Sadia Hussain Public Sector Economics Section A

Please make sure you attempt all questions. There are 1 essay questions and 2 short questions. You
have 2 hrs to complete the exam and an additional 15 minutes to submit the exam. All submissions
are to be made through the LMS portal. Make sure you email me your exam as well as a backup. Use
economic concepts from the course to explain your answers.

Your answers will be checked for plagiarism. A similarity index of more than 30 percent (from the
web or amongst your peers) will lead to the cancellation of the exam.

Total marks (70 marks)

Question 1 (25 marks)

Anna has a total income of $600 which she spends on stationery and books. The price of books is
$30 while stationary is half times as expensive.

a. Using indifference curves and budget line analysis, graphically show the optimal point of
consumption. The MRS food, stationary is 2
b. The government imposes a tax on stationery of $5 per unit. Show how that will change
the analysis.
c. Graphically show, how much is the tax revenue, equivalent variation, and the deadweight
loss.
d. Explain how the Pareto efficiency condition will be compromised.

Question 2
Comment on the following statement (25 marks)
a. If the demand for good does not change, does this mean there is no excess burden?

b. In a three-good model (leisure, goodx, goody), a proportionately equal amount of tax on

good x and y will lead to a Pareto inefficient outcome

c. A land tax of 20 percent is going to reduce the value of land by 20 percent. Show through
calculation.

d. A partial factor tax on capital in the manufacturing sector as opposed to capital in the
agricultural sector, hurts capital owners.
Question 3 (20 marks)
Using readings from class and other sources, explain whether the Pakistan’s tax system is
a. Horizontally equitable. Explain with respect to different definitions of horizontal equity
b. Efficient
c. Under the recent tax reforms, has the government struck a balance between equity and
efficiency?