Chapter 16 Efficient and Equitable Taxation
Multiple Choice
1. A natural monopoly has
A) many producers of the same product.
B) easy access to the market.
C) a single firm providing the industry’s output.
D) one buyer of output.
Ans: c
2. Horizontal equity incorporates the notion that
A) those earning higher incomes should pay more in taxes.
B) those earning equal incomes should pay the same in taxes.
C) taxes paid should be unassociated with income levels.
D) there should be no excess burden created by a tax.
Ans: b
3. Tax evasion is
A) an illegal act.
B) prevalent in the United States.
C) failing to pay legally due taxes.
D) all of the above.
Ans: d
4. The Ramsey Rule implies that goods be in consumption.
A) unrelated
B) equal
C) opposite
D) moderate
Ans: a
5. Tax avoidance is
A) illegal in the United States.
B) changing your behavior so as to reduce your tax liability.
C) the same as tax evasion.
D) a minor source of concern in the United States.
Ans: b
6. When the minimum marginal penalty for tax evasion is greater than the maximum marginal tax rate,
theory suggests that tax evasion will be
A) greater than 1.
, B) .
C) 0.
D) 100.
Ans: c
7. Vertical equity incorporates the notion that
A) those earning higher incomes should pay more in taxes.
B) those earning equal incomes should pay the same in taxes.
C) taxes paid should be unassociated with income levels.
D) there should be no excess burden created by a tax.
Ans: a
8. Average cost pricing is found
A) when supply equals demand.
B) when AC = MR.
C) when P = 0.
D) where AC = AR.
Ans: d
9. “For goods that are unrelated in consumption, efficiency requires that tax rates be inversely
proportional to elasticities.” This is the definition of
A) the benefits-received principle.
B) the Ramsey Rule.
C) the second best principle.
D) the inverse elasticity rule.
Ans: d
10. Deciding to engage in tax evasion requires consideration of all of the following, except the
A) probability of being caught.
B) probability of conviction if caught.
C) probability of winning extra money.
D) costs of defending oneself.
Ans: c
11. A linear income tax schedule is known as
A) a flat income tax.
B) a regressive tax.
C) a Haig-Simons tax.
D) a user fee.
Ans: a
12. Optimal commodity taxation would
A) put a tax on leisure time, which is currently untaxed.
B) have the smallest amount of excess burden possible for a given amount of tax revenue.
C) optimize tax rates on the wealthiest Americans.
Multiple Choice
1. A natural monopoly has
A) many producers of the same product.
B) easy access to the market.
C) a single firm providing the industry’s output.
D) one buyer of output.
Ans: c
2. Horizontal equity incorporates the notion that
A) those earning higher incomes should pay more in taxes.
B) those earning equal incomes should pay the same in taxes.
C) taxes paid should be unassociated with income levels.
D) there should be no excess burden created by a tax.
Ans: b
3. Tax evasion is
A) an illegal act.
B) prevalent in the United States.
C) failing to pay legally due taxes.
D) all of the above.
Ans: d
4. The Ramsey Rule implies that goods be in consumption.
A) unrelated
B) equal
C) opposite
D) moderate
Ans: a
5. Tax avoidance is
A) illegal in the United States.
B) changing your behavior so as to reduce your tax liability.
C) the same as tax evasion.
D) a minor source of concern in the United States.
Ans: b
6. When the minimum marginal penalty for tax evasion is greater than the maximum marginal tax rate,
theory suggests that tax evasion will be
A) greater than 1.
, B) .
C) 0.
D) 100.
Ans: c
7. Vertical equity incorporates the notion that
A) those earning higher incomes should pay more in taxes.
B) those earning equal incomes should pay the same in taxes.
C) taxes paid should be unassociated with income levels.
D) there should be no excess burden created by a tax.
Ans: a
8. Average cost pricing is found
A) when supply equals demand.
B) when AC = MR.
C) when P = 0.
D) where AC = AR.
Ans: d
9. “For goods that are unrelated in consumption, efficiency requires that tax rates be inversely
proportional to elasticities.” This is the definition of
A) the benefits-received principle.
B) the Ramsey Rule.
C) the second best principle.
D) the inverse elasticity rule.
Ans: d
10. Deciding to engage in tax evasion requires consideration of all of the following, except the
A) probability of being caught.
B) probability of conviction if caught.
C) probability of winning extra money.
D) costs of defending oneself.
Ans: c
11. A linear income tax schedule is known as
A) a flat income tax.
B) a regressive tax.
C) a Haig-Simons tax.
D) a user fee.
Ans: a
12. Optimal commodity taxation would
A) put a tax on leisure time, which is currently untaxed.
B) have the smallest amount of excess burden possible for a given amount of tax revenue.
C) optimize tax rates on the wealthiest Americans.
