Chapter 17 QUIZ ANSWERS

Public Choice Theory and the Economics of Taxation

1. Suppose that Steve and Susie each perceive $200 of marginal benefit from a proposed new park, whereas Elizabeth perceives $800. If the proposed tax levied on each for the park would $300, a majority vote will: 
   A. defeat this project and resources will be underallocated to it.
   B. pass this project and resources will be efficiently allocated.
   C. pass the this project and resources will be underallocated to it.
   D. pass this project and resources will be overallocated to it.

Answer the next question on the basis of this table showing the marginal benefit that a particular public project will provide to each of the three members of a community. No vote trading is allowed.

2. If the tax cost of this proposed project is $600 per person, a majority vote will: 
   A. defeat this project and resources will be underallocated to it.
   B. defeat this project and resources will be allocated efficiently.
   C. pass this project and resources will be overallocated to it.
   D. defeat this project and resources will be overallocated to it.

3. Refer to the above table. The inconsistency illustrated by the table is that, while a majority of voters prefer the: 
   A. highway to the lighthouse and the submarine to the highway, they also prefer the lighthouse to the submarine.
   B. lighthouse to the highway and the lighthouse to the submarine, they also prefer the submarine to the highway.
   C. highway to the lighthouse and the submarine to the lighthouse, they also prefer the submarine to the highway.
   D. lighthouse to the submarine and the highway to the submarine, they also prefer the highway to the lighthouse.

4. The median-voter model implies that: 
   A. political voting will be as economically efficient as "dollar voting" in competitive markets.
   B. all voters have about the same preferences for various public goods and services.
   C. many people will be dissatisfied with the size of government in the economy.
   D. with majority voting there can never be a consistent ordering of public good preferences.

5. The median-voter model implies that a political office seeker will: 
   A. adopt more extreme views when seeking his or her party's nomination than when running against the other party's opponent.
   B. adopt less extreme views when seeking his or her party's nomination than when running against the other party's opponent.
   C. favor extensive government spending because demand curves for public goods are added vertically rather than horizontally.
   D. favor the private resolution of externality problems rather than governmental intervention.

Answer the next question(s) on the basis of the following table that shows the total costs and total benefits facing a city of five different potential baseball stadiums of increasing size. All figures are in millions of dollars.

6. Refer to the above table. Suppose a five-person city council must decide via majority voting which of these stadiums to build. Also suppose that each of the stadium sizes has the support of one council member. According to the median voter model, the council will ultimately vote in favor of stadium: 
   A. A.
   B. B.
   C. C.
   D. D.
7. Refer to the above table. The marginal cost and marginal benefit of stadium B (relative to A) are: 
   A. $20 million and $50 million, respectively.
   B. $100 million and $200 million, respectively.
   C. $30 million and $50 million, respectively.
   D. $20 million and $60 million, respectively.
8. Public choice theorists hold that politicians will: 
   A. favor programs entailing immediate and clear-cut costs and vaguely defined or deferred benefits.
   B. follow policies leading to an optimal allocation of resources between public and private sectors.
   C. favor programs entailing immediate and clear-cut benefits and vaguely defined or deferred costs.
   D. objectively weigh the costs and benefits of various government programs and vote accordingly.
9. A special-interest issue is one whose passage yields: 
   A. large private benefits compared to external benefits.
   B. large external benefits compared to private benefits.
   C. small economic losses to a small number of people and large economic losses to a large number of people.
   D. large economic gains to a small number of people and small economic losses to a large number of people.
10. Suppose lawyers seek legislation to limit the use of computer software that enables people to use their personal computers to self-prepare their own wills, trusts, and other legal documents. This is an example of: 
    A. logrolling.
    B. the principal-agent problem.
    C. rent-seeking behavior.
    D. limited and bundled choices.
11. Using income as the tax base, which of the following best illustrates a regressive tax? 
    A. the Federal inheritance tax
    B. a 7 percent general sales tax
    C. the corporate income tax
    D. the personal income tax

Answer the next question(s) on the basis of the following five schedules, all of which represent income tax schedules for an economy. All figures are in billions of dollars.

12. Which of the above schedules represent(s) a progressive tax? 
    A. V only
    B. III and V
    C. II and III
    D. III only
13. The general sales tax is regressive because: 
    A. the incidence of the tax is on sellers rather than buyers.
    B. tax rates are constant and incomes are variable.
    C. lower income families save a smaller percentage of their incomes than do higher income families.
    D. tax rates decrease as consumer spending increases.

