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3. The government has hired an economics expert to inform them about the optimal tax level, which depends on a number of underlying economic factors
3. The government has hired an economics expert to inform them about the optimal tax level, which depends on a number of underlying economic factors that they government is unsure about. Based on these factors, the optimal tax level is a number f between 0 and 35%. The expert observes the true optimal level, but the government does not. The expert, after observing , makes a report to the government about the optimal tax level, r. After receiving the report, the government sets the actual tax level 7. (a) (5 points) Sketch this game using a game tree. (b) (3 points) Suppose the government believes that the expert is truthful; that is, they always report the true optimal level. If the government always wants to set ECON 221 - 004 ASSIGNMENT 4, Page 3 of 3 April 4, 2024 the actual tax level as closely as possible to the optimal level, what are the values of R and T for a given 7 () (2 points) Suppose the expert only cares about society, so they also want the tax level to be as close to the optimal level as possible. Is the situation in (b) an equilibrium? Explain. (d) (5 points) Suppose the expert is wealthy, and always wants 7" to be lower than the socially optimal level. Is the situation in (b) an equilibrium? Explain. Total for Question 3: 15
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