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 (D)</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 (D)</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. (A)</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. (D)</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. (D)</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. (C)</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. (C)</p> Signup and view all the answers

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