Consider an Economy in Which There Are Three Groups of Investors

question 2

Essay

Consider an economy in which there are three groups of investors and no others.
$\begin{array}{l}\begin{array}{|l}\hline\\\hlineGroup\\\hlinePlumbers\\\hlineDoctors\\\hlineLawyers\\\hline\end{array}\begin{array}{|l}\hline\text{Marginal tax rate}\\\hline\text{on bondss}\\\hline60 \% \\\hline 50 \% \\\hline 40 \% \\\hline\end{array}\begin{array}{|l|}\hline\text { Personal wealth }\\\hline(£ \text { millions) } \\\hline 2,500 \\\hline 700 \\\hline 100\\\hline\end{array}\end{array}$ There are no personal taxes on income from stocks.An investment is available that pays a
tax-free 4%.The tax rate is 50%.Total corporate income before earnings and taxes (EBIT)
is £224 million forever.What is the maximum debt-to-equity ratio for the economy as a whole?

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Definitions:

Utility Function

Represents the satisfaction or welfare an individual obtains from consuming goods and services, indicating preferences over various bundles of goods.

Nuts

Specifically, types of fruit composed of a hard shell and a seed, which are generally rich in nutrients.

Berries

Small, juicy fruits with a high seed content, often colorful and consumed as food; includes strawberries, blueberries, raspberries, and many others.

Utility Function

A mathematical representation of how different quantities of goods or services generate satisfaction or utility for a consumer.