If Maureen lives in a country where no taxes are levied on the first $20,000 of income and a 10% tax is levied on all income above $20,000, what is her marginal tax rate if she has an average tax rate of 5%?
A)5%
B)10%
C)15%
D)25%

Question

Quizplus · Accepted Answer

Maureen's average tax rate is calculated as the total tax paid divided by her total income. Let X be her total income. Then:
Total Tax Paid = 0.05X
Tax on income above 20,000 = 0.10(X-20,000)
Total tax paid = 0.05X + 0.10(X-20,000)
Setting the average tax rate equal to 5%, we get:
0.05X = 0.05(Total Income) = 0.05(20,000) + 0.10(X-20,000)
Simplifying the expression above, we get:
0.05X = 500 + 0.10X - 2000
0.05X = 1500
X = 30,000
Thus, Maureen's total income is $30,000. Her marginal tax rate refers to the tax rate she pays on the last dollar of income earned. Since she pays a 10% tax rate on income above $20,000, her marginal tax rate is equal to 10%. Therefore, the correct choice is B.

If Maureen Lives in a Country Where No Taxes Are