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1. According to estimates by Goolsbee and Petrin (2004), the elasticity of demand for basic cable service is -0.51, and the elasticity of demand for direct broadcast satellites is -7.40. Suppose that a community wants to raise a given amount of revenue by taxing cable service and the use of direct broadcasting satellites. If the community’s goal is to raise the money as efficiently as possible, what should be the ratio of the cable tax to the satellite tax? Discuss briefly the assumptions behind your calculation.

2. Assume the Working Income Tax Benefit tops up a single individual’s income by 25 percent of the amount that employment earnings exceed $3000, up to a maximum payment of $950. Assume the refundable credit is reduced by 15 percent on the amount of earnings in excess of $10,500.

a. Then over what range of earnings is the credit at its maximum value?

b. At what income is the credit reduced to zero?

c. Let statutory income tax be a flat rate of 30 percent, with a basic personal exemption of $10,000. Ignore all other taxes and program benefits in economy. Compute and describe effective marginal tax rate (EMTR) faced by this individual on income ranging from zero to $20,000.

d. Discuss incentive effects associated with this EMTR schedule, concerning the decision to join workforce and to increase hours worked, say, from part-time to full-time.

3. Jack and Jill live alone on an island. Their labour supply schedules are identical and given by L=(1-t)w, where t is income tax rate and w denotes wage. Jill’s wage is 6 and Jack’s is 2. Tax paid by an individual is twL and each receives a transfer equal to half the total revenues. Jack and Jill have identical utility functions given by U = C - (1/2)L2, where C denotes consumption (the individual’s income after tax and transfer). If social welfare function is W = 3Ujack = UJill, what is optimal tax rate? [Hint: prepare W as a function of the tax rate t.] Why is optimal tax rate not 0? Why is it not 1?

4. Nancy is endowed with $1000 of income in period 0 and $315 in period 1. The market interest rate is 5 percent. Her preferences between consumption in future (C1 in period 1) and consumption in present (C0 in period 0) are characterized by utility function  U(C1 ,C0) = C0 C1 , that has the marginal rate of substitution given by MRSC0C1 |ΔC1/ΔC0|= C1/C0

a. In the absence of taxation, how much money does she save or borrow?

b. Now assume the government (that ran on a political campaign slogan of “live in the present”) introduces a tax on interest income equal to 75 percent. Furthermore, any interest payments on borrowed money are not tax deductible. Draw after-tax budget constraint. Label the intercepts and the slope.

c. Determine the after-tax level of saving or borrowing.

d. Identify excess burden and the tax revenue raised on your diagram and determine their corresponding numerical values.

5. Jenna’s boss has decided to pay her a one-time bonus of $5,000. She decides to save money till she retires, 4 years from now. She contemplates two savings options. Option A is to save money for four years outside of an RRSP in a foreign corporate bond that would pay her 10 percent per year. Option B is to save for four years in an RRSP account with the domestic government bond that would pay her 8 percent per year. Marginal income tax rate which Jenna faces while she is working is 30 percent. When she retires her marginal tax rate would drop to 25 percent, since she would be in a lower tax bracket. As her financial advisor, which option do you recommend? (Answer this by computing the net amount of her bonus upon cashing in the investment at her retirement.)

6. ABC corporation is contemplating purchasing a new computer system which will yield a before-tax return of 30 percent. System depreciates at 10 percent a year. The after-tax interest rate is 8 percent, the corporation tax rate is 35 percent, and depreciation allowances follow the straight-line method over five years. There is no investment tax credit. Do you expect ABC to buy new computer system? Describe your answer.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M91963

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