Question & Answer

Assume that commuters regard bus journeys as an inferior good and car journeys as a normal good. Using indifference curves, show how (a) a rise in incomes and (b) a fall in bus fares will affect the use of these two modes of transport. How could people’s tastes be altered so that bus journeys were no longer regarded as an inferior good? If tastes were altered in this way, what effect would it have on the indifference curves?

Distinguish between a normal good, an inferior good and a Giffen good. Use indifference curves to illustrate your answer.

Sketch a person’s indifference map for two goods X and Y. Mark the optimum consumption point. Now illustrate the following (you might need to draw a separate diagram for each):

(a)  A rise in the price of good X, but no change in the price of good Y.

(b)  A shift in the person’s tastes from good Y to good X.

(c)  A fall in the person’s income and a fall in the price of good Y, with the result that the consumption of Y remains constant (but that of X falls).

Explain why the price of a good is no reflection of the total value that consumers put on it.

Consider situations where you might consider swapping items with someone. Why are such situations relatively rare? Can you think of circumstances in which this might be more common?

Is it reasonable to assume that people seek to equate the marginal utility/price ratios of the goods that they purchase, if (a) they have never heard of ‘utility’, let alone ‘marginal utility’; (b) marginal utility cannot be measured in any absolute way?

Imagine that you had £10 per month to allocate between two goods, A and B. Imagine that good A cost £2 per unit and good B cost £1 per unit. Imagine also that the utilities of the two goods are those set out in the table. (Note that the two goods are not substitutes for each other, so that the consumption of one does not affect the utility gained from the other.)

The utility gained by a person from various quantities of two goods: A and B

         (a)  What would be the marginal utility ratio (MU_a/MU_b) for the following combinations of the two goods: (i) 1A, 8B; (ii) 2A, 6B; (iii) 3A, 4B; (iv) 4A, 2B? (Each combination would cost £10.)

         (b)  Show that where the marginal utility ratio (MU_A/MU_B) equals the price ratio (P_A/P_B) total utility is maximised.

         (c)  If the two goods were substitutes for each other why would it not be possible to construct a table like the one given here?

Suppose you asked your favorite AI query tool the following question: “Don Juan, a single taxpayer, is the sole owner of DJ’s Inc., an S corporation. In 2024, DJ’s Inc. incurred a massive $600,000 business loss, all of which is allocable to Don Juan as the sole shareholder. Assume that the $600,000 loss is not limited by the basis, at-risk, or passive loss rules and that Don Juan has no other business income or business losses. How much of the $600,000 loss will Don Juan be able to deduct in 2024?”  The AI tool provided the following response:

Jeremy and Alyssa Johnson have been married for five years and do not have any children.  Jeremy was married previously and has one child from the prior marriage.  He is self-employed and operates his own computer repair store.  For the first two months of the year, Alyssa worked for Office Depot as an employee.  In March, Alyssa accepted a new job with Super Toys Inc. (ST), where she worked for the remainder of the year.  This year, the Johnsons received $255,000 of gross income.  Determine the Johnsons’ AGI for 2024 given the following information: 

Read the following letter and help Shady Slim with his tax situation.  Assume that gross income is $172,900 (which consists only of salary) and filing status of single for purposes of this problem.

This year Diane intends to file a married filing jointly return.  Diane received $197,500 of salary and paid $5,000 of interest on loans used to pay qualified tuition costs for her dependent daughter, Deb. This year Diane has also paid moving expenses of $4,300 and $28,300 of alimony to her ex-spouse, Jack, who she divorced in 2013.

a. What is Diane’s adjusted gross income?

b. Suppose that Diane also reported income of $8,800 from a half share of profits from a partnership. Disregard any potential self-employment taxes on this income. What AGI would Diane report under these circumstances?

] Lionel is an unmarried law student at State University Law School, a qualified educational institution. This year Lionel borrowed $24,000 from County Bank and paid interest of $1,440. Lionel used the loan proceeds to pay his law school tuition. Calculate the amounts Lionel can deduct for interest on higher education loans under the following circumstances:

a. Lionel’s AGI before deducting interest on higher education loans is $50,000.

b. Lionel’s AGI before deducting interest on higher education loans is $89,000.

c. Lionel’s AGI before deducting interest on higher education loans is $100,000.

Jada (age 53) and Elijah (age 60) are married, and both are self-employed. In 2024, they participate in a health insurance plan with a $3,000 annual deductible and out-of-pocket maximum of $9,000. The only other health plan they have is a vision insurance plan. Are they eligible to contribute to a health savings account? Why or why not. If so, what is their maximum HSA contribution and deduction?

Sarah was contemplating making a contribution to her traditional individual retirement account for the current year. She determined that she would contribute $6,000 to her IRA, and she deducted $6,000 for the contribution when she completed and filed her current year tax return on February 15 of the following year. Two months later, on April 15, Sarah realized that she had not yet actually contributed the funds to her IRA. On April 15, she went to the post office and mailed a $6,000 check to the bank holding her IRA. The bank received the payment on April 19. In which year is Sarah’s $6,000 contribution deductible?

Seven years ago, Halle (currently age 41) contributed $4,000 to a Roth IRA account. The current value of the Roth IRA is $9,000. In the current, year Halle withdraws $8,000 of the account balance to use as a down payment on her first home. Assuming Halle is in the 24 percent marginal tax bracket, how much of the $8,000 withdrawal will she retain after taxes to fund her house down payment?

