Assignment #7: Taxation and Elasticity (10 Points) Terms and Definitions: Define the following terms Demand Elasticity: Excise Tax: Marginal Tax Rate: Supply Elasticity: Tariff: Tax Burden: Discussion Questions: 1. Suppose you are deciding which tax structure the United States will use to tax incomes. Which tax structure would you choose and why? 2. Explain what is meant by the term tax burden, and explain why a supplier who physically pays an excise tax to the government does not incur the entire burden of the tax.
3. Using the concept of tax burden, explain how a tax increase to the rich (business owners/corporations) will effect everyone, not just the rich and businesses who are paying the tax. Short Answer Questions: 1. Explain how taxation is used for each of the following reasons. a. Repricing: b. Redistribution: c. Revenue: Use the tax tables below to answer the following questions: Tax Structure A Marginal Income Tax Rate 0 - $8,350 10% $8,351 - $33,950 15% $33,951 - $82,250 25% $82,251 - $171,550 28% $171,551 - $372,950 33% $372,950 + 35% Tax Structure B Marginal Income Tax Rate 0 - $8,350 20% $8,351 - $33,950 20% $33,951 - $82,250 20% $82,251 - $171,550 20% $171,551 - $372,950 20% $372,950 + 20% Tax Structure C Marginal Income Tax Rate 0 - $8,350 35% $8,351 - $33,950 33% $33,951 - $82,250 28% $82,251 - $171,550 25% $171,551 - $372,950 15% $372,950 + 10% 2. Complete each sentence by filling in the blank with the appropriate term (progressive, regressive, or flat). a. Tax structure A is a tax rate. b. Tax structure B is a tax rate. c. Tax structure C is a tax rate. 3. Calculate how much income tax you would have to pay for the following amounts using tax structure A. a. Income tax on $400,000 is
b. Income tax on $35,000 is 4. Calculate how much income tax you would have to pay for the following amounts using tax structure B. a. Income tax on $400,000 is b. Income tax on $35,000 is 5. Calculate how much income tax you would have to pay for the following amounts using tax structure C. a. Income tax on $400,000 is b. Income tax on $35,000 is 6. Suppose the government imposes an excise tax on the production of cigarettes of $10.00 per carton. Calculate the tax burden to both consumers and producers given the following elasticities. a. Elasticity of demand = 1.5 Elasticity of supply = 0.5 Consumers tax burden = Producers tax burden = b. Elasticity of demand = 1.5 Elasticity of supply = 2.5 Consumers tax burden = Producers tax burden = c. Elasticity of demand = 3 Elasticity of supply = 2 Consumers tax burden = Producers tax burden = Part 2: Understanding Elasticity Multiple Choice 1. Price elasticity of demand is the: A) change in the quantity of a good demanded divided by the change in the price of that good. B) change in the price of a good divided by the change in the quantity of that good demanded. C) percentage change in price of that good divided by the percentage change in the quantity of that good demanded. D) percentage change in quantity of a good demanded divided by the percentage change in the price of that good. 2. In general, the greater the elasticity the: A) smaller the responsiveness of price to changes in quantity. B) smaller the responsiveness of quantity to changes in price. C) larger the responsiveness of price to changes in quantity. D) larger the responsiveness of quantity to changes in price.
3. In 2004, the Wall Street Journal reported that Starbucks was set to raise some of its prices. The article stated that unlike Starbucks, "mass-market grocery brands such as Kraft Foods Inc.'s Folgers and Maxwell House coffees tend to be much more price-elastic." Which of the following best explains the implications of this quotation? A) When Starbucks raises prices, it causes sales of Folgers and Maxwell House to rise a lot. B) When Starbucks raises prices, it causes sales of Folgers and Maxwell House to fall a lot. C) When the price of Folgers or Maxwell House coffee rises, consumers buy only slightly less. D) When the price of Folgers or Maxwell House coffee rises, consumers buy a lot less. 4. If quantity demanded falls by 25 percent when price rises by 50 percent, demand is said to be: A) elastic. B) inelastic. C) proportional. D) responsive. 5. The short-run elasticity of demand for gasoline sold at gasoline stations is 0.20. If terrorism causes the supply of gasoline to fall, resulting in a 5 percent drop in quantity, other things the same, the price per gallon will increase by: A) 4 percent. B) 5 percent. C) 20 percent. D) 25 percent. 6. According to Exhibitor Relations Co., between 2003 and 2004, average movie ticket prices rose by about 3.58 percent and attendance fell by about 1.66 percent. Other things equal, the data imply that the elasticity of demand for movie tickets is about: A) 0.17. B) 0.36. C) 0.46. D) 2.16. 7.. According to Exhibitor Relations Co., in 2003 average movie ticket prices were $6.03 and attendance was 243 million; in 2004, average movie ticket prices were $6.25 and attendance was 239 million. Other things equal, the data imply that the elasticity of demand for movie tickets is about: A) 0.166. B) 0.358. C) 0.464. D) 2.157. 8. A newspaper recently lowered its price from 50 cents to 30 cents, causing the number of newspapers sold to increase from 240,000 to 280,000. Other things equal, the data imply that the elasticity of demand for this newspaper is about: A) 3.25. B) 0.5. C) 0.3. D) 0.15. 9. If a $100 drop in the price of a $10,000 car resulted in an increase in the quantity of cars purchased from 100 to 110 and a $100 drop in the price of a $1000 vacation rental resulted in an increase in the quantity of weekly vacation homes rented from 100 to 110, the price elasticity of demand is: A) greater for the car. B) less for the car. C) the same for both the car and the vacation rental. D) not comparable.
