Tax Evasion Decision Analysis
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Questions and Answers

What is the effect of an increase in the probability of detection according to Figure 3?

  • The optimal choice moves further away from X = Y
  • The income declared decreases
  • The optimal choice moves closer to X = Y (correct)
  • Evasion increases

    • How does an increase in the fine rate (F) affect evasion, as stated in the text?

  • Evasion increases
  • The optimal choice moves further away from an honest declaration
  • The effect on income is not clear-cut
  • The optimal choice moves closer to an honest declaration (correct)

    • What happens when the tax rate (t) increases, as discussed in Figure 5?

  • Tax evasion is reduced (correct)
  • Risk aversion increases with income
  • The opportunity line shifts outward
  • Income declared decreases

    • Why does the Yitzhaki puzzle arise according to the text?

    <p>The puzzle arises from a pure income effect</p> Signup and view all the answers

    In Prospect Theory, what conditions make it interesting?

    <p>'Loss' outcomes when not caught and 'gain' outcomes when caught</p> Signup and view all the answers

    Why does the addition of loss aversion lead to a decrease in predicted evasion?

    <p>It reduces the weight given to the possibility of being caught.</p> Signup and view all the answers

    How does the economic analysis of tax compliance using expected utility theory compare to real-world compliance?

    <p>It under-predicts real-world compliance.</p> Signup and view all the answers

    What is Pareto Efficiency in the context of the Prisoner's Dilemma game?

    <p>A situation where no player can be made better off without making another player worse off.</p> Signup and view all the answers

    What strategy characterizes Tit-for-Tat in a repeated game like the Prisoner's Dilemma?

    <p>Cheat if the opponent co-operated in the previous round.</p> Signup and view all the answers

    What is a possible explanation for rational co-operation in repeated games?

    <p>'Rational irrationality' where players cooperate for public gains.</p> Signup and view all the answers

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