Question

1. The lump sum principle says...?

1. All taxes make a consumer equally unhappy
2. A tax on one good make a consumer happier than an equivalent revenue lump sum tax.
3. A tax on one good make a consumer less happy than an equivalent revenue lump sum tax.
4. Tax revenues should only be used as a lump sum, not split up among many projects
5. A tax on one good should be kept small.

2. For normal goods…?

1. A change in income causes you to consume less of them.
2. The income effect is always larger than the substitution effect
3. The Engel curve is downward sloping
4. The Marshallian demand curve is downward sloping
5. All of the above.

3. Consider Tom’s statement “ The more Jennifer Lopez movies I see, the more I like them.” If this were a true statement of Tom’s preferences we would expect...?

1. Tom to treat all things other than Jennifer Lopez movies as bads, not goods
2. Tom’s preferences to violate the monotonicity axiom
3. Tom’s indifference curves to display an increasing marginal rate of substitution
4. Tom’s Marshallian Demand for Jennifer Lopez movies to have no substitution effect.

4. If an individual’s utility function for fish(x) and chips (y) is given by U(x, y) = min (x, 5y), the demand function for fish is given by?

1. X* = I/2px
2. X* = I/(px + py).
   
3. X* = I/(5px + py).
   
4. X = I/(px + py)2.

5. Lisa consumes only tacos and burritos. In equilibrium, her marginal utility of tacos is 20 and her marginal utility of burritos is 10. The price of a taco is $4. What is the price of a burrito?

1. $1
2. $2
3. $2.50
4. $4

Answer 1

Question 1

C. A tax on one good make a consumer less happy than an equivalent revenue lump sum tax.

Lump sum priciple says that when tax is imposed on a person's general purchasing power, it is more efficient than imposing tax on certaing special goods. By imposing tax on people's general purchasing power, it provides a non distorted purchasing choice for the same amount of tax income.

On the other hand if we are imposing tax on a special good, which gives more utility for the consumer, in such a case the utility of the consumer is affected. But when lump sum principle is applied, it leads to higher utility level for the consumer than a tax on specific goods.