- Welfare effects of free trade in an exporting country
Consider the Kenyan market for lemons.
The following graph shows the domestic demand and domestic supply curves for lemons in Kenya. Suppose Kenya's government currently does not allow international trade in lemons.
Use the black point (plus symbol) to indicate the equilibrium price of a tonne of lemons and the equilibrium quantity of lemons in Kenya in the absence of international trade. Then, use the green point (triangle symbol) to shade the area representing the consumer surplus in equilibrium. Finally, use the purple point (diamond symbol) to shade the area representing producer surplus in equilibrium.
Draw graph on separate paper or anything you can do to answer it
Based on the previous graph, the total surplus in the absence of international trade is
.
The following graph shows the same domestic demand and supply curves for lemons in Kenya. Suppose that the Kenyan government changes its international trade policy to allow free trade in lemons. The horizontal black line (PWPW) represents the world price of lemons at $800 per tonne. Assume that Kenya's entry into the world market for lemons has no effect on the world price and there are no transportation or transaction costs associated with international trade in lemons. Also assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place.
Use the green point (triangle symbol) to shade consumer surplus, and then use the purple point (diamond symbol) to shade producer surplus.
Draw graph on separate paper or anything you can do to answer it
When Kenya allows free trade of lemons, the price of a tonne of lemons in Kenya will be $800. At this price,
tonnes of lemons will be demanded in Kenya, and
tonnes will be supplied by domestic suppliers. Therefore, Kenya will export
tonnes of lemons.
Using the information from the previous tasks, complete the following table to analyze the welfare effect of allowing free trade.
Without Free Trade With Free Trade
(Dollars) (Dollars)
Consumer Surplus
Producer Surplus
When Kenya allows free trade, the country's consumer surplus (decreases or increases ) by
, and producer surplus (decreases or increases) by
. So, the net effect of international trade on Kenya's total surplus is a (loss or gain) of
.
- Winners and losers from free trade
Consider the market for meekers in the imaginary economy of Meekertown. In the absence of international trade, the domestic price of meekers is $40. Suppose that the world price of meekers is $39. Assume that Meekertown is too small to influence the world price of meekers once it enters the international market.
If Meekertown allows free trade, then it will (export or import) meekers.
Given current economic conditions in Meekertown, complete the following table by indicating whether each of the statements is true or false.
Statement True False
Meekertownian consumers were worse off without free trade than they are with it.
Meekertownian producers were better off without free trade than they are with it.
True or False: When a country is too small to affect the world price, allowing free trade will never increase total surplus in that country, regardless of whether it imports or exports as a result of international trade.
True
False
- Welfare effects of a tariff in a small country
Suppose New Zealand is open to free trade in the world market for wheat. Because of New Zealand's small size, the demand for and supply of wheat in New Zealand do not affect the world price. The following graph shows the domestic wheat market in New Zealand. The world price of wheat is PWPW = $250 per tonne.
On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) when the economy is at the free trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producer surplus (PS).
Draw graph on separate paper or anything you can do to answer it
If New Zealand allows international trade in the market for wheat, it will import
tonnes of wheat.
Now suppose the New Zealand government decides to impose a tariff of $30 on each imported tonne of wheat. After the tariff, the price New Zealand consumers pay for a tonne of wheat is
, and New Zealand will import
tonnes of wheat.
Show the effects of the $30 tariff on the following graph.
Use the black line (plus symbol) to indicate the world price plus the tariff. Then, use the green triangle (triangle symbols) to show the consumer surplus with the tariff and the purple triangle (diamond symbols) to show the producer surplus with the tariff. Lastly, use the orange quadrilateral (square symbols) to shade the area representing government revenue received from the tariff and the tan triangles (dash symbols) to shade the areas representing deadweight loss (DWL) caused by the tariff.
Draw graph on separate paper or anything you can do to answer it
Complete the following table to summarize your results from the previous two graphs.
Under Free Trade Under a Tariff
(Dollars) (Dollars)
Consumer Surplus
Producer Surplus
Government Revenue 0
Based on your analysis, as a result of the tariff, New Zealand's consumer surplus (decreases or increases) by
, producer surplus (decreases or increases ) by
, and the government collects
in revenue. Therefore, the net welfare effect is a (gain or loss ) of
.
