Scenario: Contiguous States Often Use Tax Policy to Attract Residents

question 33

Multiple Choice

Scenario: Contiguous states often use tax policy to attract residents, firms, and economic activity. These "tax competitions" between states can be modeled with game theory. Suppose New Jersey currently has a state sales tax of 7 percent and Pennsylvania has a state sales tax of 6 percent. The game shown below models the effect of a reduction in each state's sales tax rate to 3 percent on each state's sales tax revenue. Assume the motivation of each state is to maximize tax revenue. The first number in a cell is the payoff to New Jersey; the second number is the payoff to Pennsylvania.

(Source: John Greenwald, "A No-Win War Between the States," Time, April 8, 1996, 44-45.
-Refer to the scenario above.Is there a dominant strategy equilibrium?

• A) No.
• B) Yes, New Jersey lowers its sales tax rate to 3 percent and Pennsylvania maintains its sales tax rate.
• C) Yes, both New Jersey and Pennsylvania maintain their sales tax rates.
• D) Yes, both New Jersey and Pennsylvania lower their sales tax rates to 3 percent.

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Definitions:

Tightness

In cultural psychology, the degree to which a culture restricts or regulates behaviors, with strict norms and intolerance for deviation.

Affective Forecasting

The process by which individuals predict their future emotional states or reactions to events.

Positive Events

Occurrences or experiences that contribute to one's happiness, well-being, or positive emotional state.

Negative Events

Unfortunate or harmful incidents that can lead to emotional distress, physical harm, or psychological impact on individuals.