Suppose that all commodities, including leisure, are taxed
at a rate of t = 25 percent. What is the equivalent value of
time endowment tax that is equivalent to the uniform
commodity tax rate on all goods?
a. 20 percent
b. 25 percent
c. 30 percent
d. 35 percent
e. 40 percent

Question

Suppose that all commodities, including leisure, are taxed
at a rate of t = 25 percent. What is the equivalent value of
time endowment tax that is equivalent to the uniform
commodity tax rate on all goods?
a. 20 percent
b. 25 percent
c. 30 percent
d. 35 percent
e. 40 percent

Accepted Answer

∻Answer∻ ⚹ b. 25 percent ⚹ ∻Solution∻ ‖ a ⋮ Understanding the Tax on Leisure: When a uniform commodity tax is imposed on all goods, including leisure, it means that the price of leisure is also taxed. Since leisure can be considered as the opportunity cost of labor (i.e., working time), a tax on leisure effectively reduces the after-tax wage rate. ‖ ‖ b ⋮ Calculating the Equivalent Tax on Time Endowment: If the tax rate on all goods is 25%, then for every unit of leisure consumed, an individual has to give up 1.25 units of consumption of other goods due to the tax. This means that the individual's time endowment effectively faces the same 25% tax rate because the opportunity cost of leisure is now 25% higher. ‖ ∻Key Concept∻ ⚹ Tax Equivalence between Leisure and Goods ⚹ ∻Explanation∻ ⚹ The equivalent value of a time endowment tax that is equivalent to a uniform commodity tax rate on all goods, including leisure, is the same as the tax rate on goods because the opportunity cost of leisure is taxed at the same rate as the consumption of goods. ⚹◊What impact does a tax on commodities, including leisure, at a rate of 25 percent have on consumer behavior and market equilibrium in Microeconomics?⍭ Generate me a similar question◊

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