Question 1

Not only do both wage subsidies and minimum wages increase wages, but:

Accepted Answer

A)  they also increase employment. 
B)  they also reduce employment. 
C)  subsidies increase employment, whereas minimum wages reduce it. 
D)  subsidies reduce employment, whereas minimum wages increase it. 
A)  they also increase employment. 
B)  they also reduce employment. 
C)  subsidies increase employment, whereas minimum wages reduce it. 
D)  subsidies reduce employment, whereas minimum wages increase it. C

Question 2

What do subsidies and commodity taxes have in common?

Accepted Answer

A)  In both cases, who the policy mainly affects depends on who is assigned the tax or subsidy. 
B)  Both policies create inefficient increases in trade. 
C)  Both policies have a greater impact on the side of the market with the more inelastic curve. 
D)  Both policies decrease deadweight loss. 
A)  In both cases, who the policy mainly affects depends on who is assigned the tax or subsidy. 
B)  Both policies create inefficient increases in trade. 
C)  Both policies have a greater impact on the side of the market with the more inelastic curve. 
D)  Both policies decrease deadweight loss. C

Question 3

Using demand and supply diagrams show the difference between a tax imposed on sellers and a tax imposed on buyers. In each diagram, identify the equilibrium price and quantity with no tax, equilibrium quantity with the tax, price paid by buyers, and price received by sellers.

Accepted Answer

Note in the following diagrams, that equilibrium prices begin at the same level and that prices paid by the buyers are the same as are prices received by the sellers. Similarly, Q_s with no tax is the same in both diagrams as is Q_s with taxes.

Question 4

Government subsidies to California cotton farmers:

Accepted Answer

A)  create deadweight losses because the billions of dollars of resources used to grow cotton in deserts could be put to higher-valued uses. 
B)  correct a market failure because cotton prices are too low to support cotton farmers. 
C)  raise prices to consumers and lower prices received by cotton farmers. 
D)  benefit California cotton buyers because they pay only a small fraction of the world price. 
A)  create deadweight losses because the billions of dollars of resources used to grow cotton in deserts could be put to higher-valued uses. 
B)  correct a market failure because cotton prices are too low to support cotton farmers. 
C)  raise prices to consumers and lower prices received by cotton farmers. 
D)  benefit California cotton buyers because they pay only a small fraction of the world price.

Question 5

A market is described by the equations Qd = 100 - P, and Qs = P. A tax of $10 is placed on the seller of the product such that he will receive less to take home than the original equilibrium price. Therefore, the new supply equation becomes Qs = (P - T). Does the seller pay the whole $10 of the tax burden? How much does the seller pay? How much does the buyer pay? Why do they split the burden in this way?

Accepted Answer

The original equilibrium is 100 – P = P.

Question 6

Which form of taxation hurts apple growers more: a $1 per bushel production tax or a $1 per bushel consumption tax?

Accepted Answer

A)  The consumption tax hurts growers more. 
B)  The production tax hurts growers more. 
C)  Each tax hurts the apple grower equally. 
D)  Neither tax hurts the grower. 
A)  The consumption tax hurts growers more. 
B)  The production tax hurts growers more. 
C)  Each tax hurts the apple grower equally. 
D)  Neither tax hurts the grower.

Question 7

Figure: Soda Market   How much consumer surplus is lost because of a 70¢ tax?

Accepted Answer

A)  $18,000,000 
B)  $60,000,000 
C)  $69,000,000 
D)  $78,000,000 
A)  $18,000,000 
B)  $60,000,000 
C)  $69,000,000 
D)  $78,000,000

Question 8

By law, workers pay half the Social Security tax and employers pay the other half. Is this a fair way to allocate the tax?

