Chapter 6.2, Problem 2E

Reminder Round all answers to two decimal places unless otherwise indicated.

Marginal Tax Rate Let $T\left(I\right)$ denote the income tax, in dollars, that you pay on a yearly income of $I$ dollars. The rate of change $\frac{dT}{dI}$ is known as the marginal tax rate.

a. Explain the meaning of the marginal tax rate in practical terms.

b. The marginal tax rate is normally given as a percentage. Explain in practical terms what a marginal tax rate of $30\%$ means.

c. You are offered a payment of $\$1000$ for a speaking engagement. You will have to pay $\$300$ for travel and lodging, and your marginal tax rate is $30\%$. How much, after paying travel, lodging, and taxes, do you earn from the speaking engagement? (Assume that you pay tax only on the net income, that is, the payment minus the expenses of travel and lodging.)