Microeconomics An Intuitive Approach With Calculus 2nd Edition by Thomas Nechyba – Test Bank

$20.00

Pay And Download

 

Complete Test Bank With Answers

 

 

 

Sample Questions Posted Below

 

 

 

 

 

True / False

 

1. Homothetic tastes are always tastes over essential goods.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   Tastes for perfect substitutes are homothetic — but neither good is essential in that case.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

2. Tastes for perfect substitutes are both homothetic and quasilinear.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   The MRS for such tastes is the same everywhere — which implies it is the same along any ray from the origin (required for homotheticity) and along any vertical or horizontal ray (implying quasilinearity in both goods).
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

3. Tastes for perfect complements are both homothetic and quasilinear.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   They are not quasilinear.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

4. There are no quasilinear tastes that have elasticity of substitution equal to 1 everywhere.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   In order for tastes to have constant elasticity of substitution, they must be representable by a constant elasticity of substitution (CES) utility function. The CES utility function that has elasticity of substitution equal to 1 is the Cobb-Douglas function — which is homothetic and not quasilinear.
POINTS:   1
DIFFICULTY:   B-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

5. There are no quasilinear tastes that have constant elasticity of substitution.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   This is false — perfect substitutes are quasilinear (in both goods) and have constant elasticity of substitution equal to .
POINTS:   1
DIFFICULTY:   B-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

6. There is no elasticity of substitution that is inconsistent with tastes being homothetic.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   All CES utility functions represent homothetic tastes — and their elasticity of substitution can vary from 0 to .
POINTS:   1
DIFFICULTY:   B-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

7. Consider the utility function . If , the elasticity of substitution is equal to 1.
The elasticity of substitution for CES utility functions is .

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   The elasticity of substitution for CES utility functions is .
POINTS:   1
DIFFICULTY:   B-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

8. Consider the utility function . If , the elasticity of substitution is equal to .

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   The elasticity of substitution for CES utility functions is — thus the elasticity of substitution in this case is .
POINTS:   1
DIFFICULTY:   B-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

9. All homogeneous functions (of any degree) are homothetic but not all homothetic functions are homogeneous (of some degree).

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   All homothetic functions are homogeneous but not all homogeneous functions are homothetic.
POINTS:   1
DIFFICULTY:   B-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

10. If tastes are Cobb-Douglas, they can be represented by a utility function that is homogeneous of degree k where k can take on any positive value.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   The Cobb-Douglas utility function is homogeneous of degree . Since we can take a utility function to any power an retain the same underlying indifference curves, we can represent Cobb-Douglas indifference curves with a function that is homogeneous of any degree.
POINTS:   1
DIFFICULTY:   B-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

11. When two goods are perfect substitutes, averages are better than extremes, resulting a diminishing marginal rate of substitution.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   When two goods are perfect substitutes, averages are valued the same as extremes, resulting in a constant indifference curve, giving us constant rather than diminishing marginal rates of substitution.
POINTS:   1
DIFFICULTY:   A section material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   10/7/2015 1:00 PM
DATE MODIFIED:   10/7/2015 2:04 PM

 

12. In the case of perfect complements, more is not necessarily better.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   Perfect complements represent an extreme case in that more of one component is not better if the other is missing; only more of both goods is better.
POINTS:   1
DIFFICULTY:   A section material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   10/7/2015 1:00 PM
DATE MODIFIED:   10/7/2015 2:08 PM

 

Multiple Choice

 

13. Suppose  consumer cannot taste the difference between Miller Lite and Bud Light, but Miller Lite is sold in 12 ounce cans while Bud Light is sold in 8 ounce cans. In a graph with cans of Miller Lite on the horizontal and cans of Bud Light on the vertical axis, which of the following is the correct slope for this consumer’s indifference curves:

  a.
  b. -1
  c.
  d. There is not enough information to tell.

