Suppose That You Are Unemployed and Collecting Unemployment Insurance Benefits

question 35

Essay

Suppose that you are unemployed and collecting unemployment insurance benefits of $200 per week, and suppose that your income is tax-free. Your employment counselor calls you and reports that she has found you a job that offers 40 hours of work per week at $12.50 per hour. You do some quick calculations and discover that your after-tax earnings from this job would be $360 per week. If unemployment benefits are cut off as soon as you regain employment, what is the real take-home wage rate from your new job offer? What does that make the tax rate on your earnings? (Hint: the loss of benefits is an implicit tax.)

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Definitions:

Mezzanine Financing

A hybrid form of capital typically used in late-stage financing composed of debt and equity, ranking between senior debt and equity in terms of claim on assets.

Principle Amount

The original sum of money borrowed in a loan or the initial amount of investment before interest or profit.

Equity

The value of an ownership interest in property, including shareholders' equity in a corporation, representing the residual value to shareholders after debts and liabilities have been settled.

Private Placement

The sale of securities to a relatively small number of select investors as a way of raising capital.