Continue to assume that the U.S. government collects a 35% tax on all corporate

Question

Continue to assume that the U.S. government collects a 35% tax on all corporate profit earned in the United States and that the Mexican government collects a 20% tax on all corporate profit earned in Mexico.

Suppose that Acme Worldwide decides to increase the price that Acme U.S. pays Acme Mexico for engines. This price is an example of a transfer price, a price that a multinational corporation uses to transfer goods from one of its companies to another. Because this is not a market price but a price that is set by Acme Worldwide, it can set any price it wants.

In particular, suppose that it raises the price for engines from $3,000 to $3,500. This will increase profit in Mexico by $500 and reduce profit in the United States by $500. By how much will this reduce the total taxes that Acme Worldwide, including Acme U.S. and Acme Mexico, has to pay on each car that it sells?

Acme US
Revenue: $15000
Payment to Workers: $10500
Purchased Inputs:
Engines $3000
Elecricity $500

US HYRDOELECTRIC
Revenue: $500
Payment to Workers: ?
Purchased Inputs: $0

Acme Mexico
Revenue: $3000
Payments to Workers: $2200
Purchased Inputs: $0



A. $175

B. $150

C. $120

D. $100

E. $90

F. $75

Explanation / Answer

500(.35-.20)= 75 F

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