1

What will make the tax evasion increase? Use the tax evasion model to answer this question.

a. Increase marginal penalty.

b. Increase probability of audit.

c. Decrease marginal tax rate.

d. Increase marginal tax rate.

2

Ben, who has a federal personal income tax rate of 20 percent, holds an oil stock that appreciates in value by 10 percent each year. He bought the stock one year ago. Bens stockbroker now wants him to switch the oil stock for a gold stock that is equally risky. Ben has decided that if he hold the oil stock, he will keep it only one more year and then sell it. If he sells the oil stock now, he will invest all the (after-tax) proceeds of the sale in the gold stock and then sell the gold stock one year from now. Suppose the Ben buys the oil stock for $2,500 at the start of period 0. How much will Ben receive after tax if he holds on to the oil stock now, and then sell it one year later?

a. $3,010

b. $2,750

c. $2,920

d. $2,825

Following the previous question, what is the minimum rate of return the gold stock must pay for Ben to make the switch? Answer the question with the lock-in effect.

a. 8.25%

b. 10.19%

c. 16.14%

d. 10.28%

3

Use a two-period life-cycle model to answer the question on the effects of taxation on saving. Consider a tax on the interest revenues with deductible interest payments. Which of the following statements is false?

a. Substitution effect implies borrowers will increase their present consumption.

b. Income effect implies borrowers will decrease their present consumption.

c. Substitution effect implies savers will increase their present consumption.

d. Income effect implies savers will decrease their present consumption.

4

There are some reasons for why there are tax exemptions. Which of the following reason is incorrect?

a. To adjust ability to pay.

b. To provide tax relief for low-income families.

c. To encourage certain behavior.

d. To remain basic living standard.