Question

Consider the economy of Citronia, where citizens consume only oranges. Assume that oranges cost $1 each, and each person can buy at most 5,000 oranges. The government has devised the following tax plans:
Plan A Plan B
Consumption up to 1,000 oranges is taxed at 20%. Consumption up to 2,000 oranges is taxed at 30%.
Consumption higher than 1,000 oranges is taxed at 80%. Consumption higher than 2,000 oranges is taxed at 10%.

Required:
Derive the marginal and average tax rates under each tax plan at the consumption levels of 500 oranges.

Answer 1

Explanation:

We are to find marginal tax and average tax rate at a consumption level of 500 oranges for plan A and plan B

Plan A

Consumption level = 500 oranges

Tax = 20%

Tax payable on this = 500 x 20% = 500 x 0.2 = 100

Marginal tax rate = 20 %

Average tax return = 100/500 = 0.2x100 = 20%

Plan B

At tax rate = 30%

Same consumption level

Tax payable = 500 x 30% = 500 x 0.3 = 150

Marginal tax rate = 30%

Average tax rate = 150/500 = 0.3 x 100 = 30%