If the return to savings, r, is subject to taxation at rate t, then in equilibrium a saver's marginal rate of time preference will equal:

Question

Quizplus · Accepted Answer

The marginal rate of time preference represents the rate at which an individual is willing to trade present consumption for future consumption. In equilibrium, this rate must be equal to the after-tax return on savings, as the individual must be indifferent between consuming now or saving and consuming in the future. However, the after-tax return is only a portion of the pre-tax return, so we need to adjust for the tax rate. Therefore, the equation becomes [1 + r(1 - t)], which is option D.

If the Return to Savings, R, Is Subject to Taxation