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sample test questions

Indicate the answer choice that best completes the statement or answers the question.

1. Consider three bundles:

Bundle A: 1 shirt and 2 hats

Bundle B: 2 shirts and 2 hats
Bundle C: 3 shirts and 1 hat

Which of the following violates the assumption of nonsatiated preferences?

a. Nancy prefers bundle B to C.
b. Diane prefers bundle B to A.
c. Steve prefers bundle C to B.
d. Ryan prefers bundle A to B.

2. Suppose that you buy a lot of music and that the prices of CDs go up. The income effect means that you buy
fewer CDs because:
a. your nominal income has been reduced.
b. your real income has been reduced.
c. you now enjoy music less.
d. CDs are less expensive relative to other goods.

3. Consumer surplus can be defined as the difference between:

a. the demand curve and the price of the good.
b. the supply curve and the price of the good.
c. the supply curve and the demand curve.
d. the price charged by sellers and the price paid by buyers.

4. Graphically, the budget constraint can be described as:

a. the slope being the difference between the prices of the goods.
b. the slope being the sum of the prices of the goods.
c. a downward-sloping line.
d. the slope being the product of the prices of the goods.

5. Part I of the Coase theorem states that when there are well-defined property rights and costless bargaining,
then, in a market in which there is an externality, which statement is TRUE?
a. The socially optimal level of consumption can be achieved through the use of taxes and subsidies by
the government.
b. The socially optimal level of consumption can be achieved through the use of quantity restrictions by
the government.
c. The socially optimal level of consumption can be achieved through negotiations between the affected
parties.
d. The socially optimal level of consumption cannot be achieved without mediation by the government.

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6. Suppose that factories in Chicago, Illinois, and Gary, Indiana, produce pollution that affects people living in
western Michigan. Even though the polluting plants and affected individuals can be identified, the externality
cannot be resolved privately because of the large number of both polluters and affected individuals. This is an
example of:
a. the assignment problem.
b. the free rider problem.
c. the problem of internalizing an externality.
d. transaction costs and negotiating problems.

7. The demand for a product is given by Q = 120 – P, where quantity is measured in pounds. The market supply
is given by MC = 10. The production of this product causes toxins to be emitted into the air. The marginal
external damage of this product is $2 per unit. What level of taxation would generate the socially efficient level
of the good?
a. $0
b. $2
c. $10
d. $20

8. Public goods:
a. are likely to be underprovided by the private sector due to the free rider problem.
b. are likely to be overprovided by the private sector due to the free rider problem.
c. can be provided only by the public sector, while private goods can be provided only by the private
sector.
d. cannot be provided by the private sector because they are rival in consumption.

9. A painting by Monet displayed in a museum is:

a. excludable but not rival.
b. rival but not excludable.
c. both rival and excludable.
d. neither rival nor excludable.

10. The demand for clean parks is Q = 100 – P. The marginal cost of cleaning a park is constant at $75. What is
the socially optimal number of clean parks?
a. 0
b. 25
c. 100
d. 175

11. Which of the following provides insurance against job loss?

a. disability insurance
b. workers' compensation
c. Medicare

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d. unemployment insurance

12. Insurance allows individuals to:

a. consume more in every period in the future.
b. have steadier consumption in every period in the future.
c. shift consumption from bad possible outcomes to good possible outcomes.
d. avoid negative outcomes, such as automobile accidents.

13. Paula earns $40,000 per year and rides her bicycle to work. There is a 1% chance that she will break her leg
in the next year and a 99% chance that she won't be hurt at all. Medical bills for a broken leg are estimated at
$4,000. If Paula buys full health insurance at an actuarially fair premium, what is the premium she will pay for
the next year?
a. $4
b. $40
c. $400
d. $4,000

14. The Social Security program faces a serious financing problem over the next 75 years because it has
promised benefits:
a. that exceed what it expects to collect in taxes by over $10 trillion.
b. equal to what it expects to collect in taxes.
c. that fall short of what it expects to collect in taxes by over $10 billion.
d. that exceed what it is allowed to collect in taxes since the tax rate cannot be changed.

15. What is the full benefits age for those born in 1960 or later?
a. 50
b. 55
c. 67
d. 72

16. Which of the following is a reason there is redistribution from those born later to those born earlier?
a. Social Security benefits diminish with age, and those born earlier lived longer.
b. Those born earlier paid into the system for only part of their lives but received benefits throughout
their retirement.
c. The size of the payroll tax has remained constant over the years.
d. Social Security benefits have increased over the years in order to keep pace with inflation.

