Suppose the welfare benefit formula is Benefit = $4,800 – 0.67 (Wages > $6,000)
ID: 1219380 • Letter: S
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) $6,000?
$
(iii) $11,000?
$
(c) What is the breakeven level of income in this case?
Instructions: Enter your response rounded to two decimal places.
$
Explanation / Answer
(a)
(i) The marginal tax rate on the first $6,000 of wage is 0%.
(ii) The marginal tax rate on wages above $6,000 is 67%.
(b)
(i) Wage = $0
Wage is less than $6,000.
Benefit = $4,800 - 0.67(wages > $6,000)
= $4,800 - $0
= $4,800
If wages equal $0 then the benefit is $4,800.
(ii) Wage = $6,000
Wage is equal to $6,000.
Benefit =
Benefit = $4,800 - 0.67(wages > $6,000)
= $4,800 - $0
= $4,800
If wages equal $6,000 then the benefit is $4,800.
(iii) Wage = $11,000
Wage is greater than $6,000.
Benefit =
Benefit = $4,800 - 0.67(wages > $6,000)
= $4,800 - 0.67(5,000)
= $1,450
If wages equal $11,000 then the benefit is $1,450.
(c) Calculate Break-even level of income -
Break-even level of income = Basic benefits/Marginal tax rate = $4,800/0.67 = $7,164.18
The break-even level of income is $7,164.18
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