 

ANSWER:   c
RATIONALE:   It takes 1.5 Bud Light cans to get to 12 ounces of beer — which is what one can of Miller Lite contains. Thus, 1.5 cans of Bud Light are just as good as (and no better than) 1 can of Miller Lite, giving us the slope of -1.5.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   Multiple Choice
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

14. Consider the utility function . Which of the following are true statements about the indifference maps represented by this function.

  a. MRS=-1 along the 45 degree line if and only if .
  b. MRS=-1 along a ray steeper than the 45 degree line if and only if .
  c. MRS=-1 along a ray shallower than the 45 degree line if and only if .
  d. All of the above.
  e. None of the above.

 

ANSWER:   a
RATIONALE:   When the exponents are equal to one another, the Cobb-Douglas function gives rise to indifference curves that are symmetric around the 45 degree line — thus (a) is true. Options (b) and (c) would be true if the inequalities were reversed.
POINTS:   1
DIFFICULTY:   B-Section Material
QUESTION TYPE:   Multiple Choice
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

Subjective Short Answer

 

15. Suppose our tastes are homothetic. It is often observed that people become more rigid — more set in their ways — as they get older. Can you translate this observation into “economics-speak” by discussing which feature of our tastes is likely the be changing as we get older?

ANSWER:   The feature of our tastes that is indicative of “flexibility” is the degree of substitutability in our indifference map. The more substitutable we think of goods, the more flexible we are in terms, whereas we become more inflexible as our tastes treat goods as relatively more complementary.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   Subjective Short Answer
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

16. Suppose our tastes can be represented by the function . It is often observed that people become more rigid — more set in their ways — as they get older. What parameter is changing as we get older — and how is it changing? (Explain.)

ANSWER:   The parameter is increasing from a value as low as -1 to a value as high as — causing our elasticity of substitution to fall from a value as high as to one as low as 0 as we grow older.
POINTS:   1
DIFFICULTY:   B-Section Material
QUESTION TYPE:   Subjective Short Answer
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

17. Suppose the only characteristic of beer that a consumer cares about is alcohol content. Currently, Bud Light and Miller Lite both have the same alcohol content.

a. Illustrate the consumer’s indifference curves in a graph with ounces of Miller Lite on the horizontal and ounces of Bud Light on the vertical axis.

b. Suppose that the producers of Bud Light lower the price of Bud Light. How will your answer to (a) change?

c. Suppose that the producers of Bud Light lower the alcohol content of their beer by 50%. How will your answer to (a) change?

d. Since we identify tastes with indifference maps, would you say that the consumer’s tastes have changed in (b) or (c)?

e. How could we change the units we use to measure Miller Lite in order to get the indifference map in (c) to again look like the one in (a)?

ANSWER:   a. The indifference curves are straight lines with slope of -1.

b. The answer will not change — prices affect budgets, not tastes.

c. The indifference curves will again be straight lines, but this time with slope of -2.

d. While the indifference map has changed in (c), the consumer’s tastes have not. Rather, the nature of the underlying product has changed — and the same tastes that care only about alcohol content therefore give rise to an indifference map that looks different.

e. If we changed the units of Miller Lite to “half-ounces”, we would again have indifference curves that are straight lines with slope of -1.

POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   Subjective Short Answer
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

18. Suppose the only characteristic of beer that a consumer cares about is alcohol content. Currently, Bud Light and Miller Lite have the same alcohol content.

a. Using to denote ounces of Miller Lite and to denote ounces of Bud Light, what’s the simplest possible utility function that can describe this consumer’s tastes over the two products.

b. Suppose Bud Light lowers its alcohol content by 50%. How would you change the utility function to account for this?

c. Derive the MRS for the functions in (a) and (b) — and interpret your answer.

ANSWER:   a.
b. or
c. In (a), MRS = -1 — i.e. no matter what bundle the consumer consumers, she is always willing to trade one Bud Light for one more Miller Lite.