17. Which is a moral hazard effect of Social Security?

a. Retirees die sooner than they would without Social Security.
b. Workers retire sooner than they would without Social Security.
c. Retirees buy less health insurance than they would without Social Security.
d. Workers work longer and become more unhealthy than they would without Social Security.
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18. If a politician proposed that Social Security be made more solvent by increasing the amount employers pay
into the Social Security program, which approach is that politician advocating for the reform of Social Security?
a. raising taxes further
b. extending the base of taxable wages
c. raising the retirement age
d. lowering benefits for all recipients

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Answer Key
1. d

2. b

3. a

4. c

5. c

6. d

7. b

8. a

9. a

10. b

11. d

12. b

13. b

14. a

15. c

16. b

17. b

18. a

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sample test2 questions

Indicate the answer choice that best completes the statement or answers the question.
       1. Assume that all people have identical utility functions that exhibit diminishing marginal utility and that, as people
are taxed more, they work less. Which statement about the optimal income tax system is TRUE?
a. The marginal utility of the last dollar of income for each person is equal.
b. Each person is taxed so that the utility levels of everyone are equal.
c. The marginal revenue raised from taxing each person is equal for each person.
d. The ratio of marginal utility to marginal revenue is equal for each person.

       2. A tax system in which average tax rates fall as income rises is a _____ tax system; the way in which the
average tax rate changes as income rises is a measure of _____ equity.
a. regressive; vertical
b. regressive; horizontal
c. progressive; vertical
d. progressive; horizontal

       3. Which statement describes the major advantage of incorporation?
a. Incorporation solves the agency problem.
b. Income tax rates are significantly lower.
c. The owners of the firm cannot be held personally responsible for the obligations of the firm.
d. Expenses can be deducted from income.

       4. The goals of optimal income taxation include all of the following EXCEPT:
a. maximizing tax revenue.
b. minimizing the distortions due to taxation.
c. maximizing the nation's social welfare function.
d. achieving vertical equity.

       5. Suppose the supply in the market for cigarettes is given by QS  = 30 + 5P and demand is given by QD = 48 –
P. If government imposes a $6 tax on each pack of cigarettes, the price paid by consumers increases from
$_____ to $_____.
a. 3; 8
b. 3; 9
c. 13; 21
d. 13; 22

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sample test2 questions

       6. Artists and musicians in Ireland do not have to pay income tax on the sales from their work. This tax policy
was modified in 2006 to include only those making less than 250,000 euros per year. Which of the following
was an effect of this tax policy?
a. The Irish band U2 moved most of their business operations to the Netherlands.
b. Most of the creative community in Ireland relocated to Italy.
c. Many of the artists and musicians in Ireland started working in other career fields with lower income tax
rates.
d. This tax had no effect on artists and musicians in Ireland.

       7. Which kind of depreciation is the TRUE deterioration in the value of capital in each period of time?
a. depreciation credits
b. depreciation allowances
c. economic depreciation
d. depreciation schedule

       8. Suppose your city's government is considering levying a tax on all commercial car washes within the city limits.
The state government is also considering levying a tax on all commercial car washes in the state. In the short
run, consumers bear _____ of the tax burden under the local tax than under the state tax. In the long run, car
wash employees bear _____ of the tax burden under the local tax than under the state tax.
a. more; less
b. more; more
c. less; more
d. less; less

       9. Suppose the supply in the market for cigarettes is given by QS  = 30 + 5P and demand is given by QD = 48 –
P. In free market equilibrium, the price per pack is $_____, and the quantity bought and sold is _____.
a. 3; 30
b. 3; 45
c. 13; 30
d. 13; 45

       10. Which statement is TRUE regarding a $1 per gallon tax on gasoline imposed on consumers?
a. It shifts the supply of gasoline to the left.
b. It shifts the supply of gasoline to the right.
c. It shifts the demand for gasoline to the left.
d. It shifts the demand for gasoline to the right.

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       11. If a tax on labor is levied on workers, the gross wage will _____, and the after-tax wage will _____, assuming
that supply and demand are neither perfectly elastic nor perfectly inelastic.
a. fall; fall
b. fall; rise
c. rise; rise
d. rise; fall

       12. Which statement is TRUE regarding a $1 per gallon tax on gasoline?
a. The consumer tax burden is greater when the tax is imposed on consumers.
b. The consumer tax burden is greater when the tax is imposed on the producers.
c. The producer tax burden is the same no matter on whom the tax is imposed.
d. The producer tax burden depends both on whom the tax is imposed and on the demand and supply
elasticities.

       13. Which statement about taxation in the United States is TRUE?
a. Subnational governments rely more on sales and property taxes than does the federal government.
b. Subnational governments rely more on individual income taxes than does the federal government.
c. Subnational governments rely less on wealth taxes than does the federal government.
d. Subnational governments rely less on property taxes than does the federal government.

