Question & Answer

As you move down a straight-line demand curve, what happens to elasticity? Why?

What is the price elasticity of demand at the point (a) where the demand curve crosses the vertical axis; (b) where it crosses the horizontal axis?

(Looking at the Maths) These questions refer to the diagram.

               1. What is the price elasticity of demand at points l and k?

Referring to Figure 2.15, use the mid-point formula to calculate the price elasticity of demand between (a) P = 6 and P = 4; (b) P = 4 and P = 2. What do you conclude about the elasticity of a straight-line demand curve as you move down it?

To illustrate these figures, draw the demand curve corresponding to the following table.

If the curve had an elasticity of –1 throughout its length, what would be the quantity demanded (a) at a price of £1; (b) at a price of 10p; (c) if the good were free?

1. Assume that demand for a product is inelastic. Will consumer expenditure go on increasing as price rises? Would there be any limit?

2. Can you think of any examples of goods which have a totally inelastic demand

(a) at all prices;

(b) over a particular price range?

Demand for oil might be relatively elastic over the longer term, and yet it could still be observed that over time people consume more oil (or only very slightly less) despite rising oil prices. How can this apparent contradiction be explained?

What is the difference between horizontal and vertical equity?  How do tax preferences affect people’s view of horizontal equity?

What is the difference between the income and substitution effects?  For which types of taxpayers is the income effect more likely descriptive?  For which types of taxpayers is the substitution effect more likely descriptive?

Kobestrongly dislikes SUVs and is appalled that so many are on the road.  He proposes to eliminate the federal income tax and replace it with a $50,000 annual tax per SUV.  Based on the number of SUVs currently owned in the United States, he estimates the tax will generate exactly the amount of tax revenue currently collected from the income tax.  What is wrong with Kobe’s proposal?  What type of forecasting is Kobelikely using?

Benjaminrecently bought a truck in Alabama for his business in Georgia.  What different types of federal and state taxes may affect this transaction?

When we calculate average and effective tax rates, do we consider implicit taxes?  What effect does this have on taxpayers’ perception of equity?

What is an ad valorem tax?  Name an example of this type of tax.

What is the difference between a sales tax and a use tax?

The state of Georgia recently increased its tax on a pack of cigarettes by $2.00.  What type of tax is this?  Why might Georgia choose this type of tax?

What are some of the taxes that currently are unique to state and local governments?  What are some of the taxes that the federal, state, and local governments each utilize?

What are some of the taxes that currently are unique to state and local governments?  What are some of the taxes that the federal, state, and local governments each utilize?

What is the distinguishing feature of an excise tax?

What is the distinguishing feature of an excise tax?

What is the tax base for the Social Security and Medicare taxes for an employee or employer?  What is the tax base for Social Security and Medicare taxes for a self-employed individual?  Is the self-employment tax in addition to or in lieu of federal income tax?

Which is the largest tax collected by the U.S. government?  What types of taxpayers are subject to this tax?

Arnold and Lilly have recently had a heated discussion about whether a sales tax is a proportional tax or a regressive tax.  Arnoldargues that a sales tax is regressive.  Lillycounters that the sales tax is a flat tax.  Who is correct?

Describe the differences between a proportional, progressive, and regressive tax rate structure.

Which is a more appropriate tax rate to use to compare taxpayers’ tax burdens – the average or the effective tax rate?  Why?

Describe the three different tax rates discussed in the chapter and how taxpayers might use them.