In (b), MRS = -2 — i.e. no matter what bundle the consumer consumes, she is always willing to trade 2 Bud Lights (that now have half the alcohol content) for 1 more Miller Lite.

POINTS:   1
DIFFICULTY:   B-Section Material
QUESTION TYPE:   Subjective Short Answer
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

19. Suppose you are very picky about your outdoor BBQ experiences — and you need exactly 1 cup of lighter fluid for each bag of charcoal you use. If you have either leftover charcoal or leftover lighter fluid, you simply discard it.

a. With cups of lighter fluid on the horizontal and bags of charcoal on the vertical axis, illustrate some of your indifference curves.

b. Suppose that your favorite charcoal has just gotten better because the producer has infused the charcoal with half a cup of lighter fluid per bag. How does your answer to (a) change?

c. How could you change the units in which lighter fluid is measured on the horizontal axis to get your graph from (b) to look the same as you original graph in (a)?

ANSWER:   a. The indifference curves would have an L-shape, with the corner of each indifference curve lying on the 45 degree line.

b. The indifference curves would still be L-shaped, but the corners of the curves would now lie on the 60-degree line; i.e. 1 charcoal bag is paired with half a cup of lighter fluid, 2 bags with 1 cup, etc.

c. If we measure lighter fluid in half cups, we get back the original graph.

POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   Subjective Short Answer
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

20. Suppose you are very picky about your outdoor BBQ experiences — and you need exactly 1 cup of lighter fluid for each bag of charcoal you use. If you have either leftover charcoal or leftover lighter fluid, you simply discard it.

a. Letting cups of lighter fluid be denoted as and bags of charcoal as , give the simplest possible utility function that captures your tastes.

b. Suppose that your favorite charcoal has just gotten better because the producer has infused the charcoal with half a cup of lighter fluid per bag. How does your answer to (a) change?

ANSWER:   a.

b. or

POINTS:   1
DIFFICULTY:   B-Section Material
QUESTION TYPE:   Subjective Short Answer
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:52 PM
DATE MODIFIED:   2/11/2015 10:52 PM

 

 

 

 

True / False

 

1. The burden of a per-unit tax will fall disproportionately on consumers when the supply curve is relatively more elastic than the demand curve.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   The burden of a tax is always shifted toward the more inelastic side of the market.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

2. To identify the burden of a per-unit tax on consumers, we have to use the aggregate marginal willingness to pay curve whenever the underlying good is not quasilinear.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   The burden of a tax is determined by actual consumer behavior — which is measured on uncompensated demand curves.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

3. When the leisure demand curve is relatively inelastic, the bulk of the burden of a wage tax falls on workers.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   Inelastic leisure demand curves translate to inelastic labor supply curves — and the burden of a tax is always disproportionately born by the side of the market that behaves relatively more inelastically.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

4. The more inelastic the supply curve in a goods market, the smaller will be the deadweight loss from a per-unit tax in that market.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   More inelastic supply curves translate into smaller reductions in market transactions from a per-unit tax — which lowers the deadweight loss.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

5. Regardless of whether goods are inferior or normal, the deadweight loss from a per-unit tax is always greater the more price elastic the market demand curve for a good.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   Deadweight on the consumer side arise from substitution effects. Consider then two inferior good with the same uncompensated demand curve. But one has a small substitution effect and the other has a large substitution effect, with the income effects leading to the same uncompensated demand. Then the deadweight loss is greater for the latter — implying it is possible to have a good with a more elastic uncompensated demand that gives rise to a smaller deadweight loss.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

6. A wage tax in a labor market with a perfectly inelastic labor supply curve is efficient.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   Such a labor supply curve has offsetting substitution and wealth effects — with the substitution effect giving rise to a deadweight loss from a wage tax.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

7. A tax on interest income could be efficient even if it leads to a decrease in savings.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   If consumption now and consumption in the future are perfect complements, savings will decrease when the after-tax interest rate falls — but there are no substitution effects that give rise to a deadweight loss.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

