1.

Consider the utility function below where an individual gets utility her market income (x), plus a public transfer which is equal to the tax rate (y) times the average income, minus a tax which is equal to the tax rate (y) times her income (x) and finally minus the intrinsic burden of the tax/transfer system which is equal to the public transfer squared (y2).

= + 2

1.1. (15 %)

Which tax rate maximizes the individual's utility? (Hint: Use first-order-condition.). Show calculations.

1.2. (10 %)

Imagine, a situation where the intrinsic burden of the tax/transfer system was (2y2) instead of (y2), which could be interpreted as a less efficient government, how would that affect the individual's taxrate preference? Show calculations.

1.3 (10 %)

Based on the findings above, what are the effects of a less efficient government on individuals'preferred tax rate.