Carl, a resident of Econoland, currently works 20 hours a week and earns an annu
ID: 1225960 • Letter: C
Question
Carl, a resident of Econoland, currently works 20 hours a week and earns an annual income of $60,000. The following table shows income tax rates in Econoland. Annual Income Up to $60,000 From $60,000 to $90,000 Over $90,000 Tax Rate 10% 20% 30% This is an example of a income tax. After paying income taxes, Carl receives per year. If Carl works an additional 10 hours a week (30 hours a week total), his annual income will be $90,000. After paying income taxes, Carl will receive week, Carl will receive an additional per year. In other words, by working an additional 10 hours per If Carl works 10 more hours in a week (40 hours a week total), his annual income will further increase to $120,000 After paying income taxes, Carl will receive per week, Carl will receive per year. In other words, by working 10 more hours more than what he will receive if he works only 30 hours a week.Explanation / Answer
(a) Progressive income tax
(b) Income tax = $60,000 x 10% = $6,000
After paying tax, Carl receives $54,000 (= $60,000 - $6,000).
(c) If income = $90,000, income tax = $60,000 x 10% + $(90,000 - 60,000) x 20%
= $6,000 + $30,000 x 20%
= $(6,000 + 6,000)
= $12,000
Income received after tax = $(90,000 - 12,000) = $78,000
So, Carl earns additional $(78,000 - 54,000) = $24,000
(d) When income = $120,000,
Income tax = $12,000 + $(120,000 - 90,000) x 30%
= $12,000 + $30,000 x 30%
= $(12,000 + 9,000)
= $21,000
Earning after income tax = $(120,000 - 21,000) = $99,000
Carl will receive $(99,000 - 78,000) = $21,000 more.
(e) As Carl works more, additional amount from working 10 more hours decreases, which means his cost of leisure decreases.