8. The statutory incidence of a tax is the same as the economic incidence of a tax whenever a tax is levied on a side of a market that is perfectly price-inelastic.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   If one side of the market is perfectly price inelastic, the tax will be fully passed on to that side of the market no matter how it is statutorily levied. Thus, if the statute levies the tax on the inelastic side of the market, the economic incidence is the same as the statutory incidence.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

9. The economic benefit of a per-unit subsidy accrues disproportionately to the side of the market that is more price-inelastic.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   Just as the cost of tax is disproportionately born by the more price-inelastic side of the market, the benefit accrues disproportionately to the more price inelastic side of the market.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

10. Regardless of the size of wealth and substitution effects for workers, the benefit of a wage subsidy will accrue disproportionately to workers if the labor supply curve is relatively more wage-inelastic than the labor demand curve.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   The benefit of a wage subsidy is determined by the change in wages received by workers relative to wages paid by employers — and is thus determined by the uncompensated labor supply curve.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

11. Regardless of how price elastic labor demand curves are, employers are unaffected by wage taxes if labor supply is perfectly inelastic.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   Perfectly inelastic labor supply implies wage taxes are passed on entirely to workers — leaving employers paying the same wage as before a tax is imposed.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

12. When a per-unit tax is levied on a goods market in which supply is not perfectly inelastic  but such a tax nevertheless does not give rise to any deadweight loss, consumers are made no worse off by the imposition of the tax.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   The absence of a deadweight loss implies the absence of substitution effects. With supply not perfectly inelastic, we know that the price consumers pay increases — which means consumers are made worse off. But they are worse off because of an income effect, not because of a substitution effect, and income effects do not give rise to deadweight losses.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

13. Regardless of how price inelastic the supply curve, tax revenue from a per-unit tax rises the more price inelastic the demand curve is.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   The more price inelastic either curve, the more tax revenue will be raised because the smaller will be the reduction in the quantity transacted.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

14. When tastes are quasilinear, the sole reason for the deadweight loss from a per-unit tax is that output falls under the tax.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   When tastes are quasilinear, we only have substitution effects in the demand curve — and the inefficiency on the consumer side arises from the reduction in output.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

15. The consumer-side deadweight loss from a per-unit tax in the goods market arises from solely from the fact that output falls under the tax.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   When goods are perfect complements, there is no deadweight loss on the consumer side despite the fact that output falls under the tax.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

16. If supply is perfectly elastic in a consumer goods market, a per unit tax will always be inefficient unless the market demand curve for consumers is perfectly inelastic.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   The perfect elasticity of the supply curve implies the tax will be passed to consumers. But if there is no substitution effect (as in the case of perfect complements), the tax will be efficient even if the market demand curve is downward sloping because of income effects.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

17. In perfectly competitive industries with identical firms, consumers always end up paying the entire burden of a per-unit tax on output in the long run.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   The long run supply curve is perfectly elastic in this case — which means taxes are passed to consumers.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

18. In perfectly competitive markets with identical firms, the burden of a tax is shared by consumers and producers in the short run so long as market demand is not perfectly elastic.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   The short run market supply curve is upward sloping but not perfectly inelastic — which means consumer price rises and producer price falls under a tax.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

19. If either the supply or the demand curve in a goods market is very elastic, a per-unit tax will end up not raising very much revenue.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   The way a per-unit tax does not raise much revenue is that it causes a sharp decrease in output. But so long as one of the curves is relatively inelastic, that won’t happen.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

20. The larger the wealth effect, the less likely it is that a wage tax will give rise to a Laffer curve that has a downward sloping portion.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   The wealth effect causes workers to work more as the wage tax increases, whereas the substitution effect causes them work less. The larger the wealth effect, the more likely it is that the worker will not reduce the amount of time spent working as wage taxes rise — and thus the less likely it is that tax revenues fall as the wage tax increases.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

21. If demand is linear, tax revenue rises at a constant rate as per unit taxes increase.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   Linear demand curves give rise to Laffer curves with an inverse U-shape.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