- Effects of a tariff on international trade
The following graph shows the domestic supply of and demand for soybeans in Honduras. The world price (PWPW) of soybeans is $550 per tonne and is represented by the horizontal black line. Throughout the question, assume that the amount demanded by any one country does not affect the world price of soybeans and that there are no transportation or transaction costs associated with international trade in soybeans. Also, assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place.
If Honduras is open to international trade in soybeans without any restrictions, it will import
tonnes of soybeans.
Suppose the Honduran government wants to reduce imports to exactly 100 tonnes of soybeans to help domestic producers. A tariff of
per tonne will achieve this.
A tariff set at this level would raise
in revenue for the Honduran government.
- Free trade benefits
In addition to the positive welfare effects that free trade has on an economy, there are a variety of other benefits of international trade. Consider the following scenario:
Without free trade, Rooby has market power as a local producer. Once free trade is implemented in the local economy, Rooby is no longer able to raise its prices above competitive levels.
The previous scenario represents which of the following benefits of free trade?
Lower costs through economies of scale
An enhanced flow of ideas
Increased competition
Increased variety of goods - The arguments for restricting trade
Suppose there is a policy debate regarding Canada's imposing trade restrictions on imported tires:
Domestic producers of tires send a lobbyist to the Canadian government to request that the government impose trade restrictions on imports of tires. The lobbyist claims that the Canadian tire industry is new and cannot currently compete with foreign firms. However, if trade restrictions were temporarily imposed on tires, the domestic tire industry could mature and adjust and would eventually be able to compete in the world market.
Which of the following justifications is the lobbyist using to argue for the trade restriction on tires?
National-security argument
Unfair-competition argument
Jobs argument
Infant-industry argument - Externalities - Definition and examples
An externality arises when a firm or person engages in an activity that affects the well-being of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is beneficial, it is called a (negative or positive ) externality.
The following graph shows the demand and supply curves for a good with this type of externality. The dashed drop lines on the graph reflect the market equilibrium price and quantity for this good.
Shift one or both of the curves to reflect the presence of the externality. If the social cost of producing the good is not equal to the private cost, then you should shift the supply curve to reflect the social costs of producing the good; similarly, if the social value of producing the good is not equal to the private value, then you should shift the demand curve to reflect the social value of consuming the good.
Draw graph on separate paper or anything you can do to answer it
With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be (greater or less) than the socially optimal quantity.
Which of the following generates the type of externality previously described? Check all that apply.
A leading electronics manufacturer has discovered a new technology that dramatically improves the picture quality of plasma televisions. Firms of all brands have free access to this technology.
Sam has planted several trees in his backyard that increase the beauty of the neighbourhood, especially during the fall foliage season.
The city where you live has granted a permit to put a movie theatre in your neighbourhood, causing traffic jams at night and on weekends.
Your roommate, Andrew, has bought a bird that keeps you up at night with its chirping.
- The effect of negative externalities on the optimal quantity of consumption
Consider the market for bolts. Suppose that a hardware factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional tonne of bolts imposes a constant external cost of $140 per tonne. The following graph shows the demand (private value) curve and the supply (private cost) curve for bolts.
Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $140 per tonne.
Draw graph on separate paper or anything you can do to answer it
The market equilibrium quantity is (1.5 or 2 or 2.5 or 3 or 3.5 or 4 or 4.5 or 5 or 5.5 ) tonnes of bolts, but the socially optimal quantity of bolt production is (1.5 or 2 or 2.5 or 3 or 3.5 or 4 or 4.5 or 5 or 5.5 ) tonnes.
To create an incentive for the firm to produce the socially optimal quantity of bolts, the government could impose a (tax or subsidy) of
per tonne of bolts.
- Efficiency in the presence of externalities
Parks confer many external benefits on society: open space, trees that reduce pollution, and so on. Therefore, the market equilibrium quantity of parks is not equal to the socially optimal quantity. The following graph shows the demand for parks (their private value), the supply of parks (the private cost of producing them), and the social value of parks (the private value and external benefits).
Use the black point (plus symbol) to indicate the market equilibrium quantity. Next, use the purple point (diamond symbol) to indicate the socially optimal quantity.
Draw graph on separate paper or anything you can do to answer it - Understanding different policy options to correct for negative externalities
Carbon dioxide emissions have been linked to worsening climate conditions. The following table lists some possible public policies aimed at reducing the amount of carbon dioxide in the air.
