Chapter 15
Taxation and Efficiency
Multiple Choice
1. 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.
Ans: a
2. Equivalent variation means
A) finding an equivalent change in income that puts a person on the same utility as a change in price
would.
B) finding equal tax rates that insure quantity demanded does not change.
C) equalizing excess burden across all markets.
D) moving the same distance in either direction from a starting point on an indifference curve.
Ans: a
3. The compensated demand curve
A) shows how the quantity demanded changes when the price changes.
B) shows how income is compensated, so that the individual’s commodity bundle stays on the same
indifference curve.
C) is sometimes referred to as the Hicksian demand curve.
D) is all of the above.
Ans: d
4. The slope of the production possibilities curve is the
A) marginal rate of substitution.
B) contract curve.
C) offer curve.
D) Engel curve.
E) marginal rate of transformation.
Ans: e
5. The Double Dividend Effect requires
A) double credit on airline miles.
B) two different taxes.
C) no taxes on stock dividends.
D) Pigouvian taxes.
Ans: d
, 6. 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.
Ans: a
7. Points on the same utility curve are
A) points where the person is indifferent between bundles on the line.
B) points where utility is maximized.
C) never possible.
D) known as “points of light.”
Ans: a
8. The tax interaction effect is the in excess burden in the labor market stemming from the
in real wages caused by a Pigouvian tax.
A) increase; increase
B) reduce; reduction
C) increase; reduction
D) reduction; increase
Ans: c
9. A tax that causes the price that producers receive for a commodity to deviate from the buyer’s price is
A) a unit tax.
B) a compensated tax.
C) an income tax.
D) a price-distorting tax.
Ans: d
10. Which of the following would be an example of a lump-sum tax?
A) a compensated tax
B) a retail sales tax
C) a head tax
D) an admission fee
Ans: c
11. Which of the following is a unit excise tax?
A) a tax of 15%
B) an admissions fee of $5.00 on each ticket purchased
C) an ad valorem tax of $3.00
D) an income tax of $3.00
Ans: b
12. The economic incidence of a unit tax is
A) generally borne by the buyers.
Taxation and Efficiency
Multiple Choice
1. 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.
Ans: a
2. Equivalent variation means
A) finding an equivalent change in income that puts a person on the same utility as a change in price
would.
B) finding equal tax rates that insure quantity demanded does not change.
C) equalizing excess burden across all markets.
D) moving the same distance in either direction from a starting point on an indifference curve.
Ans: a
3. The compensated demand curve
A) shows how the quantity demanded changes when the price changes.
B) shows how income is compensated, so that the individual’s commodity bundle stays on the same
indifference curve.
C) is sometimes referred to as the Hicksian demand curve.
D) is all of the above.
Ans: d
4. The slope of the production possibilities curve is the
A) marginal rate of substitution.
B) contract curve.
C) offer curve.
D) Engel curve.
E) marginal rate of transformation.
Ans: e
5. The Double Dividend Effect requires
A) double credit on airline miles.
B) two different taxes.
C) no taxes on stock dividends.
D) Pigouvian taxes.
Ans: d
, 6. 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.
Ans: a
7. Points on the same utility curve are
A) points where the person is indifferent between bundles on the line.
B) points where utility is maximized.
C) never possible.
D) known as “points of light.”
Ans: a
8. The tax interaction effect is the in excess burden in the labor market stemming from the
in real wages caused by a Pigouvian tax.
A) increase; increase
B) reduce; reduction
C) increase; reduction
D) reduction; increase
Ans: c
9. A tax that causes the price that producers receive for a commodity to deviate from the buyer’s price is
A) a unit tax.
B) a compensated tax.
C) an income tax.
D) a price-distorting tax.
Ans: d
10. Which of the following would be an example of a lump-sum tax?
A) a compensated tax
B) a retail sales tax
C) a head tax
D) an admission fee
Ans: c
11. Which of the following is a unit excise tax?
A) a tax of 15%
B) an admissions fee of $5.00 on each ticket purchased
C) an ad valorem tax of $3.00
D) an income tax of $3.00
Ans: b
12. The economic incidence of a unit tax is
A) generally borne by the buyers.
