Economics_Introduction to economics_03_MC_03_280_SPI

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Economics_ Introduction to economics_03_MC_03_280_SPI Question: The income earned by the individual in 2005 is $5000 and in 2006 is $8000. The federal income tax paid by the individual in 2005 is $800 and in 2006 is $1200. How much is the marginal tax rate? a. 13%. b. 14% c. 15% d. 16% Solution: Answer is option ‘a’. General guidance: Concepts and reason The concept of the question is based on tax. Tax is the compulsory payment to the government. The government would impose a tax based on income received from work, business profit, and wealth of individuals. Fundamentals The marginal tax rate is calculated by using the formula is represented as follows: Change in taxes paid Marginal tax rate Change in income  The changes in tax paid is calculated by using the formula is represented as follows: Change in taxes paid Tax paid in current year Tax paid in previous year   The change in income is calculated by using the formula is represented as follows: Change in income Income in current period Income in previous period   Starting hint: Calculate the change in taxes paid and change in income. Step 1: The change in income is calculated by using the formula as follows: Change in income 8000 5000 3000    The change in taxes paid is calculated by using the formula as follows: Change in taxes paid 1200 800 400    Explanation: The change in income is calculated by subtracting the base year income from current year income and change in taxes paid is calculated by subtracting the base year taxes paid from the current year taxes paid by the individual, which is shown in step 1 respectively. Hence, the change in income is $3000 and change in taxes paid is $400. Common mistake: The possibility of making errors while adding the variables. Hint for the next step: Calculates the marginal tax rate. Step 2: The marginal tax rate is calculated by using the formula as follows: 400 Marginal tax rate 3000 0.13   Explanation: The marginal tax rate is calculates by dividing the change in taxes paid with change in income, which is shown in step 2 respectively. Hence, the marginal tax rate is 0.13 or 13%. Common mistake: The possibility of making errors while adding the variables.

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