Suppose the welfare benefit formula is Benefit = $4,800 – 0.67 (Wages > $6,000)

Question

Suppose the welfare benefit formula is

Benefit = $4,800 – 0.67 (Wages > $6,000)

Instructions: Enter your responses as a percent to the nearest whole number.

(a) What is the marginal tax rate on

(i) The first $6,000 of wages?

%

(ii) Wages above $6,000?

%

(b) How large is the benefit if wages equal

Instructions: Enter your responses rounded to the nearest whole number.

(i) $0?

$

(ii) $4,000?

$

(iii) $9,000?

$

(c) What is the breakeven level of income in this case?

Instructions: Enter your response rounded to two decimal places.

$

References

eBook & Resources

Explanation / Answer

Answer:(a) (i) Marginal tax rate on The first $6,000 of wages:

Since the wage ceiling is $6000, the marginal tax rate on the first $6000 wages is 0%

(ii) Marginal tax rate on Wages above $6,000:

Since the wage ceiling is $6000, the marginal tax rate on thewages above $6000 is 67%

Answer:(b) (i) Maximum Welfare benefit against the wages equal to $0:

Benefit=4800-0.0*(0-6000)

=4800

(ii) Maximum Welfare benefit against the wages equal to $4000:

Benefit=4800-0.0*(4000-6000)

=4800

(iii) Maximum Welfare benefit against the wages equal to $9000:

Benefit=4800-0.67*(9000-6000)

=2790

Answer:(c) Breakeven level of income=[(Maximum award)/(Marginal tax rate)]+(wage ceiling)

(4800/0.67)+6000

=13164.18

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