1. Suppose that the tax rate is 50% and the probability of getting caught evading taxes is 20% plus an additional 10% for every $10,000 in tax evasion. (Hence, P = 0.2 + 0.1X, where X is measured in $10,000s of evasion.) Individuals who are caught evading taxes will be forced to pay the taxes they owe in addition to a $30,000 penalty.

1. a) What is the expected benefit of evading $100,000?

2. b) What is the expected cost of evading $100,000?

3. c) How much evasion will a risk-neutral taxpayer engage in?