In Italy, firms pay tax on reported profits at a constant proportionate rate t € (0,1). If the firm's profit is, the owner of the firm can choose to report any amount of profit r where 0 ≤ r ≤ 7, and thus pay tr in tax. However, if the firm is audited, it must pay additional tax on unreported profit -r at a rate of t+f, where 0 < ƒ <1-t. Thus if the firm is audited, it pays tr+(t+ƒ)(π-r) in tax. The probability of being audited is p. Assume that the owner of each firm maximizes expected utility with a strictly increasing von Neumann-Morgenstern utility function that depends only on after-tax profit.

In Italy, firms pay tax on reported profits at a constant proportionate rate t € (0,1). If the firm's profit is, the owner of the firm can choose to report any amount of profit r where 0 ≤ r ≤ 7, and thus pay tr in tax. However, if the firm is audited, it must pay additional tax on unreported profit -r at a rate of t+f, where 0 < ƒ <1-t. Thus if the firm is audited, it pays tr+(t+ƒ)(π-r) in tax. The probability of being audited is p. Assume that the owner of each firm maximizes expected utility with a strictly increasing von Neumann-Morgenstern utility function that depends only on after-tax profit.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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