Assume that the lost output due to tax distortions is proportional to the square of the tax rate. If the average cost of the distortion created by taxes is currently $1000, and the tax rate is increased from 40% to 50%, the average cost of the distortion created by taxes will increase to
a. $640.
b. $383.33.
c. $450.00.
d. $1562.50.
Answer: D
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