Accepted Answer

A)  No, workers should pay the whole tax. 
B)  No, employers should pay the whole tax. 
C)  Yes, the legal responsibility for the tax has nothing to do with who ultimately pays, so it is as good an allocation as any other. 
D)  Economics cannot answer such a question. 
A)  No, workers should pay the whole tax. 
B)  No, employers should pay the whole tax. 
C)  Yes, the legal responsibility for the tax has nothing to do with who ultimately pays, so it is as good an allocation as any other. 
D)  Economics cannot answer such a question.

Question 9

Use the following to answer questions:
Figure: Demand and Supply with Subsidy  
-(Figure: Supply and Demand with Subsidy) Refer to the figure. Suppose a subsidy allows sellers to receive their product at the price of $8 with a quantity of 400 units. What is the dollar amount of the subsidy per unit of the good?

Accepted Answer

A)  $1 
B)  $6 
C)  $2 
D)  $100 
A)  $1 
B)  $6 
C)  $2 
D)  $100

Question 10

If buyers pay $10 per unit and sellers receive $8.50 per unit, the tax is $1.50 per unit.

Accepted Answer

A) True 
 B)False

Question 11

Use the following to answer questions:
Figure: Tax on Buyers 2  
-(Figure: Tax on Buyers 2) In the diagram, the size of the tax is:

Accepted Answer

A)  $1.00. 
B)  $2.00. 
C)  $3.00. 
D)  $4.00. 
A)  $1.00. 
B)  $2.00. 
C)  $3.00. 
D)  $4.00.

Question 12

Why has the Earned Income Tax Credit (EITC) increased employment among single mothers?

Accepted Answer

A)  It provides a certain amount of tax relief for single men. 
B)  It provides a certain amount of tax relief for childless married couples. 
C)  It provides a certain amount of tax relief for families with children. 
D)  It provides a certain amount of tax relief for all low-income workers. 
A)  It provides a certain amount of tax relief for single men. 
B)  It provides a certain amount of tax relief for childless married couples. 
C)  It provides a certain amount of tax relief for families with children. 
D)  It provides a certain amount of tax relief for all low-income workers.

Question 13

Suppose the government requires firms to buy insurance against hair loss for their employees. Workers will end up paying for this coverage in the form of lower wages.

Accepted Answer

A) True 
 B)False

Question 14

Use the following to answer questions:
Figure: Tax on Sellers  
-(Figure: Tax on Sellers) If a $3 tax per unit purchased was placed on buyers instead of sellers, buyers would pay ________ and sellers would receive ________.

Accepted Answer

A)  $3; $6 
B)  $6; $3 
C)  $4; $6 
D)  $4; $3 
A)  $3; $6 
B)  $6; $3 
C)  $4; $6 
D)  $4; $3

Question 15

Which of the following statements is correct for a specific good or service?

Accepted Answer

A)  Whoever pays for a subsidy also pays the entire commodity tax on an item. 
B)  Whoever bears the burden of a tax also receives the benefit of the subsidy. 
C)  Whoever bears the burden of a tax also bears the cost of the subsidy. 
D)  Governments bear the burdens of both taxes and subsidies. 
A)  Whoever pays for a subsidy also pays the entire commodity tax on an item. 
B)  Whoever bears the burden of a tax also receives the benefit of the subsidy. 
C)  Whoever bears the burden of a tax also bears the cost of the subsidy. 
D)  Governments bear the burdens of both taxes and subsidies.

Question 16

A wage subsidy will:

Accepted Answer

A)  reduce the wages received by workers. 
B)  reduce the number of workers employed. 
C)  increase the number of workers employed. 
D)  increase the unemployment rate, especially among low-skilled workers. 
A)  reduce the wages received by workers. 
B)  reduce the number of workers employed. 
C)  increase the number of workers employed. 
D)  increase the unemployment rate, especially among low-skilled workers.

Question 17

Figure: Two Demand Curves   In this figure, the benefits of a subsidy will be greater for sellers facing demand curve ______, the ______ demand.

