This Document Contains Chapters 16 to 18 Chapter 16 Efficient and Equitable Taxation Multiple Choice 1. A natural monopoly has A) many producers of the same product. B) easy access to the market. C) a single firm providing the industry’s output. D) one buyer of output. Answer: C 2. Horizontal equity incorporates the notion that A) those earning higher incomes should pay more in taxes. B) those earning equal incomes should pay the same in taxes. C) taxes paid should be unassociated with income levels. D) there should be no excess burden created by a tax. Answer: B 3. Tax evasion is A) an illegal act. B) prevalent in the United States. C) failing to pay legally due taxes. D) all of the above. Answer: D 4. The Ramsey Rule implies that goods be __________ in consumption. A) unrelated B) equal C) opposite D) moderate Answer: A 5. Tax avoidance is A) illegal in the United States. B) changing your behavior so as to reduce your tax liability. C) the same as tax evasion. D) a minor source of concern in the United States. Answer: B 6. When the minimum marginal penalty for tax evasion is greater than the maximum marginal tax rate, theory suggests that tax evasion will be A) greater than 1. B) . C) 0. D) 100. Answer: C 7. Vertical equity incorporates the notion that A) those earning higher incomes should pay more in taxes. B) those earning equal incomes should pay the same in taxes. C) taxes paid should be unassociated with income levels. D) there should be no excess burden created by a tax. Answer: A 8. Average cost pricing is found A) when supply equals demand. B) when AC = MR. C) when P = 0. D) where AC = AR. Answer: D 9. “For goods that are unrelated in consumption, efficiency requires that tax rates be inversely proportional to elasticities.” This is the definition of A) the benefits-received principle. B) the Ramsey Rule. C) the second best principle. D) the inverse elasticity rule. Answer: D 10. Deciding to engage in tax evasion requires consideration of all of the following, except the A) probability of being caught. B) probability of conviction if caught. C) probability of winning extra money. D) costs of defending oneself. Answer: C 11. A linear income tax schedule is known as A) a flat income tax. B) a regressive tax. C) a Haig-Simons tax. D) a user fee. Answer: A 12. Optimal commodity taxation would A) put a tax on leisure time, which is currently untaxed. B) have the smallest amount of excess burden possible for a given amount of tax revenue. C) optimize tax rates on the wealthiest Americans. D) eliminate tax evasion in the United States. Answer: B 13. Refer to Figure 16.3 in your textbook. When the MCz line crosses the Dz line, profits for the firm are A) 0. B) greater than 1. C) less than 0. D) . Answer: C 14. A situation in which the government cannot implement an optimal tax policy because the policy is inconsistent with the government’s incentives over time is known as A) government tax problem. B) time inconsistency of optimal policy. C) the double counting game. D) Wagner’s Law. Answer: B 15. A time endowment is A) the number of hours in a day. B) a gift of time that a person receives. C) the maximum number of hours in a year that a person can work. D) the largest amount of time that can be spent at leisure. E) all of the above. Answer: C 16. The idea of two individuals being equally well off in the absence and existence of taxation is A) time consistency of optimal taxation. B) flat tax income schedule. C) benefits received principle. D) utility definition of horizontal equity. Answer: D True/False 17. Neutral taxation is taxing different commodities at the same tax rate. A) True B) False C) Uncertain Answer: A 18. Choosing optimal user fees for government produced services is similar to choosing optimal taxes. A) True B) False C) Uncertain Answer: A 19. Natural monopolies have U-shaped cost curves. A) True B) False C) Uncertain Answer: B 20. Tax evasion is more likely to occur when people feel that their tax dollars are not being used properly. A) True B) False C) Uncertain Answer: C 21. Income is a poor measure of relative position when attempting to determine horizontal