Lars Osberg, a single taxpayer with a 35 percent marginal tax rate, desires health insurance. The health insurance would cost Lars $8,500 to purchase if he pays for it himself (Lars's AGI is too high to receive any tax deduction for the insurance as a medical expense). Volvo, Lars's employer, has a 40 percent marginal tax rate. Answer the following questions about this benefit (ignore FICA taxes in your analysis).
a. What is the maximum amount of before-tax salary Lars would give up to receive health insurance from Volvo?
b. What would be the after-tax cost to Volvo to provide Lars with health insurance if it could purchase the insurance through its group plan for $5,000?
c. Assume that Volvo could purchase the insurance for $5,000. Lars is interested in getting health insurance and he is willing to receive a lower salary in exchange for the health insurance. What is the least amount by which Volvo would be willing to reduce Lars's salary while agreeing to pay his life insurance?
d. Will Volvo and Lars be able to reach an agreement by which Volvo will provide Lars's health insurance?