Lecture12 - Announcements No HW due today No HW due today....

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
nnouncements Announcements o HW due today No HW due today. HW5 is now available on MyEconLab 1of 40
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
pplications of the LDMU Applications of the LDMU LDMU can explain why soda machines only dispense one pack at a time, while newspaper stands expose all of the h t t newspapers when you put your quarters in. Are newspapers readers more honest an soda drinkers? The economics than soda drinkers? The economics explanation is that the MU of one more ewspaper is pretty low while MU of one newspaper is pretty low while MU of one more soda is high. Vendors have probably never heard of the LDMU, but they behave accordingly. 2of 40
Background image of page 2
3of 40
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Applications of the LDMU LDMU can be used to explain why taxation is sometimes used to redistribute income from e relatively wealth to the relatively poor the relatively wealth to the relatively poor. e taxation system in theUS is a progressive The taxation system in the U.S. is a progressive tax system. Definition of a progressive tax: as your income increases, the amount of taxes you pay ( as a percentage of your income ) increases. ontrast this with a flat tax Definition of a at Contrast this with a flat tax. Definition of a flat tax: you pay the same percentage of your income in taxes, regardless of your level of income. 4of 40
Background image of page 4
The LDMU and Tax Policy LDMU offers a rational foundation for a progressive tax system . A progressive tax system is based on the belief that paying taxes should be equally “painful” for all, whether they are extremely wealthy or whether they are of more modest means. A progressive tax system assumes the MU of income is a decreasing function of income. Or, graphically: MU 5of 40 Income/year
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
MU and Tax Policy LDMU and Tax Policy A perfectly progressive tax system is one in which, after taxes and redistribution, all people receive the same income. 6of 40
Background image of page 6
The LDMU and Tax Policy A “perfectly” progressive tax system makes sense if these four assumptions hold true: come affects utility e more income you have 1.Income affects utility – the more income you have the “happier” you are. . eryone has the same utility function for income. 2. Everyone has the same utility function for income. 3.The LDMU applies to income–you get less utility from the last dollar of income than from the first. 4.Total income in society is fixed. If these assumptions are true, you could make a strong case for having a progressive tax and redistribution system such that everyone’s after tax income is equal. 7of 40
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
tax system. Suppose we have a society with two people, a 2005 student (you) and me. Assume there is a total income in society of $100,000 and that conditions 1 4 ove hold What tax policy should we use to maximize the total utility of above hold. What tax policy should we use to maximize the total utility of society? My Marginal Utils
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/18/2008 for the course ECON 2005 taught by Professor Zirkle during the Spring '07 term at Virginia Tech.

Page1 / 35

Lecture12 - Announcements No HW due today No HW due today....

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online