equity. A) True B) False C) Uncertain Answer: A 22. People who are risk neutral are more likely to engage in tax evasion than people who are risk loving. A) True B) False C) Uncertain Answer: C 23. Optimal user fees are paid only by the consumers of the good or service produced. A) True B) False C) Uncertain Answer: A 24. If a tax is efficient, it will necessarily be equitable. A) True B) False C) Uncertain Answer: B 25. Changing tax regimes can sometimes be difficult and lead to inequities. A) True B) False C) Uncertain Answer: A 26. Working fewer hours to reduce your tax burden is tax evasion. A) True B) False C) Uncertain Answer: B 27. It is easier to under-report income in industries that deal with a lot of cash. A) True B) False C) Uncertain Answer: A 28. Natural monopolies occur when a single or a few firms can take advantage of economies of scale and supply the entire industry output. A) True B) False C) Uncertain Answer: A Essay 29. Consider a monopolist that has a total cost curve of TC = 110Q – (0.25)Q2. The market demand equation is Qd = 155 – P. (A) What are the total revenue, marginal revenue, marginal cost, equilibrium quantity, equilibrium price, and profits for the monopolist in this market? (B) Suppose the government instructs the firm to produce using average cost pricing. What are the equilibrium quantity, equilibrium price, and profits? (C) Suppose further that the government wants the firm to produce where supply equals demand. What will be the equilibrium quantity, equilibrium price, and profits? Answer: Price can be written as P = 155 - Q. (A) TR is price multiplied by quantity for TR = P x Q = 155 x Q – (0.25) x Q2. Marginal revenue is MR =155 – 2 x Qd. Marginal costs are MC = 110 – 0.5 x Q. MC=MB for monopolist Q* = 30, P* = 125, TR = P x Q = 125 x 30 = 3,750 Profits = TR – TC = 3,750 – [110 x 30 - (0.25) 302] = 675. (B) AC = TC/Q = 110 + (0.25) x Q. AC = D if the government intervenes, 110 - (0.25) x Q = 155 - Q so Q* = 60 and P* = 95 TR = P x Q = 60 x 95 = 5,700 Profits = TR – TC = 5,700 – [110 x 60 – (0.25) x 602] = 0 (C) Now the monopolist produces at perfectly competitive market quantity, S = D so MC = D thus 110 + (0.5) x Q = 155 - Q Q* = 90 and P* = 65 TR = P x Q = 65 x 90 = 5,850 Profits = TR – TC = 5,850 – [110 x 90 – (0.25) x 902] = - 2,025 30. Refer to Figure 16.1 in your textbook. Assume that the equation of Dx is P = 50 – 2Qd. (A) If the original price of the good was $10 and a $4 tax was imposed, what is the tax income? What is the excess burden? (B) How much marginal excess burden will be created if an additional dollar of tax is levied? (C) How much additional tax is collected? Answer: (A) If the original price of the good was $10 and a $4 tax was imposed, tax income is the shaded area denoted by abhj. Q* with no tax can be calculated as 10 = 50 – 2Q and Q* = 20. If $4 of tax is levied, then Q1 = 18, then the Tax = (14 - 10) x (18) = $72, excess burden is the shaded area denoted by abc which is equal to 4 * 2 / 2 = $4 (B) If an additional tax is levied then Tax = $5, P = 15, Q2 = 17.5. Marginal excess burden is the shaded area denoted by fbae which is equal to [(1/2)*(1/2)*1 + (1/2)*4] = $2.25 (C) Additional tax is collected is the difference between shaded area denoted by gfih and baei which is equal to [(1*17.5) – (4*1/2)] = 15.5 31. Refer to the figure below. If the equation of MC of unreported income is MC = 4 + 2X, and the MB of unreported income is MB = 44 – 3X, what will be the amount of unreported income? How much of a change will there be if enforcement becomes more strict, resulting in MC = 9 + 2X? Answer: Set MB = MC. Giving 4 + 2X = 44 – 3X. Therefore, X* = 8. The increase in MC reduces X* to 7. 32. Suppose the demand for good X can be represented by the following equation: Xd = 22 - (1/4) P. Furthermore, suppose that the demand for good Y can be represented by Yd = 50-P. (A) Find the elasticity of demand for both good X and good Y when the price is $10. (B) Suppose that an ad valorem tax is placed on both goods. Good Y is taxed at a rate of 5%. To ensure that the inverse elasticity rule holds, what must be the rate at which good X is taxed? Reminder: Elasticity at a given price is found using the formula = - (1/S) (P/X), where S is the slope of the demand curve, X is the quantity demanded, and P is the price. Answer: (A) x = (1/4) (10/19.5) = 0.128. y = (1/1) (10/40) = 0.25. (B) To ensure tx/ty = x/ y, given ty = 0.05, solve tx/0.05 = 0.25/0.128 = 0.0975 or 9.75%. 