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Microeconomics Chapters 16&18
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To say that land rent performs no incentive function means that:
higher rental payments will not bring forth a larger quantity of land.
rent is not a cost to specific firms, but it is a cost from the standpoint of the economy as a whole.
rent does not allocate land in terms of productive efficiency.
rent tends to allocate land into the most productive uses.
higher rental payments will not bring forth a larger quantity of land.
The demand for farmland will increase if:
the demand for food decreases.
technological advances make land more productive.
the price of farm labor increases and the output effect exceeds the substitution effect.
the supply of farmland increases.
technological advances make land more productive.
Which of the following is correct?
Although land has no production cost from society's viewpoint, rental payments are costs to individual producers.
Land rent is not a cost to either society or individual producers.
Although land rent is a cost from society's viewpoint, it is not a cost to individual producers.
Land rent is a cost to both society and individual producers.
Although land has no production cost from society's viewpoint, rental payments are costs to individual producers.
The rent paid for the pasture land used to graze cattle would increase if:
the productivity of the land increased.
people decided to consume more beef.
oil deposits were discovered on the land.
any of these occurred.
any of these occurred.
Refer to the diagrams. Assume that only wheat can be grown on the three grades of land shown in Figures (a), (b), and (c). Also assume that identical amounts of labor, capital, and other needed inputs are used in farming each grade of land. On the basis of these three figures, we can say that:
the land shown in both Figures (a) and (b) is a "free good."
the land shown in Figure (a) only is a "free good."
the land shown in all three figures is a "free good."
land is not a "free good" in any of the three figures.
the land shown in Figure (a) only is a "free good."
The largest single share of all income earned by Americans consists of:
wages and salaries.
interest.
rents.
corporate profits.
wages and salaries.
If labor's share of the income paid to American resource suppliers is broadly defined as the sum of wages and salaries and proprietors' income, we can say that labor's relative share has:
remained approximately constant since 1900.
increased dramatically at the expense of capitalist income.
declined by about one-third since 1900.
decreased because of the decline of unionism.
remained approximately constant since 1900.
(Last Word) Suppose you deposit $5,000 in a bank that pays 10 percent interest compounded twice a year. The actual annual interest rate you receive is:
10 percent.
11 percent.
10.25 percent.
12 percent.
10.25 percent.
The future value of $3,000 deposited today at 5 percent interest is $3,646.52 four years from now.
True
The present value of $4,000 deposited today at 8 percent interest is $5,038.85 three years from now.
False.
Suppose that you own a 10-acre plot of land that you would like to rent out to wheat farmers. For them, bringing in a harvest involves $30 per acre for seed, $80 per acre for fertilizer, and $70 per acre for equipment rentals and labor. With these inputs, the land will yield 40 bushels of wheat per acre. Now suppose the price at which wheat can be sold is $5 per bushel and that farmers want to earn a normal profit of $10 per acre.
Instructions: Enter your answers as whole numbers.
a. What is the most that any farmer would pay to rent your 10 acres?
b. What if the price of wheat rose to $6 per bushel?
a. What is the most that any farmer would pay to rent your 10 acres? $100
b. What if the price of wheat rose to $6 per bushel? $500
Suppose that you own a 20-acre plot of land that you would like to rent out to wheat farmers. For them, bringing in a harvest involves $35 per acre for seed, $80 per acre for fertilizer, and $70 per acre for equipment rentals and labor. With these inputs, the land will yield 40 bushels of wheat per acre. Now suppose the price at which wheat can be sold is $6 per bushel and that farmers want to earn a normal profit of $10 per acre.
Instructions: Enter your answers as whole numbers.
a. What is the most that any farmer would pay to rent your 20 acres?
b. What if the price of wheat rose to $7 per bushel?
a. What is the most that any farmer would pay to rent your 20 acres? $900
b. What if the price of wheat rose to $7 per bushel? $1,700
Suppose that the demand for loanable funds for car loans in the Milwaukee area is $10 million per month at an interest rate of 10 percent per year, $11 million at an interest rate of 9 percent per year, $12 million at an interest rate of 8 percent per year, and so on.
Instructions: Enter your answers as whole numbers.
a. If the supply of loanable funds is fixed at $15 million, what will be the equilibrium interest rate?
b. If the government imposes a usury law and says that car loans cannot exceed 3 percent per year, how big will the monthly shortage (or excess demand) for car loans be?
c. What if the usury limit is raised to 7 percent per year?