       14. Which statement about the Laffer curve is TRUE?
a. As the tax rate rises from 0% to 100%, tax revenues rise at a constant rate.
b. As the tax rate rises from 0% to 100%, tax revenues rise and then fall.
c. As the tax rate rises from 0% to 100%, tax revenues fall at a constant rate.
d. As the tax rate rises from 0% to 100%, tax revenues rise but at a diminishing rate.

       15. Which statement is TRUE?
a. Effective excise tax rates have risen for high-income groups over the last 20 years.
b. The bottom quintile pays much more in payroll taxes than in income taxes.
c. Effective corporate tax rates are higher than effective income tax rates for all households.
d. Effective income tax rates have not changed over the last 20 years.

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sample test2 questions

Answer Key

1. d
2. a
3. c
4. a
5. a
6. a
7. c
8. d
9. b
10. c
11. d
12. c
13. a
14. b
15. b

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sample test3 questions

Indicate the answer choice that best completes the statement or answers the question.
       1. Suppose that you respond to an income tax increase by giving more money to charity (which is tax
deductible). This is an example of:
a. reporting effect.
b. income exclusion effect.
c. compliance effect.
d. direct effect.

       2. Assume that two people have the same income. Under the U.S. tax code, someone who chooses to save
some income to consume more later is taxed _____ than someone who chooses to spend all of the income
now, which is _____.
a. more; efficient
b. more; inefficient
c. more; vertically inequitable
d. less; inefficient

       3. If the tax rate on income is given by t and the wage is given by w, what is the after-tax wage?
a. w – t
b. w – t + 1
c. w(t – 1)
d. w(1 – t)

       4. If the penalties associated with tax evasion are increased and the risk of being caught evading taxes increases,
which of the following statements is TRUE, other things held constant?
a. The marginal cost of evading taxes is decreased for any given level of unreported income.
b. The marginal cost of evading taxes is increased for any given level of unreported income.
c. More tax evasion occurs.
d. The two changes cancel each other out, so there is no change in tax evasion.

       5. Andrew wants to withdraw $1,000 from his Individual Retirement Account (IRA) this year to cover an
unexpected medical expense. Which of the following is true regarding this withdrawal?
a. He will not be able to withdraw money from his IRA for any reason.
b. He will have to forfeit all interest earned on any monies deposited into his IRA.
c. He will have to pay a 10% penalty.
d. He will have to pay only the regular income taxes on his withdrawal.

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       6. If the tax rate on income is given by t and the wage is given by w, what is the slope of the budget constraint?
a. –w + t
b. w – t + 1
c. w(t – 1)
d. w(1 – t)

       7. A consumption tax levied on the increase in the value of a good at each stage of production is called a(n):
a. expenditure tax.
b. cash-flow tax.
c. flat tax.
d. value-added tax.

       8. An individual's savings is defined as the difference between:
a. current income and current consumption.
b. cumulative income and cumulative consumption to the present time, EXCLUDING interest gained or
lost over that time.
c. cumulative income and cumulative consumption to the present time, INCLUDING interest gained or
lost over that time.
d. lifetime spending and lifetime income.

       9. Assume that the nominal rate of interest is 10% and that the inflation rate is 10%. The real rate of interest:
a. cannot be determined from the given information.
b. is 0%.
c. is 10%.
d. is 20%.

       10. Suppose that in the first period, a woman works, earns income Y, and saves S of the income. In the second
period, the woman consumes her savings plus whatever interest it earned (r is the interest rate). How much
does the woman consume in the first period?
a. Y
b. 2Y – S
c. Y – S
d. Y(1 + r)

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sample test3 questions

       11. Suppose that in the first period, a woman works, earns income Y, and saves S of the income. In the second
period, the woman does not work and consumes her savings plus whatever interest it earned (r is the interest
rate). How much does the woman consume in the second period if S = 0?
a. 0
b. Y – S
c. Y + S
d. Y(1 + r)

       12. If the payroll tax were increased, the empirical evidence suggests that:
a. secondary earners would work more.
b. primary earners would work more.
c. secondary earners would change their hours worked more than would primary earners.
d. primary earners would change their hours worked more than would secondary earners.

       13. Suppose the government were to eliminate taxes on interest from savings. According to economic theory,
individuals:
a. will definitely save more.
b. might save more or less.
c. will definitely save less.
d. will definitely save the same amount as before.

       14. A sales tax is a tax on _____; a payroll tax is a tax on _____.
a. capital gains; income
b. consumption; consumption
c. consumption; income
d. income; income

       15. Suppose that, as a result of an income tax rate increase, you pay more tax on the same amount of income.
This is an example of which channel through which tax rate changes can change tax revenues?
a. reporting effect
b. income exclusion effect
c. compliance effect
d. direct effect

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sample test3 questions

Answer Key

1. b
2. b
3. d
4. b
5. c
6. c
7. d
8. a
9. b
10. c
11. a
12. c
13. b
14. c
15. d

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sample test questions final exam

Indicate the answer choice that best completes the statement or answers the question.
       1. For persons who earn an amount of income such that the Earned Income Tax Credit (EITC) benefit is
reduced as they work more, which statement is TRUE?
a. The effect of the EITC on labor supply is ambiguous.
b. The substitution effect induces these persons to work less.
c. The income effect induces these persons to work more.
d. There are no income or substitution effects.

