Cal Poly Pomona, EC Bruce Brown Midterm II, February 22, 2001 (please clearly print your family name with all capital letters)

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1 Cal Poly Pomona, EC Bruce Brown NAME Midterm II, February 22, 2001 (please clearly print your family name with all capital letters) - Mark your answers on this exam (only this exam will be returned, not your scantron forms) - You may use an ordinary language dictionary (not electronic or economics dictionary). Use of a calculator is also allowed, but can not be shared by students. You may leave when finished. - Hand in both this exam and your scantron form when you are done. - Clearly fill in the bubble on your scantron form which corresponds to the best answer Use the following system of income tax for the following 3 problems: Income (in thousands of $) Marginal Tax Rate (MTR) % % % 1) What is the tax liability (in dollars) of someone earning $50 thousand per year? a) 15 thousand $ b) 12 thousand $ c) 9 thousand $ d) 8 thousand $ 2) What is the average tax rate (ATR) for this person? a) 40% b) 30% c) 32% d) 26% 3) If a different individual who was earning $20,000 initially earns an additional $1000 the additional tax liability will be: a) $ 600 b) $ 400 c) $ 300 d) $ 260 4) By definition, Pure Public Goods: a) are produced by the government. b) are financed by government purchases. c) may be consumed by more than one person. d) are free to society. 5) Which of the following will result from rent controls that reduce rents below market equilibrium? a. The quality of existing apartments will deteriorate. b. The future supply of rental housing will decrease. c. Discrimination against minorities or those with characteristics that managers dislike (noisy young students?) will be more likely in the housing market. d. All of the above are correct. 6) Which of the following is NOT an efficiency-based reason for government intervention in a market? a. A lack of competition, or sellers with monopoly power. b. Income inequality (ignore the possibility that citizens consider equality a public good ) c. Markets for goods where it is not possible to exclude some people from consuming. d. Markets where external benefits or costs exist.

2 2 The graph below depicts the effect of a 10 cent per unit tax. Use it to answer the following six questions: Price Supply Demand How much tax revenue is collected by government? a. $9.00 b.$10.00 c.$11.00 d.$50.00 Quantity 8. By how much does consumer surplus shrink because of the tax? a. $2.70 b. $2.85 c. $3.00 d. $ By how much does producer surplus shrink because of the tax? a. $6.30 b. $6.65 c. $7.00 d. $ What is the Deadweight Loss (or excess burden:) of this tax? a. $0.50 b. $2.70 c. $6.30 d. $ Which of the following is true? a. Demand was more elastic than supply at the initial equilibrium. b. Demand was less elastic than supply at the initial equilibrium. c. The elasticity of demand was.03 and elasticity of supply was.07 d. Demand and Supply had the same elasticity at the initial equilibrium

3 3 12. The Deadweight Loss occurs because: a. Money is transferred from the consumers to the government b. Money is transferred from both the consumers and producers to the government c. The distortion in prices causes an inefficiently low quantity to be consumed d. The government will spend the tax revenue in a way that will create less social benefit than if spent by the private consumers and producers. 13) The Laffer curve indicates that: a. there is always an inverse relationship between tax revenues and tax rates. b. an increase in tax rates can sometimes lead to a decline in tax revenues. c. the government can sometimes correct for market failure. d. there is always a positive, direct, relationship between tax revenues and tax rates. Use the table below to answer the following 3 questions. Units of Output Total Fixed Cost ($) Total Variable Cost ($) ) Given the above data, what is the average total cost (ATC) when output is four units? a. $1100 b. $1200 c. $1250 d. $ ) What is the marginal cost (MC) of increasing output from 2 to 3 units? a. $4400 b. $1200 c. $1000 d. $800 16) What is the total cost of producing 5 units of output? a. $ 600 b. $ 5600 c. $ 6200 d. $ ) Suppose the federal excise tax on gasoline increases 50 percent. Which of the following is the most likely impact on the tax revenue derived from the federal gasoline tax? (assume demand is relatively, but not perfectly, inelastic) a. Tax revenues will fall. b. Tax revenues will increase but by less than 50 percent. c. Tax revenues will increase by 50 percent. d. Tax revenues will increase by more than 50 percent.

