Question

Consider the economy of Pomistan, where citizens consume only apples. Assume that apples are priced at $1 each. The government has devised the following tax plans:

Plan A

•	Consumption up to 1,000 apples is taxed at 50%.
•	Consumption higher than 1,000 apples is taxed at 20%.

Plan B

•	Consumption up to 2,000 apples is taxed at 10%.
•	Consumption higher than 2,000 apples is taxed at 25%.

Use the Plan A and Plan B tax schemes to complete the following table by deriving the marginal and average tax rates under each tax plan at the consumption levels of 600 apples, 1,200 apples, and 2,500 apples, respectively.

Consumption Level	Plan A		Plan B
(Quantity of apples)	Marginal Tax Rate	Average Tax Rate	Marginal Tax Rate	Average Tax Rate
	(Percent)	(Percent)	(Percent)	(Percent)
600
1,200
2,500

Complete the following table by indicating whether each plan is a progressive tax system, a proportional tax system, or a regressive tax system.

	Progressive	Proportional	Regressive
Plan A
Plan B

Answer 1

According to the given information:

For plan A:

The marginal tax under plan A would be:

• Given that the tax below 1,000 apples is 50%, therefore at the quantity of 600 apples, the marginal tax would be 50%.
• At the quantity of 1200 apples, the marginal tax, which is the change in the tax, will be 20% as 1200 apples are more than 1000 apples.
• Similarly, at the quantity of 2500 apples, the marginal tax, which is the change in the tax, will be 20% as 2500 apples are more than 1000 apples.

The Average tax under plan A would be:

Given that the tax below 1,000 apples is 50%, therefore at the quantity of 600 apples, the average tax would be 50%.

At the quantity of 1200 apples, tax changes to 20 %; therefore, the average tax would be:

Similarly, at the quantity of 2500 apples, tax changes to 20 %; therefore, the average tax would be:

For plan B:

The marginal tax under plan b would be:

• Given that the tax below 2,000 apples is 10%, therefore at the quantity of 600 apples, the marginal tax would be 10%.
• At the quantity of 1200 apples, the marginal tax will be same as at quantity 600 apples as tax changes after 2000 apples; therefore, the marginal tax would be 10%.
• Similarly, at the quantity of 2500 apples, the marginal tax, which is the change in the tax, will be 25% as 2500 apples are more than 2000 apples.

The Average tax under plan b would be:

Given that the tax below 1,000 apples is 10%, therefore at the quantity of 600 apples, the average tax would be 10%.

At the quantity of 1200 apples, tax rate will be same as at quantity 600 aaples as tax does nt changes at this level. Therefore, the average tax would be 10%

Similarly, at the quantity of 2500 apples, tax changes to 25 %; therefore, the average tax would be:

Hence, the conclusion of all these calculation would be:

According to the given table, both plans explains different types of tax system such as:

Progressive tax system explains the taxation policy in which the government imposes more burden on rich people as an increase in income will lead to an increase in the tax rate. On the other hand, the regressive tax system refers to the taxation policy in which the government imposes more tax burden on the poor people than the rich people as an increase in income leads to a decrease in the tax rate.

Therefore, Plan A indicating the regressive tax system as the tax rate decreases as the consumption increases.

Plan B indicating the progressive tax system as the tax rate increases as the consumption of apple increases.