14. Refer to the above graph. Which of the lines in the above diagram represent(s) a progressive tax? 
    A. both A and B.
    B. D only.
    C. C only.
    D. B only.
15. Refer to the above graph. Which of the lines in the above diagram represent(s) a regressive tax? 
    A. both A and B.
    B. D only.
    C. C only.
    D. B only.
16. Assume that you pay $10,000 of tax on a taxable income of $50,000. If your taxable income were $150,000, your tax payment would be $25,000. This suggests the tax is: 
    A. progressive.
    B. proportional.
    C. regressive.
    D. discriminatory.

Answer the next question(s) on the basis of the following demand and supply data for a competitive market:

17. Refer to the above data. If government levies a per unit excise tax of $1 on suppliers of this product, equilibrium price and quantity will be: 
    A. $9 and 3,000.
    B. $7.50 and 2,250.
    C. $8.50 and 2,250.
    D. $7 and 3,000.
18. Refer to the above data. If government has instead provided a per unit subsidy of $2 to suppliers of this product, equilibrium price and quantity would be: 
    A. $9 and 3,000.
    B. $7.50 and 2,250.
    C. $8.50 and 2,750.
    D. $7 and 3,000.
19. Assume the Environmental Protection Agency imposes an excise tax on polluting firms. In which of the following situations would we expect the additional costs to be borne most heavily by consumers? 
    A. demand is highly elastic and supply is highly inelastic
    B. demand and supply are both highly elastic
    C. demand and supply are both highly inelastic
    D. demand is highly inelastic and supply is highly elastic
20. If the demand for a product is perfectly elastic and supply is upsloping, a $1 excise tax per unit on suppliers will: 
    A. not raise price at all.
    B. lower price by $1.
    C. raise price by more than $1.
    D. raise price by $1.
21. Suppose that government imposes a specific excise tax on product X of $2 per unit and that the price elasticity of supply of X is unitary (coefficient = 1). If the incidence of the tax is such that the consumers of X pay $1.85 of the tax and the consumers pay $.15, we can conclude that the: 
    A. supply of X is highly inelastic.
    B. supply of X is highly elastic.
    C. demand for X is highly inelastic.
    D. demand for X is highly elastic.

22. In which of the above market situations will the largest portion of an excise tax of a specified amount per unit of output be borne by buyers? 
    A. 4
    B. 3
    C. 1
    D. 2
23. In which of the above market situations will the efficiency loss of an excise tax be the greatest? 
    A. 4
    B. 3
    C. 1
    D. 2
24. Assume the demand for automobile tires is highly inelastic and that the supply is highly elastic. The burden of a $2 excise tax on each tire will be: 
    A. borne by resource suppliers who provide the inputs for manufacturing tires.
    B. shared about equally by buyers and sellers of tires.
    C. borne primarily by buyers of tires.
    D. borne primarily by sellers of tires.
25. If the demand for a product is perfectly inelastic and the supply curve is upsloping, a $1 excise tax per unit of output will: 
    A. raise price by less than $1.
    B. raise price by more than $1.
    C. raise price by $1.
    D. lower price by $1.
26. If the demand for a product is perfectly inelastic, the incidence of an excise tax will be: 
    A. entirely on the buyer.
    B. mostly on the buyer.
    C. entirely on the seller.
    D. mostly on the seller.
27. Which of the following generalizations is correct? 
    A. the more elastic the supply of a product, the larger the portion of an excise tax that is borne by buyers
    B. the more elastic the demand for a product, the larger the portion of an excise tax that is borne by buyers
    C. the more inelastic the supply of a product, the larger the portion of an excise tax that is borne by buyers
    D. the more inelastic the demand for a product, the larger the portion of an excise tax that is borne by seller

28. Refer to the above diagram in which S is the before-tax supply curve and S_t is the supply curve after an excise tax is imposed. The total tax payment to government is shown by area(s): 
    A. A only.
    B. A + B + C + E + F.
    C. A + B + C.
    D. E + F.

29. Refer to the above diagram in which S is the before-tax supply curve and S_t is the supply curve after an excise tax is imposed. The total amount of the tax paid by consumers is shown by area(s): 
    A. A + B + F.
    B. A + B.
    C. A + B + C.
    D. E + F.
30. Refer to the above diagram in which S is the before-tax supply curve and S_t is the supply curve after an excise tax is imposed. The efficiency loss of the tax is shown by area(s): 
    A. A + B + C + E + F.
    B. A + B + C.
    C. A + B + F.
    D. E + F.