33. Refer to Figure 16.5 in your textbook. If the marginal cost of underreporting can be written as MC = X2 + 0.4. (A) What is the maximum marginal tax level (t) possible that will ensure tax evasion is zero? (B) If the Marginal Tax rate is equal to 0.56, how much income will be evaded? Answer: (A) t* < 0.40 (B) Set MB = MC so that X2 + 0.4 = 0.56, X2 = 0.16 and X = 0.40 34. Ms. Mahmood is a retired schoolteacher whose pension income is $25,000 per year. She also receives Social Security income of $5,000 per year. Mr. Little is a young man who does not choose to work. He inherited $600,000 from his Aunt Clara, which he invested in a bond fund that provides a 5 percent return, generating $30,000 income per year. If we are concerned about the equity of taxation, should we consider these two people as equals and tax them equally? Explain why or why not. Answer: The incomes are not derived from the same types of sources. Horizontal equity would say that since incomes are the same, they should be taxed the same. In the United States, income derived from capital gains is not taxed like other sources of income. This issue is related to the ability to pay principle, as discussed in the textbook. 35. In 2009, President Obama proposed raising the income tax on those making over $250,000 per year. Discuss the merits of this plan. Answer: The debate is still ongoing. Some argue that this group creates jobs and is comprised of small business owners. Increasing taxes will stall job creation and thus slow the economy. Others argue that increases would be minimal and would lead to greater wealth creation for all and thus stimulate the economy. 36. One of the conditions mentioned in our formulation of the Ramsey Rule is that goods be unrelated in consumption. Do you think this is a reasonable assumption? If this condition does not hold, will the Ramsey Rule still work? Answer: The assumption is reasonable, but not necessary. In advanced courses of Public Finance, the Ramsey Rule is derived when goods are related. Chapter 17 The Personal Income Tax Multiple Choice 1. AGI is A) found by subtracting certain business expenses from H-S income. B) found by subtracting exemptions from taxable income. C) not used in modern tax policy. D) none of the above. Answer: A 2. The lowest marginal tax rate used in the United States is A) 10 percent. B) 28 percent. C) 31 percent. D) 39.6 percent. Answer: A 3. A Roth IRA differs from a traditional IRA in that A) the Roth IRA allows for savings towards retirement. B) the Roth IRA is phased out at certain income levels. C) the Roth IRA is not tax deductible at the time it is deposited. D) all of the above. Answer: C 4. Which of the following is an allowable deduction? A) unreimbursed medical expenses that exceed 7.5% of AGI B) state and local income and property taxes C) interest on qualified education loans up to a certain limit D) all of the above Answer: D 5. The current federal tax structure has ______ tax brackets. A) 5 B) 6 C) 7 D) 8 Answer: B 6. The Haig-Simons definition of income A) is measured over a given time. B) measures an individual’s power to consume. C) is a net change measure. D) is all of the above. Answer: D 7. Which of the following is (are) indexed to inflation? A) standard deduction B) employer contributions to pensions C) gifts and inheritances D) none of the above Answer: A 8. Actual taxes paid divided by the taxable base is the A) adjusted gross tax rate. B) gross tax rate. C) effective tax rate. D) individual tax rate. Answer: C 9. The Tax Reform Act of 1986 did all of the following, except A) increase taxes on wealthy corporations. B) increase the standard deduction. C) raise the amount of the personal exemption. D) simplify tax filing for low income families. Answer: A 10. Tax expenditures are revenues that A) are always recouped