22. Suppose demand has price elasticity of 1 everywhere and the industry is perfectly competitive with identical firms. In the long run, tax revenue increases as tax rates increase.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   Consumer spending is always the same if price elasticity is 1, and the long run supply curve is perfectly elastic — implying taxes will be fully passed onto consumers in the long run. As tax rates rise, consumer prices rise but spending remains constant as consumers purchase less. This implies a smaller share of spending goes to producers and an increasing share is collected as tax revenue.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

23. Suppose tastes for consumption now and consumption in the future have constant elasticity of substitution. It may then be the case that a tax on interest income is efficient even if savings fall in response to the tax.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   When a tax on interest income is imposed, the wealth effect implies less consumption more (i.e. more savings) while the substitution effect implies more consumption now (i.e. less savings). The only way for savings to fall as a result of an increase in the interest rate is for the substitution effect to outweigh the wealth effect — but the substitution effect then implies the tax is inefficient.
POINTS:   1
DIFFICULTY:   B-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

24. Suppose tastes for consumption now and consumption in the future have constant elasticity of substitution. It may then be the case that a tax on interest income is efficient even if savings (defined as current income not consumed) fall in response to the tax.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   When consumption now and in the future are perfect complements, savings increase as a tax on interest income increases — and the absence of substitution effects implies no deadweight loss.
POINTS:   1
DIFFICULTY:   B-Section Material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

25. As demand and supply become more elastic, taxes reduce market output more and raise less tax revenue. ​

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   If consumers and producers are very responsible to price changes, their large response to a tax will undermine efforts to raise revenue.
POINTS:   1
DIFFICULTY:   A section material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   10/13/2015 3:50 PM
DATE MODIFIED:   10/13/2015 3:57 PM

 

26. It is usually more efficient to tax a large base at a low rate than to tax a small base at a high rate. ​

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   Governments will ultimately lose revenue if tax rates get too high.
POINTS:   1
DIFFICULTY:   A section material
QUESTION TYPE:   True / False
HAS VARIABLES:   False
DATE CREATED:   10/13/2015 3:50 PM
DATE MODIFIED:   10/13/2015 4:00 PM

 

Multiple Choice

 

27. Which of the following is true about an increase of a per-unit tax in a goods market where the good is quasilinear assuming neither supply nor demand is perfectly inelastic:

  a. The more price elastic either demand or supply, the lower will be tax revenue.
  b. The more price elastic either demand or supply, the greater will be deadweight loss.
  c. The higher the tax rate, the greater the fraction of deadweight loss over revenue.
  d. Both (a) and (b)
  e. Both (b) and (c)
  f. Both (a) and (c)
  g. All of the above
  h. None of the above

 

ANSWER:   g
RATIONALE:   When tastes are quasilinear in the good, deadweight loss derives entirely from the fact that output falls — and output falls the greater the elasticity of the curves. Revenue is similarly determined by the size of the drop in output. And deadweight loss increases “exponentially” while revenue rises less than linearly.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   Multiple Choice
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

28. Which of the following is definitely true for a per-unit tax in the goods market where neither demand nor supply is perfectly inelastic:

  a. The more price inelastic demand is, the lower deadweight loss will be.
  b. The more price inelastic supply is, the higher deadweight loss will be.
  c. A demand become more price inelastic, the after tax price for consumers rises.
  d. Both (a) and (b)
  e. Both (b) and (c)
  f. Both (a) and (c)
  g. All of the above
  h. None of the above

 

ANSWER:   c
RATIONALE:   Since there are potentially income effects that mask substitution effects, (a) is not necessarily true. As supply becomes more price inelastic, deadweight loss will fall. But as demand becomes more price inelastic, consumers will pay higher prices because the incidence of a tax is determined by uncompensated demand (relative to supply).
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   Multiple Choice
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

29. Under which of the following scenarios does an increase in the wage tax cause a drop in employment but no deadweight loss?

  a. When the wealth effect for workers is larger than the substitution effect.
  b. When the wealth effect for workers is smaller than the substitution effect.
  c. When the wealth effect for workers is equal to the substitution effect.
  d. It is possible under any of these scenarios.
  e. There is no scenario under which this is possible.