Equilibrium interest rate =
Excess demand =
a. If the supply of loanable funds is fixed at $15 million, what will be the equilibrium interest rate? 5 percent per year.
b. If the government imposes a usury law and says that car loans cannot exceed 3 percent per year, how big will the monthly shortage (or excess demand) for car loans be? $2 million worth of car loans per month.
c. What if the usury limit is raised to 7 percent per year?
Equilibrium interest rate = 5 percent per year.
Excess demand = $0
Suppose that the demand for loanable funds for car loans in the Milwaukee area is $10 million per month at an interest rate of 10 percent per year, $11 million at an interest rate of 9 percent per year, $12 million at an interest rate of 8 percent per year, and so on.
Instructions: Enter your answers as whole numbers.
a. If the supply of loanable funds is fixed at $14 million, what will be the equilibrium interest rate?
b. If the government imposes a usury law and says that car loans cannot exceed 3 percent per year, how big will the monthly shortage (or excess demand) for car loans be?
c. What if the usury limit is raised to 7 percent per year?
a. If the supply of loanable funds is fixed at $14 million, what will be the equilibrium interest rate? 6 percent per year.
b. If the government imposes a usury law and says that car loans cannot exceed 3 percent per year, how big will the monthly shortage (or excess demand) for car loans be? $3 million worth of car loans per month.
c. What if the usury limit is raised to 7 percent per year? $0 million worth of car loans per month.
To fund its wars against Napoleon, the British government sold consol bonds. They were referred to as "perpetuities" because they would pay £3 every year in perpetuity (forever).
Instructions: Enter your answers as whole numbers.
a. If a citizen could purchase a consol for £25, what would its annual interest rate be?
b. What if the price were £50?
c. What if the price were £100? .
d. Bonds are known as "fixed income" securities because the future payments that they will make to investors are fixed by the bond agreement in advance.
Do the interest rates of bonds and other investments that offer fixed future payments vary positively or inversely with their current prices?
a. If a citizen could purchase a consol for £25, what would its annual interest rate be? 12 percent.
b. What if the price were £50? 6 percent.
c. What if the price were £100? 3 percent.
d.
Do the interest rates of bonds and other investments that offer fixed future payments vary positively or inversely with their current prices? Inversely
To fund its wars against Napoleon, the British government sold consol bonds. They were referred to as "perpetuities" because they would pay £10 every year in perpetuity (forever).
Instructions: Enter your answers as whole numbers.
a. If a citizen could purchase a consol for £25, what would its annual interest rate be?
b. What if the price were £50?
c. What if the price were £100?
d. Bonds are known as "fixed income" securities because the future payments that they will make to investors are fixed by the bond agreement in advance.
Do the interest rates of bonds and other investments that offer fixed future payments vary positively or inversely with their current prices?
a. If a citizen could purchase a consol for £25, what would its annual interest rate be? 40 correct percent.
b. What if the price were £50? 20 percent.
c. What if the price were £100? 10 percent.
d.
Do the interest rates of bonds and other investments that offer fixed future payments vary positively or inversely with their current prices? Inversely
Suppose that the interest rate is 4 percent.
Instructions: Round your answers to 2 decimal places.
a. What is the future value of $100 four years from now?
How much of the future value is total interest?
b. By how much would total interest be greater at a 6 percent interest rate than at a 4 percent interest rate?
a. What is the future value of $100 four years from now? $116.99
How much of the future value is total interest? $16.99
b. By how much would total interest be greater at a 6 percent interest rate than at a 4 percent interest rate? $9.26
Suppose that the interest rate is 5 percent.
Instructions: Round your answers to 2 decimal places.
a. What is the future value of $100 five years from now?
b. How much of the future value is total interest?
c. By how much would total interest be greater at an interest rate of 7 percent than at an interest rate of 5 percent?
a. What is the future value of $100 five years from now? $127.63
b. How much of the future value is total interest? $27.63
c. By how much would total interest be greater at an interest rate of 7 percent than at an interest rate of 5 percent? $12.63
You are currently a worker earning $60,000 per year but are considering becoming an entrepreneur. You will not switch unless you earn an accounting profit that is on average at least as great as your current salary. You look into opening a small grocery store. Suppose that the store has annual costs of $150,000 for labor, $40,000 for rent, and $30,000 for equipment. There is a one-half probability that revenues will be $200,000 and a one-half probability that revenues will be $400,000.
a. In the low-revenue situation, what will your accounting profit or loss be?