during tax season. B) only apply to large corporations. C) are needed to get full exemptions. D) are forgone due to preferential tax treatment. Answer: D 11. The “making-work-pay” credit allows A) credit for working. B) people to file taxes on April 19th. C) credit associated with learning. D) all of the above. Answer: C 12. Capital gains are A) treated exactly like other sources of income. B) taxed differently than other sources of income. C) generally not associated with a “lock-in effect.” D) only realized at death. Answer: B 13. The Haig-Simons definition of income includes A) employer pension contributions and insurance purchases. B) transfer payments. C) income in-kind. D) all of the above. Answer: D 14. A tax credit A) is not the same as a tax deduction. B) is another phrase for a tax deduction. C) is never calculated on federal tax returns. D) only applies to the EITC. Answer: A 15. Inflation A) has no impact on taxing strategies. B) can be temporarily offset with tax cuts. C) only became a tax problem in the late 1990s. D) generally affects state governments most severely. Answer: B 16. Flat tax A) is same tax rate to everyone. B) is same tax rate to each component of income. C) allows a tax base with no deductions with a few exemptions and expenses. D) is true for only a and b. E) all of the above. Answer: E True/False 17. According to the H-S definition of income, employer contributions are excluded from money income. A) True B) False C) Uncertain Answer: A 18. A 401(k) account means that the maximum amount of savings that can be deposited is $401,000. A) True B) False C) Uncertain Answer: B 19. State and local income taxes should be deducted from federal income tax. A) True B) False C) Uncertain Answer: C 20. Since 1986 there have been over 15,000 changes to the tax code. A) True B) False C) Uncertain Answer: A 21. Flat taxes are more equitable than graduated tax schedules. A) True B) False C) Uncertain Answer: C 22. The standard deduction for two individuals is higher than the standard deduction for a married couple, causing a “marriage tax.” A) True B) False C) Uncertain Answer: A 23. Unreimbursed medical expenses in excess of 8.5% of AGI are tax deductible. A) True B) False C) Uncertain Answer: B 24. Exemptions are more desirable than deductions for a person in the 36% tax bracket. A) True B) False C) Uncertain Answer: A 25. AGI always exceeds taxable income. A) True B) False C) Uncertain Answer: C 26. Only realized capital gains are included in taxable income. A) True B) False C) Uncertain Answer: A 27. Investors considering switching capital assets may also consider the potential tax liability and decide not to switch is refereed as bracket creep. A) True B) False C) Uncertain Answer: B 28. President Obama proposes reintroducing the 36% and 39.5% tax brackets. A) True B) False C) Uncertain Answer: A Essay 29. Which would a taxpayer in the 35% tax bracket prefer: a $2,000 tax exemption or a $700 tax credit? What if the taxpayer were in the 25% tax bracket? Answer: For 35% taxpayer: exemption $2,000(0.35) = $700; tax credit = $700 so the taxpayer should be indifferent between tax credit and exemption. For 25% taxpayer: exemption $2,000(0.25) = $500; tax credit = $700. Choose tax credit. 30. Consider an individual who earns $95,000, has two children, pays $6,000 in child care expenses for one child, pays $19,000 in college tuition for the other child, pays $6,500 in mortgage interest (mortgage interest is tax deductible), and pays $9,600 in medical expenses. Medical expenses in excess of 7.5 percent of one’s income are deductible. Personal exemptions are $3,050 per person (including the tax filer). When the individual’s income is $30,000 or above, he / she gets a 12% child care credit. A college credit of 9% of tuition costs is given to those that have income less than $90,000. Her statutory marginal tax rate is 15 percent. What is her actual or effective marginal tax rate? Answer: Final taxes owed are $10,811.25, making the effective tax rate 11.38%. 