Question

Understanding marginal and average tax rates

Consider the economy of Pomistan, where citizens consume only apples. Assume that apples cost $1 each, and each person can buy at most 5,000 apples. The government has devised the following tax plans:

Plan A	Plan B
Consumption up to 1,000 apples is taxed at 10%.	Consumption up to 2,000 apples is taxed at 20%.
Consumption higher than 1,000 apples is taxed at 40%.	Consumption higher than 2,000 apples is taxed at 10%.

Derive the marginal and average tax rates under each tax plan at the consumption levels of 500 apples, 1,500 apples, and 2,500 apples, respectively. Fill in the following table with your results.

	Plan A		Plan B
Consumption Level	Marginal Tax Rate	Average Tax Rate	Marginal Tax Rate	Average Tax Rate
500 apples	(10%,20%/28%/40%)	(10%,20%/28%/40%)	(10%/16%/18%/20%)	(10%/16%/18%/20%)
1,500 apples	(10%,20%/28%/40%)	(10%,20%/28%/40%)	(10%/16%/18%/20%)	(10%/16%/18%/20%)
2,500 apples	(10%,20%/28%/40%)	(10%,20%/28%/40%)	(10%/16%/18%/20%)	(10%/16%/18%/20%)