For each policy listed, identify whether it is a command-and-control policy (regulation), tradable permit system, corrective subsidy, or corrective tax.
Public Policy Command-and-Control Policy Tradable Permit System Corrective Subsidy Corrective Tax
The government limits total carbon dioxide emissions by all factories to 150,000 tonnes per decade. Each individual factory is given the right to emit 180 tonnes of carbon dioxide, and factories may buy and sell these rights in a marketplace.
The government charges factories $400 for every tonne of carbon dioxide they emit.
The government orders every factory to adopt a new technology, which reduces carbon dioxide emissions into the atmosphere.
The government agrees to reimburse all factories that purchase new, emissions reducing technology in order to provide cleaner air.
- Correcting for negative externalities - Regulation versus tradable permits
Suppose the government wants to reduce the total pollution emitted by three local firms. Currently, each firm is creating 4 units of pollution in the area, for a total of 12 pollution units. If the government wants to reduce total pollution in the area to 6 units, it can choose between the following two methods:
Available Methods to Reduce Pollution - The government sets pollution standards using regulation.
- The government allocates tradable pollution permits.
Each firm faces different costs, so reducing pollution is more difficult for some firms than others. The following table shows the cost each firm faces to eliminate each unit of pollution. For each firm, assume that the cost of reducing pollution to zero (that is, eliminating all 4 units of pollution) is prohibitively expensive.
Firm Cost of Eliminating the…
First Unit of Pollution Second Unit of Pollution Third Unit of Pollution
(Dollars) (Dollars) (Dollars)
Firm X 130 165 220
Firm Y 90 115 140
Firm Z 600 750 1,200
Now, imagine that two government employees proposed alternative plans for reducing pollution by 6 units.
Method 1: Regulation
The first government employee suggests to limit pollution through regulation. To meet the pollution goal, the government requires each firm to reduce its pollution by 2 units.
Complete the following table with the total cost to each firm of reducing its pollution by 2 units.
Firm Total Cost of Eliminating Two Units of Pollution
(Dollars)
Firm X
Firm Y
Firm Z
Method 2: Tradable Permits
Meanwhile, the other employee proposes using a different strategy to achieve the government's goal of reducing pollution in the area from 12 units to 6 units. He suggests that the government issues two pollution permits to each firm. For each permit a firm has in its possession, it can emit 1 unit of pollution. Firms are free to trade pollution permits with one another (that is, buy and sell them) as long as both firms can agree on a price. For example, if firm X agrees to sell a permit to firm Y at an agreed-upon price, then firm Y would end up with three permits and would need to reduce its pollution by only 1 unit while firm X would end up with only one permit and would have to reduce its pollution by 3 units. Assume the negotiation and exchange of permits are costless.
Because firm Z has high pollution reduction costs, it thinks it might be better off buying a permit from firm Y and a permit from firm X so that it doesn't have to reduce its own pollution emissions. At which of the following prices is firm Y willing to sell one of its permits to firm Z, but firm X is not? Check all that apply.
$123
$212
$219
$569
$595
Suppose the government has set the trading price of a permit at $218 per permit.
Complete the following table with the action each firm will take at this permit price, the amount of pollution each firm will eliminate, and the amount it costs each firm to reduce pollution to the necessary level. If a firm is willing to buy two permits, assume that it buys one permit from each of the other firms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution.)
Actions for ( firm x -y-z ) same options > buy 1 permit or buy 2 permit or don’t buy/sell or sell one permit or buy two permits
Don’t forget to answer Final Amount of Pollution Eliminated
Cost of Pollution Reduction for each (firm x – y -z )
Regulation Versus Tradable Permits
Determine the total cost of eliminating six units of pollution using both methods, and enter the amounts in the following table. (Hint: You might need to get information from previous tasks to complete this table.)
Proposed Method Total Cost of Eliminating Six Units of Pollution
(Dollars)
Regulation
Tradable Permits
In this case, you can conclude that eliminating pollution is (less or more ) costly to society when the government regulates each firm to eliminate a certain amount of pollution than when it allocates pollution permits that can be bought and sold.
- Achieving lower pollution
Suppose Environment Canada wants to mandate that all methane emissions must be reduced to zero in order to alleviate global warming in Canada.
Which of the following describes why most economists would disagree with this policy?
The environment isn’t worth protecting.
The opportunity cost of zero pollution is much higher than its benefit.
Society would not benefit from lower air pollution.
