Which is the better exam question:
1. In April, Farmer Rose buys four gooseberry bushes for $25 each. In July, Farmer Rose harvests some gooseberries, which he sells for $20. The HST [harmonized sales tax, a value added tax] rate is 13 percent, and food is “zero rated” under the HST. Calculate
a. How much Farmer Rose pays in HST when he buys the gooseberry bushes
b. How much Farmer Rose collects in HST when he sells the berries
c. How much Farmer Rose remits to Canada Revenue Agency
d. How much Farmer Rose claims as input tax credits.
Explain your work, and define all underlined terms.
2. A producer buys four units of input K for $25 per unit. Input K is used to produce output X, which the producer sells for $20. The value added tax rate is 13 percent, and output X is zero-rated. Calculate
a. How much the producer pays in value added tax when he/she buys input K
b. How much the producer collects in value added tax when he sells output X.
c. How much the producer remits to the tax collection agency.
d. How much the producer claims as input tax credits.
Explain your work and define all underlined terms.
The first formulation has the advantage of testing people's ability to apply concepts to the real world, and makes it more difficult to simply guess the right answer. On the other hand, it could confuse people who do not know what gooseberries are, and those who are unfamiliar with the rhythms of planting and harvesting.
The second formulation has the advantage of testing students' knowledge of abstract concepts - what a value added tax is, for example.
So, which is the better exam question, formulation 1 or formulation 2?