Issues and Applications, What Determines the U.S. Long-Run Average Tax Rate? Con

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Issues and Applications, What Determines the U.S. Long-Run Average Tax Rate? Consider the overall average federal tax rate and its components and federal spending as a percentage of national income in the figure below: The fall in the income tax rate is the primary reason for the decline in tax revenues during economic downturns. Do you agree or disagree with this statement? Disagree. Tax revenues are independent of the tax rates therefore its fall during economic downturns must be caused by other factors. Agree. Tax revenues fall during economic downturns as a result of of reduction in tax rates by the government. Disagree. Tax revenues fall during economic downturns because of a decline in the taxable income. Disagree. According to the figure: tax rates are falling over time thus causing a decline in tax revenues regardless of the economic situation. In the widget market it is known that consumers are relatively responsive to price changes, as compared to producers. The government places a $5 per unit tax on sales of widgets. Which of the following is the most likely result? Who pays the tax will be determined by the government. Consumers and producers will split the tax evenly. Most of the tax will be paid by producers. O D Most of the tax will be paid by consumers. In Lungtopia, cigarettes sell for $5 per pack and 5,000 packs are sold every week. In an effort to raise government revenue, the mayor of the city decides to impose a $2 per pack tax on cigarettes. 1.) Using the line drawing tool, show the approximate effect of the tax on the market supply curve for cigarettes. Properly label your line. 2.) Using the point drawing tool, indicate the new equilibrium price and quantity. Label your point E1. Carefully follow the instructions above, and only draw the required objects. Price of cigarettes per pack Thousands of packs per week The market is initially in equilibrium where the demand and supply curves intersect. An excise tax has been levied on the good in die diagram to the right shifting the supply curve from S to S + T. What can be said about who pays the tax? Both the producer and consumer pay a portion of the tax but the producer pays a larger share. The entire tax is paid by the consumer. Both the producer and consumer pay a portion of the tax but the consumer pays a larger share. The entire tax is paid by the producer. Quantity

Explanation / Answer

(1) C

(2) A

(3) D

(4) B

(5) D

(6) B

(7) D

(8) C

(9) D

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