If Lower-Income Households Spend a Greater Share of Their Income

question 108

Multiple Choice

If lower-income households spend a greater share of their income on cigarettes than do higher-income households,then a tax that raises the price of cigarettes will

• A) cause lower-income households to incur a greater loss of consumer surplus than that incurred by higher-income households.
• B) cause higher-income households to incur a greater loss of consumer surplus than that incurred by lower-income households.
• C) raise consumer surplus among higher-income households.
• D) cause consumer surplus to decline among smokers, but the relative impact cannot be determined from the given information.

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Definitions:

Yield to Call

The return an investor would receive if a callable bond is held until the issuer exercises their option to redeem it before its maturity date.

Current Yield

The annual interest payment of a bond divided by its current market price, used to compare the return on investment of different bonds.

Coupon Bond

A debt security that pays the holder a fixed interest rate (the coupon) periodically until maturity, at which point the principal is repaid.

Basis Point

A unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument, equal to 1/100th of 1%.