Price 10 9 8 7 6 5 4 3 2 1 0 A B C D 1 2 3 4 5 6 7 8 9 10 Quantity 10. Refer to the graph above. The approximate elasticity of demand at point A is: A) 1/4 B) 4 C) 1 D) 2 11. Refer to the graph above. The approximate elasticity of demand at point B is: A) 2 B) 1 C) 2/3 D) 3/2 12. Refer to the graph above. The approximate elasticity of demand at point C is: A) 2 B) 1 C) 2/3 D) 3/2 13. Refer to the graph above. The approximate elasticity of demand at point D is: A) 1/4 B) 1 C) 2/3 D) 3/2 14. If the elasticity of demand for restaurant meals is 2.27, the demand for restaurant meals is: A) elastic. B) inelastic. C) unitary elastic. D) perfectly inelastic.
Price 10 8 6 4 2 A B C D E 2 4 6 8 10 12 Quantity 15. Refer to the above graph. Which point has an elasticity greater than one? A) E B) B C) C D) D 16. Refer to the above graph. Which point has an elasticity less than one? A) A. B) B. C) C. D) D. 17. Which of the following most likely correctly orders goods from most to least demand elastic? A) cars, motor transportation, transportation. B) transportation, bicycles, non-motor transportation. C) brand-name Advil, headache-relieving medicine, aspirin D) headache-relieving medicine, brand-name Advil, aspirin 18. For which of the following goods is the demand curve likely to be most inelastic? A) Hershey's Symphony chocolate bar. B) Chocolate bars with nuts. C) Candy. D) Chocolate bars. 19. When the price of coffee beans rises, the price of lower-grade coffees tend to rise by more than the increase in the price of gourmet coffees. The possible explanation for this is: A) Low-grade coffee is less price elastic since it has more substitutes. B) Low-grade coffee is more price elastic since it is a necessity. C) Gourmet coffee is more price elastic since it is a luxury and has more substitutes. D) Gourmet coffee is less price elastic since it is a luxury and has fewer substitutes. 20. If elasticity is greater than one, A) a rise in price lowers total revenue. B) a decline in price will not change total revenue. C) a rise in price increases total revenue. D) a decline in price lowers total revenue. 21. Income elasticity is defined as the: A) change in demand divided by the change in income. B) percentage change in demand divided by the percentage change in income. C) change in income divided by the change in demand. D) percentage change in income divided by the percentage change in demand.
22. Cross-price elasticity of demand is defined as the: A) percentage change in quantity demanded divided by percentage change in the price of the same good. B) percentage change in demand divided by percentage change in the price of another good. C) change in the price of another good divided by the change in quantity demanded. D) percentage change the price of another good divided by the percentage change in quantity demanded. 23. For normal goods, income elasticity is: A) greater than 0. B) greater than 1. C) less than 0. D) equal to 1. 24. Kuo S. Huang estimates that with every 20% increase in income, the quantity of grapes purchased rises by 11.2%. From this information one would conclude that grapes are: A) a luxury. B) not demanded. C) an inferior good. D) a normal good. 25. For luxuries, income elasticity is: A) greater than 0. B) greater than 1. C) less than 0. D) equal to 1. 26. Kuo S. Huang estimates that with every 15% increase income, the quantity of turkey purchased declines by 1.8%. From this information one would conclude that turkey is: A) a luxury. B) a necessity. C) an inferior good. D) a normal good. 27. For necessities, income elasticity is any value: A) greater than 0. B) greater than 1. C) less than 0. D) between 0 and 1. 28. It is estimated that a 10% decline in income will reduce cigarette smoking by 1.4%. From this information one can conclude that cigarettes are: A) a luxury. B) a necessity. C) an inferior good. D) a large portion of one's budget. 29. For complements: A) cross price elasticity of demand is negative. B) cross price elasticity of demand is positive. C) price elasticity of income is negative. D) price elasticity of income is positive. 30. It is estimated that a 3% drop in the price of Asian and European autos will decrease the demand for American cars by.84%. From this information one can conclude that: A) The income elasticity of demand for American cars is less than one. B) European and Asian cars are luxuries. C) European and Asian cars are substitutes for American cars. D) European and Asian cars are complements for American cars.