31. Martha Stewart earns $4,000 and she wants to save it for retirement, which is 10 years away. She can either save it in a taxable account or put it into a Roth IRA. Suppose that Martha can receive an annual rate of return of 8 percent and her marginal tax rate is 25 percent. By the time she reaches retirement, how much money would she have in either option? NOTE: Martha has to pay tax on the $4,000, so she cannot put the full amount into either the taxable account or the Roth. Answer: Roth IRA: $4,000 (0.75) = $3,000, then $3,000 (1.08)10 = 6,476.77. Traditional IRA: $4,000 (.75) = $3,000 then $3,000 (1.08)10 = 6,476.77, then $6,476.77 (0.75) = $4,857.58. 32. Suppose there is a simple tax system that says you pay 10% for income up to $10,000, 25% for income between $10,000 and $50,000, and 35% for all income above $50,000. Mr. Campbell has income of $72,000. Mrs. Campbell has income of $55,000. (A) What is Mr. Campbell’s individual tax liability? Mrs. Campbell’s? (B) What is their liability if they file a joint return? (C) Is there a marriage penalty? If so, how much is it? Answer: (A) Mr. Campbell: [(10,000*0.10) + (40,000*0.25) + (22,000*0.35)] = $18,700. Mrs. Campbell: [(10,000*0.10) + (40,000*0.25) + (5,000*0.35)] = $12,750. Total tax if filed separately = 18,700 + 12,750 = $31,450 (B) Jointly: [(10,000*0.10) + (40,000*0.25) + (77,000*0.35)] = $37,950. (C) Yes, the difference is $37,950 - $31,450 = $6,500. 33. Suppose you paid $500,000 for an asset. You hold the asset for five years. The interest rate that you get for the asset is 10%. Assume the tax rate on capital gains is 20%. (A) If capital gains are taxed only when the asset is realized, how much will you have earned on the asset? (B) Suppose that capital gains are taxed annually instead of at realization. How much will you have earned on the asset? (C) How big is the difference in the two taxing schemes? Answer: (A) $500,000 x (1.10)5 – $500,000 = $305,255 (B) $500,000 x (1+ (0.10x0.08))5 – $500,000 = $234,664 (C) Difference of $70,591. 34. Discuss the advantages of using an income tax system such as the one discussed in this chapter, as opposed to a consumption tax. Answer: Using income as the unit of taxation allows for progressivity in the tax code. However, a consumption tax encourages savings which is not the case in a standard income tax. 35. How much do you believe that current tax policy is influenced by politics, as opposed to sound and efficient tax policy? Answer: This is a personal question but, in general, the United States’ system of taxation has been found to be very efficient. It is not perfect, and it is easy to find areas for improvement, but given the number of people that are involved, it has worked remarkably well. 36. Should state taxes paid be deductible on federal taxes? Answer: Opinions vary on this issue. Some argue that this “offset” allows for states to pass on higher rates to other states through the federal system. Others argue that there are too many layers of taxes currently and this deduction is necessary to keep taxes reasonable. State taxes paid used to be deductible on federal taxes, but as of recent tax reforms, there are limitations. Currently, individuals can deduct up to $10,000 ($5,000 for married individuals filing separately) of state and local taxes (SALT) on their federal income tax returns. This limitation was introduced starting with tax year 2018 under the Tax Cuts and Jobs Act (TCJA). Therefore, while some state taxes can still be deducted federally, there are now caps on how much can be claimed. Chapter 18 Personal Taxation and Behavior Multiple Choice 1. Social savings is A) just another way of defining security. B) the sum of government and private savings. C) government savings only. D) defined by higher rates of interest for the government. Answer: B 2. An example of a tax-preferred savings account would be A) an IRA. B) an interest bearing savings account. C) a noninterest bearing checking account. D) cash. Answer: A 3. The Laffer curve is A) never referred to in modern day discussions of public finance. B) a curve that describes the relationship between tax rates and tax revenues. C) used to describe the relationship between consumption and hours worked. D) a curve that refers to the endowment