Question

11. On a particular Saturday, Tom had planned to paint a room in his house, but his employer gave him the opportunity to work that day. If Tom works, he must hire a painter for $120. For Tom to have a positive cash flow from working and hiring the painter a. Tom must eam more than $158 if he is in the 24% marginal tax bracket. b. Tom must eam at least S158 if he is in the 32% marginal tax bracket. c. Tom must eam at least $140 if he is in the 24% marginal tax bracket. d. Tom must earn at least S120 if he is in the 12% marginal tax bracket.

Answer 1

Solution: The answer is

a. Tom must earn more than $158 if he is in the 24% marginal tax bracket

Reason: After tax earning under option a is nearer to $120 which is the amount that tom to going to pay to painter and under that option it is given that earning must be more than $158.

Calculation:   

Earnings after tax = $158 - ( $158 * 24% ) = $ 120.08

Option (b) is not correct because marginal tax is 32% on $158 which leads to after tax earning of $107.44 ( less than $120.)

Option (c) is not correct because marginal tax is 24% on $140 which leads to after tax earning of $106.40 ( less than $120.)

Option (d) is not correct because marginal tax is 12% on $120 which leads to after tax earning of $105.60 ( less than $120.)

Option (e) is not correct because option (a) is correct.