Sarah moves from Upperland,which has no taxes or transfer payments,to Lowerland,where she is hit with taxes of $2,000 and receives transfer payments of $3,000.She earns the same wage in both countries,but in Lowerland her disposable income is
A)$1,000 higher
B)$1,000 lower
C)$5,000 higher
D)$2,000 lower
E)$3,000 higher

Question

Quizplus · Accepted Answer

Disposable income is the income that a household has available for spending and saving after income taxes and transfers are taken into account. In this case, Sarah's income and wage are the same in both Upperland and Lowerland. However, Lowerland has taxes of $2,000 and transfer payments of $3,000, which means that Sarah's disposable income in Lowerland would be:

Disposable income = Wage - Taxes + Transfer payments
Disposable income = Wage - $2,000 + $3,000
Disposable income = Wage + $1,000

Therefore, Sarah's disposable income in Lowerland is $1,000 higher than in Upperland. Thus, the answer is A) $1,000 higher.

Sarah Moves from Upperland,which Has No Taxes or Transfer Payments,to