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This Problem Compares the Effect of a Tax on Interest

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This problem compares the effect of a tax on interest earnings over a number of years, when interest is compounded annually. Suppose you purchase $1000 worth of mutual funds paying an average of 5 percent per year.
a) How much is your interest after 30 years if there was no tax on interest?
b) How much is your interest after 30 years if there is a 20 percent tax on interest earnings?


Definitions:

Average Costs

The total costs of production divided by the number of units produced, representing the cost per unit.

Returns To Scale

The change in output resulting from a proportional change in all inputs in the production process; can be increasing, constant, or decreasing.

Increasing Returns To Scale

See Economies of scale.

Economies Of Scale

Exist when average costs fall as output increases.

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