Question

In: Economics

Two consumers A and B have incomes of $30,000 and $100,000, respectively. A and B consume...

Two consumers A and B have incomes of $30,000 and $100,000, respectively. A and B consume the same bundle of goods with a cost (including tax) of $24,000. The only tax in the economy is a commodity tax levied uniformly on all gods at a rate of 20 percent.

What proportion of income is paid in tax by A and B?  

What implications does such a tax have in terms of equity?  

Is there any way the commodity tax can be restructured to improve its equity properties?  

Expert Solution

1.

Let, price of the commodity = X

Then

(X+20*X) = 24000

X = 24000/1.2 = $20000

Tax paid = 24000-20000 = $4000

So,

Proportion of income spent in tax by consumer A = 4000/30000 = 13.33%

Proportion of income spent in tax by consumer B = 4000/100000 = 4%

2.

It implies that as the income increases, there is decrease in the proportion of the income being spent upon taxes. So, it encourages inequality and disparity among the different classes of people. It is an example of regressive taxation system.

3.

Yes, commodities can be classified into the different categories and accordingly the tax should be applied. For example, the commodities as necessity goods should be tax free and luxury goods should have a higher amount of tax. Further, the goods causing negative externality such as tobacco products should have higher taxes, but medicines should have lower taxes. It will help the poor and government will also earn revenue.

Rahul Sunny answered 1 year ago

You have a portfolio worth $100,000 consisting of two stocks, A and B. You invested $30,000...

You have a portfolio worth $100,000 consisting of two stocks, A and B. You invested $30,000 in stock A and the remainder in Stock B. Consider the following information: Type your answers in the appropriate section showing all steps of your work State of the Economy Probability Of State Return on A Return on B Growth 0.25 15% 8% Normal 0.50 5% 20% Recession 0.25 -10% 25% Expected return 3.75% ?? Standard deviation ?? 6.26% a) What is the...

Consider a simple underwater exchange economy where two consumers, Bob (b) and Sandy (s), consume Jellyfish...

Consider a simple underwater exchange economy where two consumers, Bob (b) and Sandy (s), consume Jellyfish (j) and Krabby Patty burgers (k). Assume that the economy starts with the following initial allocation: Bob has 6 and Sandy has 2 Jellyfish (??=6,??=2) Bob has 4 and Sandy has 12 Krabby Patty burgers (??=4, ??=12) a. Use an Edgeworth box to represent this simple allocation economy. Make sure to locate the initial endowment and label it E. Measure goods for Bob from...

Economists have traditionally assumed that consumers are rational: they use their incomes and time to make...

Economists have traditionally assumed that consumers are rational: they use their incomes and time to make themselves as well off as they can. But recent research shows that consumers also want to be treated fairly. Surveys have found that many consumers believe it is unfair for firms to raise the prices of some goods after a sharp increase in demand (for example, following a tropical storm) while the same increase in price following a decrease in supply is deemed to...

Two equipments A and B have initial costs of $100,000 and $120,000 and expected to generate annual savings during the first year of $88,000 and $98,000 respectively.

Two equipments A and B have initial costs of $100,000 and $120,000 and expected to generate annual savings during the first year of $88,000 and $98,000 respectively. The value of these annual savings is expected to increase by 10% per year (over previous period). Assume service life of 2 years, operating hours per year of 4500, Use the NPW method to determining 5 savings/ hour for each equipment. Select the optimal equipment based on your results.

Suppose there are two consumers, A and B, and two goods, X and Y. The consumers...

Suppose there are two consumers, A and B, and two goods, X and Y. The consumers have the following initial endowments and utility functions: W X A = 2 W Y A = 9 U A ( X , Y ) = X 1 3 Y 2 3 W X B = 6 W Y B = 2 U B ( X , Y ) = 3 X + 4 Y Suppose the price of X is PX=2 and the...

McGill and Smyth have capital balances on January 1 of $40,000 and $30,000, respectively. The partnership...

McGill and Smyth have capital balances on January 1 of $40,000 and $30,000, respectively. The partnership income-sharing agreement provides for (1) annual salaries of $15,000 for McGill and $10,000 for Smyth, (2) interest at 10% on beginning capital balances, and (3) remaining income or loss to be shared 60% by McGill and 40% by Smyth. Prepare a schedule showing the distribution of net income, assuming net income is $65,000. (If an amount reduces the account balance then enter with a...

McGill and Smyth have capital balances on January 1 of $48,000 and $30,000, respectively. The partnership...

McGill and Smyth have capital balances on January 1 of $48,000 and $30,000, respectively. The partnership income-sharing agreement provides for (1) annual salaries of $22,000 for McGill and $18,000 for Smyth, (2) interest at 10% on beginning capital balances, and (3) remaining income or loss to be shared 70% by McGill and 30% by Smyth. (1) Prepare a schedule showing the distribution of net income, assuming net income is $71,000 (2) Prepare a schedule showing the distribution of net income,...

Gabriella and Steve have adjusted gross incomes of $47 comma 200 and $32 comma 700, respectively....

Gabriella and Steve have adjusted gross incomes of $47 comma 200 and $32 comma 700, respectively. Assume that each person takes one exemption and the standard deduction. Answer parts (a) through (c) below. Tax Rate Single Married Filing Jointly 10% up to $8,925 up to $17,850 15% up to $36,250 up to $72,500 25% up to $87,850 up to $146,400 28% up to $183,250 up to $223,050 Standard Deduction $6100 $12,200 Exemptions (per person) $3900 $3900 a. Calculate the tax...

An economist is interested in studying the incomes of consumers in a particular country. The population...

An economist is interested in studying the incomes of consumers in a particular country. The population standard deviation is known to be $1,000. A random sample of 49 individuals resulted in a mean income of $16,000. Construct 99% confidence interval interval for the average income. Answer the following questions a. i) Sample mean = ? a. ii) critical value Z = ? a. iii) Standard error = ? a. iv) Margin of error = ? a. v)...

Two firms A and B engage in price competition, in a market where all consumers have...

Two firms A and B engage in price competition, in a market where all consumers have reservation prices of 20 dollars. Firm A has unit costs of cA = 10, and firm B unit costs of cB = 15. Find (explain the strategies!) the ’most plausible’ Nash equilibrium in the Bertrand game where both firms simultaneously post their prices (pA, pB). Then, briefly characterize other equilibria in this game. In which sense are these latter equilibria ’less plausible’?