of time. Answer: B 4. An intertemporal budget constraint A) requires an endowment point. B) requires time to remain constant. C) has no endowment point. D) requires time to move in a loop. Answer: A 5. An income effect A) is measured as the change in prices over time. B) is not possible when people are unemployed. C) requires interest rates to remain constant. D) is the change in the quantity demand due to the fact that real income changes when prices change. Answer: A 6. To accurately draw a labor supply curve, there should be a relationship between _______ and __________. A) the wage rate; utility B) total expenditures; the wage rate C) the wage rate; hours worked D) taxes; utility Answer: C 7. An decrease in the interest rate will cause the intertemporal budget constraint to __________ through the endowment point. A) pivot clockwise B) pivot counter-clockwise C) shift clockwise D) shift counter-clockwise Answer: B 8. On the Laffer curve, an increase in tax rates causes tax revenue to increase if the starting point is A) to the right of the top. B) exactly at the top. C) to the left of the top. D) to the farthest point to the right. Answer: C 9. The consumption bundle that is available, if there are no exchanges with the market, is known as the A) federal system. B) endowment point. C) Ramsey Rule. D) Gross Replacement Rate. Answer: B 10. An individual’s consumption and saving behavior during a given year, as a result of a planning process that considers his or her lifetime economic situations, is known as the A) lifetime model. B) consumption model. C) life-cycle model. D) income model. Answer: C 11. Full loss offset allows individuals to A) claim children as dependents. B) deduct mortgage interest from taxes. C) deduct savings interest from taxes. D) deduct capital losses from taxable income. Answer: D 12. In the leisure-income model, taxing income causes A) the budget constraint to kink. B) males to work to change their work habits dramatically. C) utility to increase. D) all of the above. Answer: A 13. Human capital is A) how firms use more humans than machines in the production process. B) the accumulation of investments that make people more productive. C) more costly than other forms of capital. D) none of the above. Answer: B 14. A compensation package offered by employers often includes A) wages. B) health benefits. C) vacations. D) pensions. E) all of the above. Answer: E 15. Real rates of return are A) not taxed. B) not adjusted for inflation. C) adjusted for inflation. D) used in individual financing and not corporate financing. Answer: C True/False 16. Residential housing consumption is not affected by U.S. personal income taxes. A) True B) False C) Uncertain Answer: B 17. Increasing wage rates will result in more hours worked. A) True B) False C) Uncertain Answer: C 18. In 2009, President Obama proposed limiting the value of deductions for high-earners. A) True B) False C) Uncertain Answer: A 19. The personal income tax excludes the imputed rent from owner-occupied housing from taxation. A) True B) False C) Uncertain Answer: A 20. The theoretical effects of taxation on portfolio composition are ambiguous. A) True B) False C) Uncertain Answer: A 21. No profession in the United States has what is known as a “backward bending” supply curve. A) True B) False C) Uncertain Answer: B 22. A capital shortage results from insufficient capital to meet our national “needs.” A) True B) False C) Uncertain Answer: A 23. Taxing savings will cause people to save more. A) True B) False C) Uncertain Answer: C 24. The analysis of a progressive tax is very similar to that of a proportional tax. A) True B) False C) Uncertain Answer: A 25. Returns to investments in human capital can be calculated with great accuracy. A) True B) False C) Uncertain Answer: B Essay 26. Suppose the labor supply equation is L = (W/3) – (4/3). The wage rate is initially 5. What is the amount of producer surplus here? Answer: Putting in a wage of 5 gives L* = 1/3. Therefore, the producer surplus is (1/2) (1/3) (1) = 1/6. 