Reducing methane emissions is desirable, but the levels of pollution firms decide to emit privately are already efficient. - Correcting for negative externalities - Taxes versus tradable permits
Power stations emit sulfur dioxide as a waste product. This generates a cost to society that is not paid for by the firm; therefore, pollution is a negative externality of power production. Suppose the government wants to correct this market failure by getting firms to internalize the cost of pollution. To do this, the government can charge firms for pollution rights (the right to emit a given quantity of sulfur dioxide). The following graph shows the daily demand for pollution rights.
Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph.
Suppose the government has determined that the socially optimal quantity of sulfur dioxide emissions is 245 million tonnes per day.
One way governments can charge firms for pollution rights is by imposing a per-unit tax on emissions. A tax (or price in this case) of
per tonne of sulfur dioxide emitted will achieve the desired level of pollution.
Now suppose the government does not know the demand curve for pollution and, therefore, cannot determine the optimal tax to achieve the desired level of pollution. Instead, it auctions off tradable pollution permits. Each permit entitles its owner to emit 1 tonne of sulfur dioxide per day. To achieve the socially optimal quantity of pollution, the government auctions off 245 million pollution permits. Given this quantity of permits, the price for each permit in the market for pollution rights will be
.
The previous analysis hinges on the government having good information regarding either the demand for pollution permits or the optimal level of pollution (or both). Given that the appropriate policy (tradable permits or corrective taxes) can depend on the available information and the policy goal, consider the following scenario:
Imagine that new research suggests that if manufacturers in a particular city reduced their emissions to 100 million tonnes of waste per year, the air quality would improve dramatically.
If this is all the information the government has, which solution to reduce pollution is appropriate? Check all that apply.
Corrective taxes
Tradable permits
The effects of property rights on achieving efficiency
Consider a lake found in the town of Winnipeg, and then answer the questions that follow.
The town has a campground whose visitors use the lake for recreation. The town also has a fish cannery that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the fish cannery's waste decreases the campground's economic profit.
Suppose that the fish cannery could use a different production method that involves recycling water. This would reduce the pollution in the lake to levels safe for recreation, and the campground would no longer be affected. If the fish cannery uses the recycling method, then the fish cannery's economic profit is $2,200 per week, and the campground's economic profit is $3,200 per week. If the fish cannery does not use the recycling method, then the fish cannery's economic profit is $3,000 per week, and the campground's economic profit is $2,000 per week. These figures are summarized in the following table.
Complete the following table by computing the total profit (the fish cannery's economic profit and the campground's economic profit combined) with and without recycling.
Action Profit
Fish Cannery Campground Total
(Dollars) (Dollars) (Dollars)
No Recycling 3,000 2,000
Recycling 2,200 3,200
Total economic profit is highest when the recycling production method is (not used or used) .
When the fish cannery uses the recycling method, the campground earns $3,200−$2,000=$1,200$3,200−$2,000=$1,200 more per week than it does with no recycling. Therefore, the campground should be willing to pay up to $1,200 per week for the fish cannery to recycle water. However, the recycling method decreases the fish cannery's economic profit by $3,000−$2,200=$800$3,000−$2,200=$800 per week. Therefore, the fish cannery should be willing to use the recycling method if it is compensated with at least $800 per week.
Suppose the campground has the property rights to the lake. That is, the campground has the right to a clean (unpolluted) lake. In this case, assuming the two firms can bargain at no cost, the fish cannery will (not use or use) the recycling method and will pay the campground (0$ or between 0 and 400$ or between 400 and 800$ or between 800 and 1,200$) per week.
Now, suppose the fish cannery has the property rights to the lake, including the right to pollute it. In this case, assuming the two firms can bargain at no cost, the fish cannery will (not use or use ) the recycling method, and the campground will pay the fish cannery (o$ or between 0 and 400 or between 400 and 800$ or between 800 and 1,200$) per week.
The fish cannery will make the most economic profit when (the campground has property rights to a clean lake or it has property to pollute the lake) .
True or False: The fish cannery will use the recycling method only if the campground has the property rights.
True
False
Private solutions to correct for externalities
Consider the following scenario:
Suppose that a chicken farm uses a nearby stream to dispose of the wastes released by its chickens. These wastes flow downstream into a lake that has become thick with algae and polluted due to the minerals in the waste matter. The local office of a nonprofit environmental organization collects enough donations to stop the farm's pollution.
