Lecture 12 Feb 18

Lecture 12 Feb 18 - Announcements MT1isnextWednesday.

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Announcements MT1 is next Wednesday. Please e-mail me ASAP about conflicts. Practice exam on BB.  Study first then  take it as an “exam” (timed, no notes) Monday will be review (and we will finish  anything we didn’t finish on Friday) 1 of 40
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Applications of the LDMU LDMU can explain why soda  machines only dispense one pack at a  time, while newspaper stands expose  all of the newspapers when you put  your quarters in.  Are newspapers  readers more honest than soda  drinkers?  The economics explanation  is that the MU of one more newspaper  is pretty low while MU of one more  soda is high.  Vendors have probably  never heard of the LDMU, but they  behave accordingly. 2 of 40
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Applications of the LDMU LDMU can also be used to explain why  taxation is sometimes used to redistribute  income from the relatively wealth to the  relatively poor. 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.   Contrast this with a flat tax.  Definition of a  flat tax:   you pay the same percentage of  your income in taxes, regardless of your  4 of 40
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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: 5 of 40 MU Income/year
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LDMU and Tax Policy perfectly progressive  tax  system is one in which, after  taxes and redistribution, all people  receive the same income. 6 of 40
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The LDMU and Tax Policy A “perfectly” progressive tax system makes  sense if these four assumptions hold true: 1.Income affects utility – the more income you  have the “happier” you are. 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  7 of 40
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An illustration of the logic behind a  progressive tax system. Suppose we have a society with two people, a 2005 student (you) and 
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Lecture 12 Feb 18 - Announcements MT1isnextWednesday.

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