 

ANSWER:   e
RATIONALE:   As long as there are substitution effects, there will be a deadweight loss. The only way for there to be no change in employment is if the two effects offset each other and labor supply is perfectly inelastic — but that still means there is a deadweight loss. (It can’t be that labor demand is perfectly inelastic because of diminishing marginal product of labor.)
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   Multiple Choice
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

30. Assuming upward sloping labor supply, wage subsidies are definitely more inefficient

  a. the more elastic labor demand is.
  b. the more elastic labor supply is.
  c. the more substitutable consumption and leisure are.
  d. Both (a) and (b)
  e. Both (b) and (c)
  f. Both (a) and (c)
  g. All of the above
  h. None of the above

 

ANSWER:   f
RATIONALE:   Labor demand derives from firms — and thus there is no possibility of income and substitution effects confounding each other. Labor supply derives from the consumer model — and the relevant labor supply curve for welfare calculations is the compensated labor supply curve. The compensated labor supply is more elastic the more substitutable consumption and leisure are.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   Multiple Choice
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

31. Taxes on interest earned from savings are less inefficient

  a. the less savings behavior responds to increases in the tax rate.
  b. the more savings behavior responds to increases in the interest rate.
  c. the less willing individuals are to substitute consumption today for consumption in the future.
  d. Both (a) and (b)
  e. Both (b) and (c)
  f. Both (a) and (c)
  g. None of the above
  h. All of the above

 

ANSWER:   c
RATIONALE:   Savings responses to taxes on interest income arise from wealth effects and substitution effects, with only the latter creating deadweight loss. Thus, the size of savings behavior responses does not tell us anything about efficiency unless we know about compensated savings behavior. But the less willing individuals are to substitute across time, the smaller will be substitution effects — and thus the more efficient will be the tax.
POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   Multiple Choice
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

Subjective Short Answer

 

32. In most cases, the fact that one of the market curves is perfectly inelastic is not sufficient to conclude that a per-unit tax in that market is efficient. A tax on land rents is an exception. Can you explain why?

ANSWER:   In goods markets, supply curves are never perfectly inelastic. In the short run, they are formed by the upward sloping marginal cost curves of firms, and in the long run they are determined by entry and exit (and thus tend to be fairly or completely elastic). The demand curve in goods markets arises from the consumer model where substitution and income effects are both included, and the inefficiency arises from the substitution effect. Thus, we would need a perfectly inelastic compensated demand curve for there to be no inefficiency on the consumer side.

In labor and capital markets, the demand curve arises from firms — and must be downward sloping because of diminishing marginal product in the short run and greater elasticity in the long run. The supply curves in those markets, on the other hand, arise from the consumer model where once again substitution and wealth effects are both included in market curves but only substitution effects are relevant for deadweight losses.

The case of a land market is unique because the inelastic supply curve does not arise from the consumer model and therefore does not conflate income and substitution effects. When the tax is then passed entirely to land owners, there is no impact on consumers and thus no deadweight loss on the consumer side. And since there are no substitution effects on the supply side, there is no deadweight loss.

POINTS:   1
DIFFICULTY:   A-Section Material
QUESTION TYPE:   Subjective Short Answer
HAS VARIABLES:   False
DATE CREATED:   2/11/2015 10:53 PM
DATE MODIFIED:   2/11/2015 10:53 PM

 

 

There are no reviews yet.

Add a review

Be the first to review “Microeconomics An Intuitive Approach With Calculus 2nd Edition by Thomas Nechyba – Test Bank”

Your email address will not be published. Required fields are marked *

Category:
Updating…
  • No products in the cart.