Sherry, who is 52 years of age, opened a Roth IRA three years ago. She has contributed a total of $12,000 to a Roth IRA ($4,000 a year). The current value of the Roth IRA is $16,300. In the current year, Sherry withdraws $14,000 of the account balance to purchase a car. Assuming Sherry’s marginal tax rate is 24 percent, how much of the $14,000 withdrawal will she retain after taxes to fund her car purchase?

] Jimmer has contributed $15,000 to his Roth IRA, and the balance in the account is $18,000. In the current year, Jimmer withdrew $17,000 from the Roth IRA to pay for a new car. If Jimmer’s marginal ordinary income tax rate is 24 percent, what amount of tax and penalty, if any, is Jimmer required to pay on the withdrawal in each of the following alternative situations?

a. Jimmer opened the Roth account 44 months before he withdrew the $17,000, and Jimmer is 62 years of age.

b. Jimmer opened the Roth account 44 months before he withdrew the $17,000, and Jimmer is age 53.

c. Jimmer opened the Roth account 76 months before he withdrew the $17,000, and Jimmer is age 62.

d. Jimmer opened the Roth account 76 months before he withdrew the $17,000, and Jimmer is age 53.

George (age 42 at year-end) has been contributing to a traditional IRA for years (all deductible contributions), and his IRA is now worth $25,000. He is planning on converting the entire balance to a Roth IRA account. George’s marginal tax rate is 24 percent.

a. What are the tax consequences to George if he takes $25,000 out of the traditional IRA and contributes the entire amount into a Roth IRA one week after receiving the distribution?

b. What are the tax consequences to George if he takes $25,000 out of the traditional IRA, pays the taxes due from the traditional IRA distribution, and contributes the what’s left from the distribution to the Roth IRA one week after receiving the distribution?

c. What are the tax consequences to George if he takes $25,000 out of the traditional IRA, keeps $10,000 to pay taxes and to make a down payment on a new car, and contributes what’s left from the distribution to the Roth IRA one week after receiving the distribution?

Harriet and Harry Combs (both 37 years old) are married and both want to contribute to a Roth IRA. In the current year, their AGI before any IRA contribution deductions is $50,000. Harriet earned $46,000 and Harry earned $4,000.

a. How much can Harriet contribute to her Roth IRA if they file a joint return?

b. How much can Harriet contribute if she files a separate return?

c. How much can Harry contribute to his Roth IRA if they file separately?

Jackson and Ashley Turner (both 45 years old) are married and want to contribute to a Roth IRA for Ashley. For the current year, their AGI is $235,000. Jackson and Ashley each earned half of the income.

a. How much can Ashley contribute to her Roth IRA if they file a joint return?

b. How much can Ashley contribute if she files a separate return?

c. Assume that Ashley earned all of the couple’s income and that she contributed the maximum amount she is allowed to contribute to a Roth IRA. What amount can be contributed to Jackson’s Roth IRA?

Brooklyn has been contributing to a traditional IRA for seven years (all deductible contributions) and has a total of $30,000 in the account. In the current year, she is 39 years old and has decided that she wants to get a new car. She withdraws $20,000 from the IRA to help pay for the car. She is currently in the 24 percent marginal tax bracket. What amount of the withdrawal, after tax considerations, will Brooklyn have available to purchase the car?

} Rashaun (62 years old) retired and planned on immediately receiving distributions (making withdrawals) from his traditional IRA account. The balance of his IRA account is $160,000 (before reducing it for withdrawals ∕ distributions described below). Over the years, Rashaun has contributed $40,000 to the IRA. Of his $40,000 contributions, $30,000 was nondeductible and $10,000 was deductible. Assume Rashaun did not make any contributions to the account during the year.

a. If Rashaun currently withdraws $20,000 from the IRA, how much tax will he be required to pay on the withdrawal if his marginal tax rate is 24 percent?

b. If Rashaun currently withdraws $70,000 from the IRA, how much tax will he be required to pay on the withdrawal if his marginal tax rate is 28 percent?

c. Using the information provided in part (b), complete Form 8606, part I, to report the taxable portion of the $70,000 distribution (withdrawal). Use the most current form available.

Susan (44 years old) is a highly successful architect and is covered by an employee-sponsored plan. Her husband, Dan (47 years old), however, is a Ph.D. student and is unemployed. Compute the maximum deductible IRA contribution for each spouse in the following alternative situations.

William is a single writer (age 35) who recently decided that he needs to save more for retirement. His current year AGI before the IRA contribution deduction is $80,000 (all earned income).

a. If he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution William can make for the current year?

b. If he does participate in an employer-sponsored plan, what is the maximum deductible IRA contribution William can make for the current year?

c. Assume the same facts as in part (b), except William’s AGI before the IRA contribution deduction is $89,000. What is the maximum deductible IRA contribution William can make for the current year?

In the current year, LeSean (age 51 and single) has earned income of $3,000. He also has $30,000 of unearned (capital gain) income.

a. If he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution LeSean can make for the current year?

b. If he does participate in an employer-sponsored plan, what is the maximum deductible IRA contribution LeSean can make for the current year?

c. If he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution LeSean can make for the current year if he has earned income of $10,000?