Let the interest rate before taxes be 4% and assume the inflation rate is 3.5%. Three individual farmers are in 20%, 30%, and 40% tax brackets, respectively.

a. Determine how much (after taxes) each farmer could afford to bid for a piece of land expected to return $60.00 per year (in today’s purchasing power) into the foreseeable

future. Assume that the inflationary component of the opportunity cost is not taxed but the real component is taxed.

b. Now assume that real component and one-half of the inflationary component of the opportunity cost are taxed. How does this change the maximal bid prices each producer

would be willing to pay?

Answer rating: 100% (QA)

Part a Determining Maximum Bids with Untaxed Inflationary Component Calculate the real interest rate Real interest rate nominal interest rate inflatio... View the full answer