Assume that the lost output due to tax distortions is proportional to the square of the tax rate.If the average cost of the distortion created by taxes is currently $1000,and the tax rate is increased from 40% to 50%,the average cost of the distortion created by taxes will increase to

Question

Quizplus · Accepted Answer

Let's assume the current tax rate is t.
According to the problem, we know that the lost output due to tax distortions is proportional to the square of the tax rate. So, the cost of the distortion can be represented as k*t^2, where k is a constant of proportionality.

Given that the average cost of the distortion is $1000, we can set up an equation and solve for k:
1000=k*0.4^2
k=6250

Now, we can calculate the new average cost of the distortion when the tax rate is increased to 50%:
k*0.5^2=6250*0.25=$1562.50

Therefore, the answer is D.

Assume That the Lost Output Due to Tax Distortions Is