1. Assume that Fred consumes only two goods: waffles and ramen. Use a budget constraint and indifference curves to illustrate the impact of a tax on waffles. Is Fred happier or sadder after the imposition of the tax on waffles? Does he buy more or fewer waffles after the tax? Does he buy more or less ramen after the tax?

2. Define and discuss the differences between the substitution effect and the income effect of taxation.

3. Draw a graph depicting the case of a perfectly competitive firm making a profit in the short run. Please include (and label) marginal cost, marginal revenue, average total cost, and any other details you feel are relevant.

4. Assume a corporate income tax is levied on the firm in Question 3. Use a diagram to show how the firms optimal quantity of output is affected by the tax on corporate profits. Explain why this result occurs.

5. Assume that the fictional country of Taxania has the following tax system. Each citizen is allowed to deduct a personal exemption of $1,500 from their gross income for each member of their immediate family. Furthermore, business expenses, medical expenses, and mortgage interest is deductible, and there is a standard deduction of $12,000 for single individuals and $20,000 for married couples. Furthermore, there is a child tax credit of $1,000 per child. Income is taxed according to the following schedule:

Income Range (single) Married Tax Rate

0-10,000 0-20,000 5%

10,000-20,000 20,000-35,000 15%

20,000-50,000 35,000-80,000 25%

>50,000 >80,000 35%

Leah is single with no kids, and currently makes $72,000 per year. This year she incurred $500 in business expenses and $2,000 in medical expenses. She rents her current residence. What is Leahs current tax liability? What is her relevant marginal tax rate? What is her effective average tax rate?

Christopher and Jordan are a married couple with two children. Last year, they earned a combined income of $65,000. They own their home, paying $14,000 in mortgage interest. They had no medical expenses or business expenses. What is the couples current tax liability? What is their relevant marginal tax rate? What is their effective average tax rate?

6. Define the benefits principle of taxation and the ability to pay principle of taxation. Are these views incompatible? Discuss one government program that is justified by each principle.

7. Draw a diagram depicting an excise tax in a market for a single good. Label government revenue and deadweight loss.

8. What is meant by the term tax incidence? How does elasticity affect tax incidence? How does elasticity affect deadweight loss?

9. Prior to the implementation of an excise tax in the market for cigarettes, 20,000 packs of cigarettes were sold at a price of $5 per pack. After the imposition of a $2 tax per pack, 18,000 packs were sold at a price of $6.50. What is the deadweight loss associated with this tax? What is the revenue collected from this tax? Do producers or consumers bear more of the burden of this tax? What does that say about the relative elasticities of supply and demand? If the tax doubled to $4 per pack, what is your best estimate of what the new deadweight loss would be?

10. Draw a diagram depicting a Lorenz curve. What is this diagram used to illustrate? How would you use this diagram to calculate a Gini coefficient?

11. What is meant by the term Ricardian Equivalence? Under what conditions does this idea exist? Do you believe it to be a valid theory?

12. What is comprehensive income according to the Haig-Simons criterion? Why dont we tax people based on this definition of income?

13. Discuss how income taxes distort the labor/leisure decision. Do income taxes cause people to work more or work less? What two effects are competing in this calculation? Should I consider both effects when computing the relative deadweight loss due to income taxation over lump sum taxation?

14. Discuss what is meant by the terms progressive, regressive, and proportional as they relate to taxation. Give an example of a progressive tax and a regressive tax.

15. How does the corporate income tax influence the financing decisions of corporations? What impact does this have? Who benefits under this situation