       2. What is the effective corporate tax rate when the value of the tax credit for each dollar of investment is $0.25,
the tax rate on earnings minus labor is 35%, and the present discounted value of a $1 investment is $0.50?
a. –11.53%
b. –10%
c. 10%
d. 88.46%

       3. Which statement is TRUE?
a. The precautionary saving model, unlike the intertemporal choice model, assumes that all saving is
motivated by a desire to self-insure against risk.
b. The precautionary saving model, unlike the intertemporal choice model, assumes that some saving is
motivated by a desire to self-insure against risk.
c. The precautionary saving model, unlike the intertemporal choice model, assumes that saving is
motivated by a desire to smooth consumption.
d. The intertemporal choice model, unlike the precautionary saving model, assumes that saving is
motivated by a desire to smooth consumption.

       4. National defense is:
a. excludable but not rival.
b. rival but not excludable.
c. both rival and excludable.
d. neither rival nor excludable.

       5. To maximize total welfare, one must equate _____ with _____.
a. total social benefit; total social cost
b. marginal social benefit; total social cost
c. total social benefit; marginal social cost
d. marginal social benefit; marginal social cost

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sample test questions final exam

       6. What is the effect on the market when participants are taxed and no market failures exist?
a. The market moves closer to the competitive equilibrium, thereby reducing social efficiency.
b. The market moves closer to the competitive equilibrium, thereby enhancing social efficiency.
c. The market moves away from the competitive equilibrium, thereby reducing social efficiency.
d. The market moves away from the competitive equilibrium, thereby enhancing social efficiency.

       7. Which statement about the standard intertemporal choice model is TRUE?
a. People save in order to smooth consumption over time.
b. People gain utility directly by working.
c. For most people, it is optimal to set consumption equal to income each year.
d. A dollar to be received in 10 years is worth the same amount as a dollar received today.

       8. There is a 50% income tax in a society with only two individuals. Both individuals have pre-tax incomes of
$50,000. In period 1, there is no tax deduction, and Harry gives $5,000 to charity while Sally gives $8,000 to
charity. In period 2, the government makes charitable donations tax deductible, and Harry gives $6,000 and
Sally gives $12,000. The marginal impact of the tax break was _____; the inframarginal impact of the tax
break was _____.
a. $2,500; $13,000
b. $2,500; $6,500
c. $5,000; $13,000
d. $5,000; $6,500

       9. Which term refers to the difference between a firm's revenues and its reported costs of production?
a. dividend
b. pure profit
c. economic profit
d. accounting profit

       10. For someone who is not working at all without the Earned Income Tax Credit (EITC), which statement is true
when the person is subject to the EITC, once he starts working?
a. The income effect of the EITC induces the person to work more.
b. The substitution effect of the EITC induces the person to work more.
c. There is no substitution effect.
d. There is no income effect.

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sample test questions final exam

       11. In the accompanying figure, consumer surplus is given by area _____, while producer surplus is given by area
_____.

a. A; D
b. A + B; C + D
c. D; A
d. B; C

       12. If the penalties associated with tax evasion are increased and the risk of being caught evading taxes increases,
which of the following statements is TRUE, other things held constant?
a. The marginal cost of evading taxes is decreased for any given level of unreported income.
b. The marginal cost of evading taxes is increased for any given level of unreported income.
c. More tax evasion occurs.
d. The two changes cancel each other out, so there is no change in tax evasion.

       13. Which refers to the idea that even if individuals are willing to tell government how much they are willing to pay
for a public good, they may not have an idea of what that is?
a. preference revelation
b. preference aggregation
c. preference knowledge
d. warm glow effect

       14. If a politician suggested that Social Security benefits be means-tested, which of the following approaches is
that politician suggesting?
a. extending the base of taxable wages
b. raising the retirement age
c. lowering benefits for all recipients
d. lowering benefits for higher-income groups

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sample test questions final exam

       15. All other things equal, consumers bear more of a tax as demand becomes more _____ and supply becomes
more _____.
a. unit elastic; unit elastic
b. elastic; elastic
c. inelastic; inelastic
d. inelastic; elastic

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sample test questions final exam

Answer Key

1. b
2. a
3. b
4. d
5. d
6. c
7. a
8. d
9. d
10. b
11. d
12. b
13. c
14. d
15. d

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