Tax payers can evade the tax, and if there is no investigation, it cannot be found and they will not be punished for it. However, if there is an investigation by the tax collector, it will be found and punished. On the other hand, it will take some cost (C) to investigate. It the tax evasion is found, the tax collector can charge a punishment fee (P) in addition to the tax (T). We will assume that P>C.

The next table shows the payoffs for each case.

Tax payer

		Evade	Do not Evade
Tax collector	Investigate	T+P-C, -T-P	T-C, -T
	Do not investigate	0, 0	T, -T

1. Is there any pure strategy equilibrium?

2. Find the mixed strategy equilibrium of this game.

* Based on your answer to (2) answer the following

3. If the punishment (P) becomes higher (or severe), will there be more investigations by the tax collector? Will there be less tax evasions by the tax payer in this case?

4. If the investigation cost (C) becomes higher, will there be more investigations? Will there be more tax evasions?

5. If the tax (T) increases, what will happen to the investigation and the tax evasion?

Here is the answer, please translate this handout to clear word format. I will give the thumb, thanks.

\fPT, then as Prob to play Investigate T (TTP ) , falls, so not move Investigation Now 9 = C ( TTP ) V, so prob that tax payer evades will also decrease, yes, less tax evasion Ang 4). CT, then no effect on P, So there will nobe no effect on Investigation cT, q1, yes, more instances of tax evasiong 5). TT, then q falls, less tax evasions op = ( +p ) - + = P 70 OT ( TTP ) 2 (TTP ) 2 as TODOTT, then PT , Investigation T