Chapter 10 - Public Sector & the Tax System

Question 1

Types of taxes

Answer 1

Direct: levied on income and wealth (e.g. income tax)
Indirect: levied on the sale of goods and services (e.g. VAT)

Question 2

Specific tax

Answer 2

tax per unit of a good)
supply curve shifts up parallel

Question 3

Ad valorem tax

Answer 3

Tax is added on price and calculated as a %-of price.
Supply curve does not shift parallel

Question 4

Deadweight Loss Taxes

Answer 4

In red

Question 5

Tax burden and elasticity

Answer 5

The supply curve is elastic and the demand curve is inelastic. Thus, buyers bear most of the burden of the tax.

the supply curve is inelastic and the demand curve is elastic. Thus, sellers bear most of the burden of the tax

To keep it minimum, both should be inelastic

Question 6

Total revenue

Answer 6

TR = P * Q

Question 7

Average revenue

Answer 7

AR = TR / Q = P

Question 8

Marginal revenue

Answer 8

MR = dTR / dQ
MR = P in competitive firms

Question 9

Change in profit

Answer 9

MR – MC (marginal revenue – marginal costs)
maximizes profit where MC = P = AR = MR

Question 10

Short Run Supply Curve

Answer 10

Question 11

Conditions of Shutdown in the short run

Answer 11

if price decreases such that total revenue is < variable
in the short-runthe firm minimizes its loss by shutting down the production
-> shutdown-point = critical market price (P = AVC)

Question 12

Long Run Supply Curve

Answer 12

if the price falls below ATC better of exiting the market

Question 13

The behavioral theory of the firm

Answer 13

• Firm’s behavior is satisficing rather than maximizing
• Different agents in a firm (manager, board, shareholders, …)
• Conflict among the various agents of the firms