4 4 18) If a tax is progressive, by definition, those with a higher income pay a: a) higher marginal tax rate b) higher average tax rate. c) smaller amount of money in tax. d) lower average tax rate e) lower marginal tax rate 19) Use the table below to choose the correct answer. Income ($) Tax ($) 5, ,000 1,500 15,000 2,100 20,000 2,600 For the income range illustrated, the tax shown here is: a. progressive. b. proportional. c. regressive. d. progressive up to $6000 but regressive beyond that income level 20) A good example of a good which creates positive consumption externalities is: a. a drivers training class. b. an immunization against infectious diseases. c. painting the exterior walls of a house. d. all of the above 21. The benefits principle of taxation can be used to argue that wealthy citizens should pay higher taxes than poorer ones on the basis that: a. police services are more frequently used in poor neighborhoods. b. the wealthy benefit more from services provided by government than the poor. c. the poor are more active in political processes. d. there is more crime in rich neighborhoods than poor neighborhoods. 22. Vertical equity states that taxpayers with a greater ability to pay taxes should a. contribute a decreasing proportion of each increment in income to taxes. b. contribute a larger amount. c. be less subject to administrative burdens of a tax. d. be less subject to tax distortions that lead to deadweight losses. 23. The U.S. government has typically financed its budget deficit by a. borrowing, through issuing bonds. b. borrowing, through issuing ownership shares or stocks. c. selling profitable government enterprises. d. selling government services to the public. 24. State and local governments a. are funded entirely by their own tax base. b. receive the majority of their tax revenues from corporate income tax. c. are generally not responsible for collecting sales tax. d. receive some of their funds from the federal government.

5 5 25. The biggest single expenditure for state and local governments is a. education. b. transportation. c. Social Security. d. unemployment compensation. 26. Uncongested, non-toll roads are a good example of a a. public good. b. private good. c. common resource. d. good produced by a natural monopoly. 27. Road tolls used to reduce traffic can be desirable because (i) they charge people based on consumption. (ii) they can help bring usage closer to its optimal level. (iii) rates can differ according to the time of day. (iv) the administrative costs are virtually nonexistent. a. (i) and (ii) b. (ii) and (iii) c. (ii),(iii) and (iv) d. (i), (ii), and (iii) 28. If the supply of land is fixed, a tax on land would be paid a. entirely by the landowners. b. entirely by the renters or users of the land. c. partly by landowners and partly by land users. d. only by workers. 29. A lighthouse is typically considered a good example of a public good because a. the owner of the lighthouse is able to exclude beneficiaries from enjoying the lighthouse. b. there is rarely another lighthouse nearby to provide competition. c. a nearby port authority cannot avoid paying fees to the lighthouse owner. d. all passing ships are able to enjoy the benefits of the lighthouse without paying. 30. The Tragedy of the Commons occurs because a. a common resource is rival in consumption. b. a common resource is underutilized. c. crimes are committed in public places. d. common resources are subject to exclusionary rules. 31. Four friends decide to meet at a Chinese restaurant for dinner. They decide that each person will order an item off of the menu and they will share all dishes. When the final bill for the meal comes they decide they will split the cost evenly among each of the people at the table. When the food is delivered to the table, each person faces incentives similar to a. consumption of a common resource good. b. production of a public good. c. consumption of a natural monopoly good. d. production of a private good.

6 32. The fish in the ocean are an example of a. a common resource. b. a public good. c. a private good. d. none of the above A good is excludable if a. one person's use of the good diminishes another person's enjoyment of it. b. the government regulates its availability. c. it is not a normal good. d. people can be prevented from using it. 34. Private goods are a. excludable and nonrival. b. nonexcludable and rival. c. excludable and rival. d. nonexcludable and nonrival. 35. All remedies for externalities share the goal of a. moving the allocation of resources toward the market equilibrium (where Q market is produced) b. moving the allocation of resources toward the social optimum (where Q optimum is produced) c. increasing the allocation of resources. d. decreasing the allocation of resources. 36. According to the Coase theorem, private parties can solve the problem of externalities if a. the cost of bargaining is small. b. the initial distribution of rights favors the person being adversely affected by the externality. c. the number of parties involved is sufficiently large. d. All of the above are true. 37. Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth $500 to Dick and that Jane bears a cost of $700 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is that a. Jane pays Dick $ to get rid of the dog. b. Dick pays Jane $650 for her inconvenience. c. Jane pays Dick $650 to get rid of the dog. d. There is no private solution that would improve this situation. 38. Dioxin emission that results from the production of paper is a good example of a negative externality because a. self-interested paper firms are generally unaware of environmental regulation. b. there are fines for producing too much dioxin. c. without government involvement, self-interested paper producers will not consider the full cost of the dioxin pollution they create. d. externalities can only be identified with toxic emissions.

7 7 39. Which of the following statements about a well maintained yard best conveys the general nature of the externality? a. A maintained yard conveys a positive externality because it increases the home's market value. b. A maintained yard conveys a negative externality because it increases the property tax liability of the owner. c. A maintained yard conveys a negative externality because it makes other property owners in the neighborhood feel like their homes are less valuable. d. A maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood. 40. Since Ronald Reagan argued a reduction in tax rates would increase tax revenue by a small amount, he apparently believed that the labor supply curve was a. perfectly inelastic. b. perfectly elastic. c. relatively inelastic. d. relatively elastic.