1. Lauren has an estate of $12 million. She is deciding how much to donate to a non-profit organization (n) and to her children (c). Her utility function is u(c, n) = vcn. Estates are taxed at a rate of 50%, but $E of an estate is exempt from the tax. Donations to che non-profit are also exempt from the tax. So, the estate pays tax at a rate of 50% on the value of the estate after the donation has been made to the non-profit organization, and $E of the estate is exempt from the tax. Assume that E is less than 12 million. i) Find the kink point in the budget set. For which values of E will Lauren's estate pay some tax? ii) Find the optimal bundle. iii) Suppose that the estate tax is repealed. Find the optimal bundle now. Does the
1. Lauren has an estate of $12 million. She is deciding how much to donate to a non-profit organization (n) and to her children (c). Her utility function is u(c, n) = vcn. Estates are taxed at a rate of 50%, but $E of an estate is exempt from the tax. Donations to che non-profit are also exempt from the tax. So, the estate pays tax at a rate of 50% on the value of the estate after the donation has been made to the non-profit organization, and $E of the estate is exempt from the tax. Assume that E is less than 12 million. i) Find the kink point in the budget set. For which values of E will Lauren's estate pay some tax? ii) Find the optimal bundle. iii) Suppose that the estate tax is repealed. Find the optimal bundle now. Does the
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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please answer all three i, ii, and iii with explanations.
thank you.
Transcribed Image Text:**Problem Description:**
Lauren has an estate of $12 million. She is deciding how much to donate to a non-profit organization (n) and to her children (c). Her utility function is \( u(c, n) = \sqrt{cn} \).
Estates are taxed at a rate of 50%, but $E of an estate is exempt from the tax. Donations to the non-profit are also exempt from the tax. Therefore, the estate pays tax at a rate of 50% on the value of the estate *after* the donation has been made to the non-profit organization, and $E of the estate is exempt from the tax. Assume that \( E \) is less than 12 million.
**Questions:**
(i) Find the kink point in the budget set. For which values of \( E \) will Lauren’s estate pay some tax?
(ii) Find the optimal bundle.
(iii) Suppose that the estate tax is repealed. Find the optimal bundle now. Does the donation to the non-profit organization rise or fall when the estate tax is repealed?
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