Income Tax Game You are given the folloving gane in which the row player is the auditor and the column player is the tax payer. The auditor has two strategies; vhether to audit the tax payer or not audit. The tax payer has two strategies: to be honest in his income or to cheat. The first payoffs belong to the auditor and the second payoffs belong to the tax payer. Tax Payer Honest Cheat 2,0 4,10 No audit 4,0 | 0,4 Audit Auditor Table 1: Income Tax Game If this is a simultaneous move game; 1. Mhat is the pure strategy NE? 2. What is the mixed strategy NE? 3. Interpret the mixed strategy NE. 4. Mhat could be done if the goverament vould like to increase the proportion of honest tax payers? 5. How people can be incentivized to pay their taxes? 6. Suppose that the penalty for cheating goes from -10 to -20. Shov that the proportion of tax payers vill not change but the probability of audit will decrease.

Income Tax Game You are given the folloving gane in which the row player is the auditor and the column player is the tax payer. The auditor has two strategies; vhether to audit the tax payer or not audit. The tax payer has two strategies: to be honest in his income or to cheat. The first payoffs belong to the auditor and the second payoffs belong to the tax payer. Tax Payer Honest Cheat 2,0 4,10 No audit 4,0 | 0,4 Audit Auditor Table 1: Income Tax Game If this is a simultaneous move game; 1. Mhat is the pure strategy NE? 2. What is the mixed strategy NE? 3. Interpret the mixed strategy NE. 4. Mhat could be done if the goverament vould like to increase the proportion of honest tax payers? 5. How people can be incentivized to pay their taxes? 6. Suppose that the penalty for cheating goes from -10 to -20. Shov that the proportion of tax payers vill not change but the probability of audit will decrease.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

sub= 24

Income Tax Game
You are given the following game in which the row player is the auditor and the column
player is the tax payer. The auditor has two strategies; vhether to audit the tax
payer or not audit. The tax payer has two strategies: to be honest in his income
or to cheat. The first payoffs belong to the auditor and the second payoffs belong
to the tax payer.
Tax Payer
Honest Cheat
2,0 4,10
No audit 4,0| 0,4
Audit
Auditor
Table 1: Income Tax Game
If this is a simultaneous move game;
1. What is the pure strategy NE?
2. What is the mixed strategy NE?
3. Interpret the mixed strategy NE.
4. What could be done if the government vould like to increase the proportion of
honest tax payers?
5. How people can be incentivized to pay their taxes?
6. Suppose that the penalty for cheating goes from -10 to -20. Show that the proportion
of tax payers will not change but the probability of audit will decrease.

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