In the high-revenue situation, what will your accounting profit or loss be?
b. On average, how much do you expect your revenue to be?
Your accounting profit?
Your economic profit?
Will you quit your job and try your hand at being an entrepreneur?
c. Suppose the government imposes a 25 percent tax on accounting profits. This tax is only levied if a firm is earning positive accounting profits.
What will your after-tax accounting profit be in the low-revenue case?
In the high-revenue case?
What will your average after-tax accounting profit be?
What about your average after-tax economic profit?
Will you now want to quit your job and try your hand at being an entrepreneur?
d. Other things equal, does the imposition of the 25 percent profit tax increase or decrease the supply of entrepreneurship in the economy?
a. In the low-revenue situation, what will your accounting profit or loss be? $-20,000
In the high-revenue situation, what will your accounting profit or loss be? $180,000.
b. On average, how much do you expect your revenue to be? $300,000 per year.
Your accounting profit? $80,000 per year.
Your economic profit? $20,000 per year.
Will you quit your job and try your hand at being an entrepreneur? Yes
c.
What will your after-tax accounting profit be in the low-revenue case? $-20,000
In the high-revenue case? $135,000
What will your average after-tax accounting profit be?
$57,500
What about your average after-tax economic profit? $-2,500
Will you now want to quit your job and try your hand at being an entrepreneur? No
d. Other things equal, does the imposition of the 25 percent profit tax increase or decrease the supply of entrepreneurship in the economy? Decrease
Refer to the diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. Flow (4) might represent:
the services of NASA astrophysicists.
the purchase of stealth bombers.
personal income taxes.
investment spending by private corporations.
the services of NASA astrophysicists.
Government borrowing:
is the primary means of financing public expenditures.
provides a stimulus to government spending with no opportunity cost.
may crowd out private sector investment.
is prohibited by the U.S. constitution.
may crowd out private sector investment.
In determining one's personal income tax, taxable income is:
total income less deductions and exemptions.
all income.
all income other than wages and salaries.
wage and salary income only.
total income less deductions and exemptions.
Assume that in year 1 you pay an average tax rate of 20 percent on a taxable income of $20,000. In year 2, you pay an average tax rate of 25 percent on a taxable income of $30,000. Assuming no change in tax rates, the marginal tax rate on your additional $10,000 of income is:
5 percent.
12 percent.
35 percent.
42 percent.
35 percent.
Taxes on commodities or on purchases are known as:
corporate income taxes.
sales and excise taxes.
personal income taxes.
payroll taxes.
sales and excise taxes.
Assume that you pay $10,000 of tax on a taxable income of $50,000. If your taxable income were $150,000, your tax payment would be $25,000. This suggests the tax is:
progressive.
proportional.
regressive.
discriminatory.
regressive.
If the demand for a product is perfectly elastic and supply is upsloping, a $1 excise tax per unit on suppliers will:
not raise price at all.
lower price by $1.
raise price by more than $1.
raise price by $1.
not raise price at all.
(Advanced analysis) Answer the question on the basis of the following information: The equations for the demand and supply curves for a particular product are P = 10 - .4Q and P = 2 + .4Q, where P is price and Q is quantity expressed in units of 100. After an excise tax is imposed on the product, the supply equation is P = 3 + .4Q.
Refer to the given information. The efficiency loss of this tax is:
$125.00.
$62.50.
$87.50.
$1.00.
$62.50.
The basic source of state government's revenue is the property tax.
False
A progressive tax takes relatively more from the rich than it does from the poor.
True
Suppose a tax is such that an individual with an income of $10,000 pays $2,000 of tax, a person with an income of $20,000 pays $3,000 of tax, a person with an income of $30,000 pays $4,000 of tax, and so forth.
a. What is each person's average tax rate?
(Table)
Income: $10,000 $20,000 $30,000
Tax Paid: $2,000 $3,000 $4,000
Average Tax Rate:
b. Is this tax regressive, proportional, or progressive?
a. What is each person's average tax rate?
(Table)
Income: $10,000 $20,000 $30,000
Tax Paid: $2,000 $3,000 $4,000
Avergae Tax Rate: 20% 15% 13.3%
b. Is this tax regressive, proportional, or progressive?