Accepted Answer

A)  D2; more elastic 
B)  D2; least elastic 
C)  D1; more elastic 
D)  D1; least elastic 
A)  D2; more elastic 
B)  D2; least elastic 
C)  D1; more elastic 
D)  D1; least elastic

Question 18

The government can choose between taxing buyers of grapes at $1.00 per pound or taxing the sellers of grapes at $1.00 per pound. Which of the following statements is TRUE?
I. The choice most beneficial to buyers is placing the $1.00 tax on sellers.
II. The choice most beneficial to sellers is placing the $1.00 tax on buyers.
III. Either choice will have the same effect on both buyers and sellers.

Accepted Answer

A)  I and II only 
B)  III only 
C)  I only 
D)  II only 
A)  I and II only 
B)  III only 
C)  I only 
D)  II only

Question 19

If the demand curve for a good is perfectly inelastic, any commodity tax that is imposed on that market will be entirely paid by the consumer.

Accepted Answer

A) True 
 B)False

Question 20

Figure: Tax on Consumers of Gadgets   According to the figure, what is the amount of the tax that has been imposed on gadgets?

Accepted Answer

A)  $ 4 
B)  $ 2 
C)  $ 8 
D)  $ 12 
A)  $ 4 
B)  $ 2 
C)  $ 8 
D)  $ 12

Exam 6: Taxes and Subsidies

Not only do both wage subsidies and minimum wages increase wages, but:

What do subsidies and commodity taxes have in common?

Using demand and supply diagrams show the difference between a tax imposed on sellers and a tax imposed on buyers. In each diagram, identify the equilibrium price and quantity with no tax, equilibrium quantity with the tax, price paid by buyers, and price received by sellers.

Government subsidies to California cotton farmers:

Which form of taxation hurts apple growers more: a $1 per bushel production tax or a $1 per bushel consumption tax?

Figure: Soda Market How much consumer surplus is lost because of a 70¢ tax?

By law, workers pay half the Social Security tax and employers pay the other half. Is this a fair way to allocate the tax?

If buyers pay $10 per unit and sellers receive $8.50 per unit, the tax is $1.50 per unit.

Use the following to answer questions: Figure: Tax on Buyers 2 -(Figure: Tax on Buyers 2) In the diagram, the size of the tax is:

Why has the Earned Income Tax Credit (EITC) increased employment among single mothers?

Suppose the government requires firms to buy insurance against hair loss for their employees. Workers will end up paying for this coverage in the form of lower wages.

Use the following to answer questions: Figure: Tax on Sellers -(Figure: Tax on Sellers) If a $3 tax per unit purchased was placed on buyers instead of sellers, buyers would pay ________ and sellers would receive ________.

Which of the following statements is correct for a specific good or service?

A wage subsidy will:

Figure: Two Demand Curves In this figure, the benefits of a subsidy will be greater for sellers facing demand curve ______, the ______ demand.

If the demand curve for a good is perfectly inelastic, any commodity tax that is imposed on that market will be entirely paid by the consumer.

Figure: Tax on Consumers of Gadgets According to the figure, what is the amount of the tax that has been imposed on gadgets?

The Big Ideas

The Power of Trade and Comparative

Supply and Demand

Equilibrium

Elasticity and Its Applications

The Price System

Price Ceilings and Floors

International Trade

Externalities- When the Price Is Not Right

Costs and Profit Maximization Under Competition

Competition and the Invisible Hand

Monopoly

Price Discrimination

Oligopoly and Game Theory

Competing for Monopoly

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Managing Incentives

Stock Markets and Personal Finance

Price Discrimination

Consumer Choice

Filters

Use the following to answer questions: Figure: Tax on Sellers -(Figure: Tax on Sellers) If a $3 tax per unit purchased was placed on buyers instead of sellers, buyers would pay and sellers would receive .

Figure: Two Demand Curves In this figure, the benefits of a subsidy will be greater for sellers facing demand curve , the demand.