1. In what type of tax rate structure will the average tax rate typically be less than the marginal tax rate?

A. Proportional

B. Progressive

C. Regressive

D. None of the above

2. Irene is saving for a new car she hopes to purchase in four years. Irene invests $10,000 in growth stock that does not pay dividends and expects that the stock will grow in value at a rate of 6% per year. When she cashes in the investment in four year (i.e., when she sells it) she expects a 25% long-term capital gains rate will apply to the gain realized on the sale.

a. What will the value of Irenes investment be four years from now? In other words, how much cash do you think Irene will receive when she sells the investment?

b. When Irene sells the investment, how much cash will she have left after she pays the taxes due on the sale? Recall, the tax base (what will be taxed) equals the amount of cash she receives when she sales the investment minus her $10,000 initial investment.

3. Assume that Larry's marginal tax rate is 25%. If taxable, corporate bonds pay 10% interest, what interest rate would a municipal (tax-free) bond have to offer for Larry to be indifferent between the two bonds?

A. 25.0%

B. 12.5%

C. 10.0%

D. 7.5%

E. None of the above.