Regressive
Suppose a tax is such that an individual with an income of $10,000 pays $2,500 of tax, a person with an income of $20,000 pays $5,000 of tax, a person with an income of $30,000 pays $7,500 of tax, and so forth.
a. What is each person's average tax rate?
(Table)
Income: $10,000 $20,000 $30,000
Tax Paid: $2,500 $5,000 $7,500
Average Tax Rate:
b. Is this tax regressive, proportional, or progressive?
a. What is each person's average tax rate?
(Table)
Income: $10,000 $20,000 $30,000
Tax Paid: $2,500 $5,000 $7,500
Average Tax Rate: 25% 25% 25%
b. Is this tax regressive, proportional, or progressive? Proportional
Suppose in Fiscalville there is no tax on the first $10,000 of income, but a 20 percent tax on earnings between $10,000 and $20,000 and a 30 percent tax on income between $20,000 and $30,000. Any income above $30,000 is taxed at 40 percent.
Instructions: Enter your answers as whole numbers.
a. If your income is $50,000, how much will you pay in taxes?
b. Determine your marginal tax rate.
c. Determine your average tax rate.
d. Is this a progressive tax?
a. If your income is $50,000, how much will you pay in taxes? $13,000
b. Determine your marginal tax rate. 40 percent.
c. Determine your average tax rate. 26 percent.
d. Is this a progressive tax? Yes
For tax purposes, "gross income" is all the money a person receives in a given year from any source. But income taxes are levied on "taxable income" rather than gross income. The difference between the two is the result of many exemptions and deductions. To see how they work, suppose you made $50,000 last year in wages, earned $10,000 from investments, and were given $5,000 as a gift by your grandmother. Also assume that you are a single parent with one small child living with you.
Instructions: Enter your answers as whole numbers.
a. What is your gross income?
b. Gifts of up to $13,000 per year from any person are not counted as taxable income. Also, the "personal exemption" allows you to reduce your taxable income by $3,650 for each member of your household.
Given these exemptions, what is your taxable income?
c. Next, assume you paid $700 in interest on your student loans last year, put $2,000 into a health savings account (HSA), and deposited $4,000 into an individual retirement account (IRA). These expenditures are all tax exempt, meaning that any money spent on them reduces taxable income dollar-for-dollar.
Knowing that fact, now what is your taxable income?
d. Next, you can either take the so-called standard deduction or apply for itemized deductions (which involve a lot of tedious paperwork). You opt for the standard deduction that allows you as head of your household to exempt another $8,500 from your taxable income.
Taking that into account, what is your taxable income?
e. Apply the tax rates shown in the table below to your taxable income.
Federal Personal Income Tax Rates 2013 Table
Instructions: For the following, round your answers to 1 decimal place.
How much federal income tax will you owe?
What is the marginal tax rate that applies to your last dollar of taxable income?
f. As the parent of a dependent child, you qualify for the government's $1,000 per-child "tax credit." Like all tax credits, this $1,000 credit "pays" for $1,000 of whatever amount of tax you owe.
Given this credit, how much money will you actually have to pay in taxes?
Using that actual amount, what is your average tax rate relative to your taxable income? 10 correct percent.
What about your average tax rate relative to your gross income?
a. What is your gross income? $65,000
b.
Given these exemptions, what is your taxable income? $52,700
c.
Knowing that fact, now what is your taxable income? $46,000
d.
Taking that into account, what is your taxable income? $37,500 correct.
How much federal income tax will you owe? $4,732.4
What is the marginal tax rate that applies to your last dollar of taxable income? 15 percent.
f.
Given this credit, how much money will you actually have to pay in taxes? $3,732.4
Using that actual amount, what is your average tax rate relative to your taxable income? 10 percent.
What about your average tax rate relative to your gross income? 5.7 percent.
Interest rates are the payments needed to entice individuals to:
Accept insurable risk
Accept uninsurable risk
Sacrifice their present consumption
Sacrifice their future consumption
Sacrifice their present consumption
The following table shows the projected rate of return and number of investment projects which might be undertaken by a small firm. Each project requires an investment of $1,000.
