Plan A taxes oranges at a 5% rate for the first 500 oranges consumed, and 40% for oranges consumed above 500 up to 1400. The average tax rate for consuming 1400 oranges under Plan A is 15%. Plan B taxes oranges at a 30% rate for the first 500 oranges consumed, and 30% for oranges consumed above 500 up to 1400. The average tax rate for consuming 1400 oranges under Plan B is 30%.

1. Consider the economy of Citronia, where citizens consume only oranges. Assume that oranges
are priced at $1 each. The government has devised the following tax plans:
Plan A
Solution
Average Tax=Total Tax/ Quantity
For Quantity 1400 in Plan A Average Tax rate=(1000*5%+(1400-1000)*40%)/1400=15%
Plan A
Consumption
Marginal
Average
500
5%
5.0%
1400
40%
15.0%
2500
40%

2. 26.0%
Plan B
Consumption
Marginal
Average
500
30%
30.0%
1400
30%
30.0%
2500
10%
14.0%
Plan A
Consumption Marginal Average
500 5% 5.0%
1400 40% 15.0%
2500 40% 26.0%