Suppose workers at a firm are willing to pay (in foregone after-tax wages )$1200 a year in order to get a fringe benefit.The worker's tax bracket is 40% (so that for every $1000 a firm pays a worker,they get $600 in after-tax take home pay).If a firm gives the worker the fringe benefit and workers reduce their after-tax wage by $1200,how much is wage paid by the firm being reduced by?
A) $2000
B) $3000
C) $1200
D) $720

Question

Quizplus · Accepted Answer

Since the workers are willing to forego $1200 in after-tax wages for the fringe benefit, and they are in a 40% tax bracket (meaning they take home 60% of their pre-tax wage), the firm must pay $2000 before taxes to achieve the $1200 after-tax reduction. This is because $2000 * 60% = $1200.

Suppose Workers at a Firm Are Willing to Pay (In