 1% of the first $10,000 of income and
2% on all income above $10,000.
1b) What percentage of their income does a person with $20,000 in
income pay?
1. 3%
2. 2%
3. 1.5%
4. 1%
An income tax taxes 1% of the first $10,000 of income and
2% on all income above $10,000.
1c) Is this income tax proportional, progressive, or regressive?
1. proportional
2. progressive
3. regressive
Check Your Understanding 7-4
Questions 2 and 3
2) When comparing households at different income levels, economists find
that consumption spending grows more slowly than income. Assume that
when income grows by 50%, from $10,000 to $15,000, consumption grows
by 25%, from $8,000 to $10,000.
Compare the percent of income paid in taxes by a family with $15,000
in income to that paid by a family with $10,000 in income under a 1%
tax on consumption purchases. Is this tax a proportional, progressive,
or regressive tax?
1.
2.
3.
proportional
progressive
regressive
3a) Payroll taxes do not affect a person’s incentive to take a job
because they are paid by employers.
1.
2.
True
False
3b) A lump-sum tax is a proportional tax because it is the same
amount for each person.
1.
2.
True
False