27. Jennifer lives in two periods. In the first period, her income is fixed at $72,000; in the second, she is gets a 4% raise in her income. She can borrow and save at the market interest rate of 5 percent. (A) Sketch her intertemporal budget constraint. (B) Suppose that Jennifer is unable to lend at any rate of interest, although she can still borrow at 5 percent. Sketch her new intertemporal budget constraint. Answer: (A) Her income for the second year is 72,000*1.04 = $74,880. If she borrows in Period 1 for the amount she will earn in Period 2, her total income is [72,000 + (74,880/1.05)] = $143,314 If she lends in Period 1 for the amount she will earn in Period 1, her total income in period 2 is [(72,000 *1.05) + 74,880] = $150,480 Her intertemporal budget constraint is as follows: (B) If she cannot lend at market rate, her Period 2 income is constant at $74,880. However, she can borrow at 5 percent. Therefore her new intertemporal budget constraint is as follows: 28. Refer to Figure 18.7 in your textbook. The intercept point N is actually found by I1 + I0(1 + r). The intercept point M is calculated by I0 + I1/(1 + r). Show that the slope of the budget constraint is indeed . Answer: The slope is found by dividing rise by run. Divide N by M and reduce, then you will get -(1 + r). 29. Big Boi earns $4,000 and she wants to save it for retirement, which is 10 years away. She can either save it in a taxable account or put it into a Roth IRA. Suppose that Big Boi can receive an annual rate of return of 8 percent and her marginal tax rate is 25 percent. By the time she reaches retirement, how much money would she have in either option? NOTE: Big Boi has to pay tax on the $4,000, so she cannot put the full amount into either the taxable account or the Roth IRA. Answer: Roth IRA: $4,000 (0.75) = $3,000, then $3,000 (1.08)10 = 6,476.77. Traditional IRA: $4,000 (.75) = $3,000, then $3,000 (1.08)10 = 6,476.77, then $6,476.77(0.75) = $4,857.58. 30. Refer to Figure 18.1 in your textbook. If the total number of hours (T) per week is 168 and the wage rate is $10, how much consumption is possible if the number of hours worked is 35? How does your answer change if the wage rate decreases to $8.50 but number of hours worked also increases to 40? Answer: At 35 hours worked, total consumption is $10*(35) = $350. At a wage of $8.50 and 35 hours, total consumption becomes 8.50*(40) = $340. 31. In the textbook, there was a discussion of the average numbers of hours worked in the US being around 34 hours per week. As you enter the work force, do you expect this number to increase or decrease? Answer: Answers will vary based on expectations. Some would argue that with increasing tax burdens, people will be forced to work more hours (provided jobs are available). Others will argue that advances in technology will make working easier and less hours on average will be required. The issues of preferences must also be considered. As I enter the workforce, I expect the average number of hours worked per week to vary depending on the industry and job role. Some sectors might see increases due to demands or expectations of overtime, while others could experience decreases influenced by flexible work arrangements and evolving labor practices. Overall, it's challenging to predict a universal trend without considering specific economic conditions and workplace policies. 32. Sometimes increases in the wage rate will cause individuals to work more hours. It is also the case that this same increase could cause people to work fewer hours. What is happening to cause this variance? Answer: This is generally a case of preferences. At higher wages, it is possible to obtain the same level of consumption as with a lower wage with fewer hours. Those who prefer to have those hours as leisure may choose to work less. 33. The tax code in the United States allows for the deductibility of mortgage interest, but not for interest on credit cards. Why is this difference allowed to exist? Answer: Increasing home ownership is seen as increasing private investment, whereas credit cards are viewed as consumption mechanisms. Test Bank for Public Finance Harvey Rosen, Ted Gayer 9780078021688
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