question
There are 100 households in the economy of Equalor. Initially, 99 of them have an income of $10,000 each, and one household has an income of $1,010,000. What is the median income in this economy? What is the mean income?
answer
The median income is $20,000 and the mean income is $10,000.
question
There are 100 households in the economy of Equalor. Initially, 99 of them have an income of $10,000 each, and one household has an income of $1,010,000. Through its poverty programs, the government of Equalor now redistributes income. It takes $990,000 away from the richest household and distributes it equally among the remaining 99 households. What is the median income in this economy now? What is the mean income? Has the median income changed? Has the mean income changed? Which indicator (mean or median household income) is a better indicator of the typical Equalorian household's income? Explain.
answer
The median income is $20,000 and the mean is $15,000. The mean has increased by $5,000. Mean income is better because it represents the standard of living.
question
Critics of traditional welfare programs often cite a disincentive to work as a flaw in the policy. Why would these critics be in favor of the Earned Income Tax Credit (EITC)? And why is the EITC described as a negative income tax?
answer
The EITC gives people more money for the more kids women have. This helps the economy because a growing population will produce more GDP in the long run. The EITC is a negative income tax because it is given to people who don't make much money and have a lot of need for the money, so these people's net worth is negative.
question
The country of Marxland has the following income tax and social insurance system. Each citizen's income is taxed at an average tax rate of 100%. A social insurance system then provides transfers to each citizen such that each citizen's after-tax income is exactly equal. That is, each citizen gets (through a government transfer payment) an equal share of the income tax revenue. What is the incentive for one individual citizen to work and earn income? What will the total tax revenue in Marxland be? What will be the after-tax income (including the transfer payment) for each citizen? Do you think such a tax system that creates perfect equality will work?
answer
People will work for the intrinsic value of working - the satisfaction of doing a job well done. People will make the things that they enjoy making. People will all make the same amount of money. This system will work as long as good leaders are in charge.
question
In a private insurance market, there are two different kinds of people: some who are more likely to require expensive medical treatment and some who are less likely to require medical treatment and who, if they do, require less expensive treatment. One health insurance policy is offered, tailored to the average person's health care needs: the premium is equal to the average person's medical expenses (plus the insurer's expenses and normal profit). Explain why such an insurance policy is unlikely to be feasible.
answer
This one size-fits all policy would work for the average person. Most people are not average. Those people who are healthy would purchase the policy but not use it. Those who are unhealthy wouldn't purchase the policy because it doesn't provide enough coverage.
question
All states impose excise taxes on gasoline. According to data from the Federal Highway Administration, the state of California imposes an excise tax of $0.18 per gallon of gasoline. If California doubled the excise tax, would tax revenue double? Why or why not?
answer
The tax revenue would double because the price elasticity of demand for gasoline is high and people will pay whatever they have to pay to get to where they need to go.
question
Under what supply and demand conditions would an excise tax create a large incidence of the tax on suppliers and a small incidence of the tax on consumers? Explain how this works.
answer
If the supply curve is relatively elastic and the demand curve is relatively inelastic, the burden of a tax will fall mainly on suppliers. When demand is inelastic, a price increase will prompt a large decrease in quantity demanded. But because suppliers have an elastic supply curve, the quantity supplied cannot change by much. Therefore, most of the tax is paid by suppliers, the group least responsive to a price change.
question
Assess the following tax policies in terms of the benefits principle versus the ability - to - pay principle: A tax on gasoline that finances maintenance of state roads.
answer
This tax is based on the ability-to-pay principle, since the people paying the tax have money enough to drive cars.
question
Assess the following tax policies in terms of the benefits principle versus the ability - to - pay principle: An 8% tax on imported goods valued in excess of $800 per household brought in on passenger flights.
answer
This tax is based on the benefits principle, since the tax will benefit the government.
question
Assess the following tax policies in terms of the benefits principle versus the ability - to - pay principle: Airline - flight landing fees that pay for air traffic control.
answer
This tax is based on the ability-to-pay principle, since the airlines make large profits.
question
Assess the following tax policies in terms of the benefits principle versus the ability - to - pay principle: A reduction in the amount of income tax paid based on the number of dependent children in the household.
answer
This tax is based on the benefits principle, since the benefit will go to taxpayers instead of welfare recipients.
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