A senior citizen gets a part-time job at a fast-food restaurant. She earns $8 per hour for each hour she works, and she works exactly 25 hours per week. Thus, her total pretax weekly income is $200. Her total income tax assessment each week is $40, but she has determined that she is assessed $3 in taxes for the final hour she works each week.

a. What is this person’s average tax rate each week?

b. What is the marginal tax rate for the last hour she works each week?

a. 20%

b. 37.5%

Explanation:

The computation is shown below:

For person average tax rate each week is

= (Total income tax assessment ÷ total pretax weekly income) × 100

= ($40 ÷ $200) × 100

= 20%

And, the marginal tax rate for the last hour is

= (Assessed in taxes for final hour) ÷ (earning per hour) × 100

= ($3) ÷ ($8) × 100

= 37.5%

We compute each of the above by applying the above formula

cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.

empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.

optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.

instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.

harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.

social norms: we are heavily influenced by the actions of others; while this can be in certain circumstances, it also contributes to the pressure to keep up with the joneses through conspicuous consumption.