Economics: Multiple Choice Questions

Improved Essays
Register to read the introduction… If the compensated elasticity of supply of labor is zero, then a tax on labor earnings will have zero excess burden.
16. Lump-sum taxes do not prevent prices from equaling the marginal social cost and benefit of any goods and services.
17. Lump-sum taxes can vary in amount based on income level.
18. A lump-sum tax can distort prices and affect consumption behavior.
Multiple Choice Questions
1. A lump-sum tax:
a. distorts market prices so that they do not simultaneously equal MSB and MSC.
b. can result in price changes but does not prevent prices from simultaneously being equal to MSB and MSC.
c. results in substitution effects that change prices.
d. results in both substitution effects and income effects that change prices.
2. The current price of compact discs, which are traded in perfectly competitive markets, is $10. A $1 per unit tax is levied on the discs. Annual record sales decline from five million to four million as a result of the tax. Assuming that the income effect of the tax-induced price change is negligible, the excess burden of the tax will be:
a. $500,000 per year.
b. $1 million per year.
c. $2 million per year.
d. $2.5 million per
…show more content…
be paid entirely by landlords.
d. have zero excess burden.
e. both (c) and (d)
4. Currently, a 10-cent per gallon tax is levied on gasoline consumption. The tax is increased to 20 cents per gallon. The excess burden of the tax will:
a. remain the same.
b. double.
c. increase four times.
d. decline.
5. The supply of new cars is perfectly elastic. A $400 per car tax is levied on buyers. As a result of the tax,
a. the price received by sellers will fall by $400.
b. the price paid by buyers, including the tax, will increase by $400.
c. the quantity of cars sold per year will be unchanged.
d. the excess burden of the tax will be zero.
e. both (c) and (d)
6. Other things being equal, the more inelastic the demand for a taxed good,
a. the greater the portion of the tax paid by sellers.
b. the greater the excess burden of the tax.
c. the greater the portion of the tax paid by buyers.
d. the less the portion of a tax on sellers that can be shifted to buyers.
7. The market supply of labor is perfectly inelastic. However, the income effect of tax-induced wage changes are believed to be substantial. Then it follows that a tax on labor income will:
a. have zero excess

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