Refer to the above table and information. The number of investment projects this firm would undertake will decrease from 4 to 2 if the interest rate in the loanable funds market:
Increases from 10 percent to 20 percent
Decreases from 20 percent to 10 percent
Decreases from 15 percent to 10 percent
Increases from 15 percent to 20 percent
Increases from 10 percent to 20 percent
Steve Jobs and Apple achieved tremendous successes with iMac, iPhone, iPad by:
Developing and producing these products in foreign locations
Outsourcing the development and production to other companies
Developing and producing both hardware and software
Mimicking, with great speed, its rivals and competitors
Developing and producing both hardware and software
Answer the question using the following table with investment-demand in an economy.
Refer to the above table. An increase in the interest rate from 15% to 19% percent would:
Increase investment by $90 billion
Decrease investment by $90 billion
Decrease investment by $110 billion
Decrease investment by $140 billion
Decrease investment by $110 billion
Suppose that the quantity of a certain type of farmland available is 400,000 acres, and the demand for this land is given in the table below.
Refer to the above information and table. How much of the farmland will be rented?
200,000 acres
300,000 acres
400,000 acres
500,000 acres
400,000 acres
The prices paid to a productive resource usually perform an incentive function except with what resource?
Land
Labor
Capital
Entrepreneurial ability
Land
A firm wants to borrow funds to purchase a new piece of equipment that costs $20,000 and has a useful life of one year. The investment is expected to produce an additional $1,500 in total revenue. The firm will most likely make the investment if the interest rate is:
6 percent
8 percent
10 percent
12 percent
6 percent
Use the following demand schedule and possible supply schedules, A-D, to answer the question.
Refer to the above schedules. There would be no incentive function performed by price in which of the given resource supply schedules?
A
B
C
D
C
Labor's share of income earned by Americans is smaller than the share of capital.
False
Since 1900, the relative share of "wages & salaries, plus proprietors' income" in the total income earned by Americans in a typical year has been about:
20 percent
50 percent
80 percent
95 percent
80 percent
For a given future value, the higher is the interest rate, the higher will be the present value.
False
If a factor of production has no production cost and has a fixed supply, then payments to that factor constitute what economists call:
Abnormal profits
Economic rent
Normal profits
Interest payments
Economic rent
Refer to the diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. Flow (2) might represent:
the provision of national defense by government.
a government subsidy to farmers.
corporate income tax payments.
welfare payments to low-income families.
corporate income tax payments.
With respect to local finance:
death and gift taxes are the major source of revenue and most expenditures are for hospitals and health services.
the corporate income tax is the major source of revenue and natural resource development is the major type of expenditure.
property taxes are the basic source of revenue and education is the major type of expenditure.
sales and excise taxes are the major source of revenue and highway construction and maintenance is the major type of expenditure.
property taxes are the basic source of revenue and education is the major type of expenditure.
Assume the Environmental Protection Agency imposes an excise tax on polluting firms. In which of the following situations would we expect the additional costs to be borne most heavily by consumers?
Demand is highly elastic and supply is highly inelastic.
Demand and supply are both highly elastic.
Demand and supply are both highly inelastic.
Demand is highly inelastic and supply is highly elastic.
Demand is highly inelastic and supply is highly elastic.
Refer to the figure in which S is the before-tax supply curve and St is the supply curve after an excise tax is imposed. The total tax collection from this excise tax will be area:
ABCE + ECF.
ABCE.
ECF.
0BCG.
ABCE.
The greater the elasticity of supply of and demand for a good, the:
smaller will be the efficiency loss of an excise tax on the good.
more likely the good will be a public good rather than a private good.
larger will be the efficiency loss of an excise tax on the good.
larger will be the proportion of an excise tax on the good that will be shifted forward to consumers.
larger will be the efficiency loss of an excise tax on the good.
Refer to the diagram in which S is the before-tax supply curve and St is the supply curve after an excise tax is imposed. The total amount of the tax paid by consumers is shown by areas:
A + B + F.
A + B.
A + B + C.
E + F.
A + B.
Which of the following taxes is least likely to be shifted?
A state excise tax on the sellers of football tickets.
A personal income tax.
A general sales tax on retailers who sell foodstuffs and clothing.
A federal excise tax on the producers of whiskey.
A personal income tax.
(Last Word) For each dollar paid in taxes, approximately how much do households in the top quintile receive back in the form of government expenditures?
12 cents.
28 cents.
41 cents.
73 cents.
41 cents.
A tax is progressive if the average tax rate rises as income increases.
True
The greater the elasticity of demand and supply, the greater is the efficiency loss of a tax.
True
;