ASSIGNMENT # 2 SOLUTION
1. Assume that the five residents of Econoville receive incomes of $50, $75, $125,
$250, and $500. Present the resulting personal distribution of income as a graph
similar to Figure
Compare the incomes of the lowest and highest fifth of the income receivers.
The distribution of income is quite unequal. The highest 20 percent of the residents receive
10 times more income than the lowest 20 percent.
2. Suppose in Fiscalville there is no tax on the first $10,000 of income, but a 20
percent tax
on earnings between $10,000-20,000 and a 30 percent tax on income between $20,000
and $30,000.
Any income above $30,000 is taxed at 40 percent. If your income is $50,000, how
much in taxes will
you pay? Determine your marginal and average tax rates. Is it a progressive tax?
Explain.
Total tax = $13,000; marginal tax rate = 40% average tax rate = 26%. This is a progressive
tax;
the average tax rate rises as income goes up.