Consider a situation where a government is deciding between two different taxes on beer. The first tax is $2.88 per case and the second is a tax of one cent per ounce placed on beer. Both are paid by the supplier
Assume both will raise the same amount of revenue this period. Pretend you are an advisor to the government and explain to them which tax they should enact.
After carefully considering the two taxes, in my opinion this government should adopt the ad valorem tax, i.e., the tax of one cent per ounce of beer. The primary reason I argue in favor of the ad valorem tax is that the ad valorem tax will change in response to change in price. Thus if prices rise in the future the tax will not need to be changed in order to keep up with inflation. In addition, the unit tax on a case of beer could be more distortionary than the ad valorem tax because producers have an incentive to increase the number of cans in a case (if possible) or the number of ounces in each can in a case.
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The estimated cost of automobile jobs saved due to limitations on foreign autos is $105,000 per job. Why is there a cost to saving jobs through protectionism?
What will be an ideal response?
Excess reserves are equal to
A) the sum of desired reserves plus any reserves that are more than are required. B) actual reserves minus desired reserves. C) actual reserves plus desired reserves. D) desired reserves minus actual reserves.
Mary and Cathy are roommates. Mary assigns a $30 value to smoking cigarettes. Cathy values smoke-free air at $15 . Which of the following scenarios is a successful example of the Coase theorem?
a. Cathy offers Mary $20 not to smoke. Mary accepts and does not smoke. b. Mary pays Cathy $16 so that Mary can smoke. c. Mary pays Cathy $14 so that Mary can smoke. d. Cathy offers Mary $15 not to smoke. Mary accepts and does not smoke.
Suppose Reta is planning for retirement in a two-period world. In the first period Reta is young and earns $1 million, and in the second period Reta is old and retired and earns nothing. The interest rate is initially 10 percent, but then it falls to 7 percent. After the interest rate falls, the
a. substitution effect will induce Reta to consume more when she is young. b. substitution effect will induce Reta to consume less when she is young. c. income effect will induce Reta to consume more when she is young. d. change in interest rates affects the substitution effect but not the income effect.