Practice Questions # 3 Department of Economics Second Semester

B.Sc./B.A. Third Year University of Karachi Public Finance (542)

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Seat No.: _____________________________
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Instructions: Attempt all questions in your handwriting in the given order. Take the snaps of the solved
problems and paste the pictures into the MS Word/PDF file. Upload the file in Google Classroom. The hard
copy, emailed assignments, and submissions after the deadline are unacceptable.

Question #1: The effect of a new tax on market equilibrium depends on the shape of supply and demand
curves. How shapes of supply and demand curves matter?

Question #2: How a sales tax increase affects the equilibrium price and quantity of a good and whether the
tax falls more heavily on consumers or suppliers depends on the shape of the supply and demand curves.

Question #3: Differentiate between a specific and an Ad Valorem tax. Compare the effect of a specific and
an Ad Valorem tax on market equilibrium of (i) a perfectly competitive firm and (ii) a monopolist.

Question #4: The equilibrium is the same no matter whom the government taxes. Explain.

Question #5: Analyze the effect of a specific and a lump-sum tax on cost curves.

Question #6: What is the effect on the short-run equilibrium of a specific tax of t per unit that is collected
from all n firms in a market? What is the incidence of the tax?

Question #7: If Qd = 32 – 2P is the demand function and Qs = – 4 + 2P is the supply function, then determine
the slopes of the demand and supply function, equilibrium price-output combination, consumer surplus,
and producer surplus. If the government imposes a specific tax of 2 units, then find the new equilibrium
price-output combination, consumer surplus, producer surplus, tax burden on consumer and producer, and
the deadweight loss. Compare the initial and final conditions graphically.

Question #8: How direct taxes are different from indirect taxes?

Question #9: Explain the difference in regressive, proportional, and progressive taxes.

Question #10: Filing tax returns is an annual activity seen as a moral and social duty of every responsible
citizen of the country. Explain the importance of filing income tax returns.

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