Which of the following types of private solutions to the externality of pollution has occurred in this case?
Contracts
Moral codes and social sanctions
Charities
Integration of different types of businesses through merger or acquisition
It's important to note that sometimes private solutions to externalities do not work. For example, this occurs when the number of parties involved is so large that it makes (the market failure the externality unimportant or government action the only viable solution or coordinating negotiations among all of the parties too costly ) .
What kind of good is it?
Determine whether each of the following goods is a private good, a public good, a common resource, or a club good.
Private Good Public Good Common Resource Club Good
A new drone that you take turns flying with your friends
A large, beautiful fountain in a town square
A dock on a lake that is open to the public
Voluntary contributions toward a public good
Edison and Kevin are considering contributing toward the creation of a building mural. Each can choose whether to contribute $300 to the building mural or to keep that $300 for a pool table.
Since a building mural is a public good, both Edison and Kevin will benefit from any contributions made by the other person. Specifically, every dollar that either one of them contributes will bring each of them $0.70 of benefit. For example, if both Edison and Kevin choose to contribute, then a total of $600 would be contributed to the building mural. So, Edison and Kevin would each receive $420 of benefit from the building mural, and their combined benefit would be $840. This is shown in the upper left cell of the first table.
Since a pool table is a private good, if Edison chooses to spend $300 on a pool table, Edison would get $300 of benefit from the pool table and Kevin wouldn't receive any benefit from Edison's choice. If Edison still spends $300 on a pool table and Kevin chooses to contribute $300 to the building mural, Edison would still receive the $210 of benefit from Kevin's generosity. In other words, if Edison decides to keep the $300 for a pool table and Kevin decides to contribute the $300 to the public project, then Edison would receive a total benefit of $300+$210=$510$300+$210=$510, Kevin would receive a total benefit of $210, and their combined benefit would be $720. This is shown in the lower left cell of the first table.
Complete the following table, which shows the combined benefits of Edison and Kevin as previously described.
Complete the following table, which shows the combined benefits of Edison and Kevin as previously described.
Kevin
Contributes Doesn't contribute
Edison Contributes $840
Doesn't contribute $720 Of the four cells of the table, which gives the greatest combined benefits to Edison and Kevin?
When neither Edison nor Kevin contributes to the building mural
When Edison contributes to the building mural and Kevin doesn't, or vice versa
When both Edison and Kevin contribute to the building mural
Now, consider the incentive facing Edison individually. The following table looks similar to the previous one, but this time, it is partially completed with the individual benefit data for Edison. As shown previously, if both Edison and Kevin contribute to a public good, Edison receives a benefit of $420. On the other hand, if Kevin contributes to the building mural and Edison does not, Edison receives a benefit of $510.
Complete the right-hand column of the following table, which shows the individual benefits of Edison.
Hint: You are not required to consider the benefit of Kevin.
Kevin
Contribute Doesn't contribute
Edison Contribute $420, --
, --
Doesn't contribute $510, --
, --
If Kevin decides to contribute to the building mural, Edison would maximize his benefit by choosing (to contribute or not to contribute ) to the building mural. On the other hand, if Kevin decides not to contribute to the building mural, Edison would maximize his benefit by choosing (not to contribute or to contribute ) to the building mural.
These results illustrate (the creation of a positive externality or why markets are efficient or the tragedy of the commons or the free rider problem) .
Common resources versus private goods
Spring is here, and Ana and her uncle would like to go fishing for the weekend in Saskatchewan. Ana could either go to the river in town where anyone can fish without a permit, or she could drive up to a stream located on her family's property in the countryside to fish. Assume that, no matter where people fish, all of the fish that are caught would be kept (that is, there is no "catch and release" policy).
The fish in the private stream are considered (rival in consumption or not rival in consumption) and (not excludable or excludable) whereas the fish in the river are (not rival in consumption or rival in consumption ) and (excludable or not excludable) . In other words, the fish in the private stream are an example of (a private good or common resource or a club good or a public good ) , and the fish in the river are an example of (a club good or a public good or private good or a common good) .
Fishing in the river will likely lead to (the tragedy of the commons or adverse selection or the free rider problem) because of which of the following reasons?
All fishermen will choose to fish in the stream believing that there are more fish there.
Nobody will enjoy fishing because of the lack of private contributions to the maintenance of the river.
