AREC 202 FINAL UPDATED ACTUAL Questions and CORRECT Answers
1 view 0 purchase
Course
AREC 202
Institution
AREC 202
AREC 202 FINAL UPDATED ACTUAL
Questions and CORRECT Answers
Excise Tax - CORRECT ANSWER- Tax on sales of a good or service: "per-unit" tax
Effects:
1. It raises price paid by buyer
2. Reduces price received by sellers
3. Drives a wedge between the two
** If the producer is taxed, the supp...
AREC 202 FINAL UPDATED ACTUAL
Questions and CORRECT Answers
Excise Tax - CORRECT ANSWER✔✔- Tax on sales of a good or service: "per-unit" tax
Effects:
1. It raises price paid by buyer
2. Reduces price received by sellers
3. Drives a wedge between the two
** If the producer is taxed, the supply curve will shift upwards by the amount of the tax.
** If the consumer is taxed, the demand curve will shift downwards by the amount of the tax.
**It does not matter who is actually paying the tax, the burden is shared between producers
and buyers.
How do you calculate the amount of the per-unit tax that is imposed on sellers? - CORRECT
ANSWER✔✔- Subtract S2 and S1 curves
How do you calculate the amount of the per-unit tax that is imposed on buyers? - CORRECT
ANSWER✔✔- Subtract D2 and D1 curves
Tax incidence - CORRECT ANSWER✔✔- A measure of who is really paying the tax
(buyers or sellers). Remember, whoever bares the burden of the tax does not depend on who
pays it.
Tax Incidence depends on the elasticity's of supply and demand.
Tax Incidence and Elasticity - CORRECT ANSWER✔✔- In general, whoever is the least
flexible (inelastic) is the party that will pay the tax.
If price elasticity of demand is low (inelastic) and price elasticity of supply is high (elastic):
Excise tax falls on consumers.
If price elasticity of demand is high (elastic) and price elasticity of supply is low (inelastic):
Excise tax falls on producers.
How do you figure this out graphically?
1. Plot Equilibrium price (point where demand and supply curve intersect)
,2. Look at the quantity that is being sold and mark the price on the demand curve and on the
supply curve that is associated with that quantity.
3. Whoever has the largest gap from the equilibrium price is who the tax incidence falls on.
Who pays the FICA? - CORRECT ANSWER✔✔- FICA: Federal Insurance Contributions
Act
Workers pay 7.65% of their earnings in FICA
Each employer: matching amount
Is FICA really shared equally by workers and employers?
NO- price elasticity of demand is high (around 3) and price elasticity of supply is very low
FICA falls mainly on the suppliers of labor (lower wages) rather on employers (in form of
lower profits)
Revenue from an Excise Tax - CORRECT ANSWER✔✔- Revenue of an excise tax is equal
to the area of the rectangle (height of the tax wedge between the supply and the demand
curve, and the width is the new equilibrium quantity transacted under the tax.
Revenue= Tax incidence * equilibrium quantity
Does doubling the excise tax rate on a good double the amount of revenue collected? -
CORRECT ANSWER✔✔- No, because tax incidence will reduce the quantity of the good or
service transacted. in some cases, raising the tax rate may actually reduce the amount of
revenue the government collects.
Think about it: if there is a higher tax, do you think more people would demand that good? In
most cases, probably not, which will decrease the quantity consumed under that tax.
Tax Effects on Consumer and Producer Surplus - CORRECT ANSWER✔✔- A tax reduces
consumer and producer surplus.
The area within the rectangle is the tax revenue the government collects.
The area to the right of the rectangle (sideways triangle >) is the deadweight loss. This is the
area that government is loosing out on and does not get to collect by imposing the tax.
The area of the rectangle PLUS the area of the deadweight loss is the total fall in
consumer/producer surplus. The area above the price equilibrium (closest to the demand
curve) is the total loss in consumer surplus. The area below the price equilibrium 9closest to
the supply curve) is the total loss in producer surplus.
, Deadweight Loss and Elasticity - CORRECT ANSWER✔✔- Deadweight loss is larger when
demand/supply are elastic.
Deadweight loss is smaller when demand/supply are inelastic.
To minimize the efficiency costs of taxation, tax those goods for which demand, supply, or
both are relatively inelastic since the behavior will not change (unresponsive) when their is a
change in price. Thus, with less deadweight loss, the more tax revenue the government will
gain.
Extreme cases: perfectly inelastic supply or demand curves will result in no deadweight loss.
Benefits Principle - CORRECT ANSWER✔✔- Tax fairness
Those who benefit from public spending should bare the burden of the tax that pays for the
spending.
Ability to Pay Principle - CORRECT ANSWER✔✔- Tax fairness
Those with greater ability to pay a tax should pay more tax.
Utility - CORRECT ANSWER✔✔- A measure of the satisfaction the consumer derives from
consumption of goods and services.
Util: a unit of utility
To maximize total utility, consumers must focus on marginal utility.
Utility Function - CORRECT ANSWER✔✔- Relationship between an individual's
consumption bundle and total amount of utility it generates for that individual consumer.
Consumption Bundle - CORRECT ANSWER✔✔- Collection of all the goods and services
consumed by that individual.
Marginal Utility - CORRECT ANSWER✔✔- Change in total utility generated by consuming
one additional unit of a good or service.
Similar to marginal benefit, only calling it marginal utility.
To calculate marginal utility, subtract the total utils from the previous total utlits.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller MGRADES. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $9.49. You're not tied to anything after your purchase.