Anyone can fish in the river, and one person's fishing activity decreases the ability of someone else to fish with success.
All fishermen will choose to fish in the river because of the limited access to the stream.
Common resources and the Tragedy of the Commons
Rajiv, Yakov, and Charles are fishermen who live next to a lake that is open to fishing; in other words, anyone is free to use the lake for fishing. Assume that these men are the only three fishermen who fish in this lake and that the lake is large enough for all three fishermen to fish intensively at the same time.
Each year, the fishermen choose independently how many fish to catch; specifically, they choose whether to fish intensively (that is, to place several fishing lines in the water for long periods of time, which hurts the sustainability of the lake if enough people do it) or to fish nonintensively (which does not hurt the sustainability of the lake). None of them has the ability to control how much the others fish, and each fisherman cares only about his own profitability and not about the state of the lake.
Assume that as long as no more than one fisherman fishes intensively, there are enough fish to restock the lake. However, if two or more fish intensively, the lake will become useless in the future. Of course, fishing intensively earns a fisherman more money and greater profit because he can sell more fish.
The lake is an example of (a common resource or a public good or a private good or a club good ) because the fish in the lake are (excludable or not excludable) and (not rival in consumption or rival in consumption) .
Depending on whether Yakov and Charles both choose to fish either nonintensively or intensively, fill in Rajiv's profit-maximizing response in the following table, given Yakov and Charles's actions.
Yakov and Charles's Actions
Fish Nonintensively Fish Intensively
Rajiv's Profit-Maximizing Response (fish nonintensively or fish intensively ) ( fish intensively or fish nonintensively)
Which of the following solutions could ensure that the lake is sustainable in the long run, assuming that the regulation is enforceable? Check all that apply.
Outlaw intensive fishing.
Convert the lake to private property, and allow the owner to sell fishing rights.
Develop a program that entices more fishermen to move to the area.
Principles of tax equity
What does the principle of horizontal equity state?
People should pay taxes based on the benefits they receive from government services.
Taxpayers with a lesser ability to pay taxes should pay larger amounts.
Taxpayers with a greater ability to pay taxes should pay larger amounts.
Taxpayers with a similar ability to pay taxes should pay the same amount.
Computing and interpreting average tax rates
In a hypothetical economy, Brian earns $14,000, Crystal earns $28,000, and Edison earns $42,000 in annual income. The following table shows the annual taxable income and tax liability for these three single individuals. For example, Brian, who earns $14,000, owes $1,540 in taxes.
Use the tax liability figures provided to complete the following table by computing the average tax rate for Brian, Crystal, and Edison with an annual income of $14,000, $28,000, and $42,000, respectively.
Taxable Income Taxable Income Tax Liability Average Tax Rate
(Dollars) (Dollars) (Percent)
Brian 14,000 1,540
Crystal 28,000 3,080
Edison 42,000 4,620
The income tax system for this country is (proportional or regressive or progressive) .
Understanding marginal and average tax rates
Consider the economy of Citronia, where citizens consume only oranges. Assume that oranges are priced at $1 each. The government has devised the following tax plans:
Plan A
• Consumption up to 1,000 oranges is taxed at 5%.
• Consumption higher than 1,000 oranges is taxed at 40%.
Plan B
• Consumption up to 2,000 oranges is taxed at 30%.
• Consumption higher than 2,000 oranges is taxed at 10%.
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 level of 500 oranges, 1,400 oranges, and 2,500 oranges, respectively.
Consumption Level Plan A Plan B
(Quantity of oranges) Marginal Tax Rate Average Tax Rate Marginal Tax Rate Average Tax Rate
(Percent) (Percent) (Percent) (Percent)
500
1,400
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
Taxes paid for a given income level
Charles is single and lives in St. John’s. Charles earned $50,000 in 2013. The following table shows the federal tax rate for individuals in 2013.
On Taxable Income… The Tax Rate Is…
Up to $43,561 15%
From $43,561 to $87,123 22%
From $87,123 to $135,054 26%
Over $135,054 29%
Fill in the following table with Charles’s marginal tax rate, total amount of taxes owed, and average tax rate for 2013.
Earnings ($) Marginal Tax Rate (%) Taxes Owed ($) Average Tax Rate (%)
50,000 (15 or 22 or 26 or 29) (7,480 or 7,951 or 8,481 or 10,475 or 10,971) (15 or 16 or 17 or 21 or 22)
Sample Solution