Question

Kimberly is a self-employed taxpayer. She recently spent $2,700 for airfare to travel to Italy. What amount of the airfare is deductible in each of the following alternative scenarios? On the trip, she spent eight days on personal activities and two days on business activities.

Answer 1

Kimberly may potentially deduct 20% of her airfare to Italy for the two business days out of her ten-day trip, resulting in a $540 deduction, dependent on the tax regulations and guidance from a tax professional.

Step-by-step explanation:

The question involves Kimberly, a self-employed taxpayer, and her deductibility of airfare expenses on a mixed-use trip to Italy, which is essentially related to tax deductions for business travel. When Kimberly traveled to Italy and spent eight days on personal activities and two days on business, the deductibility of the airfare would depend on how the trip is primarily classified. According to tax regulations, if the trip is primarily for business and the personal days are incidental, a significant portion of the travel expense can be deductible. However, the scenario provided does not indicate that the trip was primarily for business. Therefore, in a strict interpretation, only a proportional amount of the airfare equivalent to the time spent on business activities might be deductible, which would be 2/10 or 20% of the $2,700, resulting in $540 being potentially deductible. In practice, this will greatly depend on country-specific tax laws and interpretations by tax professionals.

Answer 2

Kimberly's increased budget for concerts and getaways due to a rise in income shifts her budget constraint rightward, allowing her to choose a combination of both that provides higher utility, focusing on equating marginal utility per dollar spent.

Step-by-step explanation:

When Kimberly's income rises to $2,000 per year for concert tickets and overnight getaways, her budget constraint shifts to the right.

This increase in income allows her to reassess the utility and marginal utility she receives from both activities. With a higher budget, Kimberly can now choose a combination of concert tickets and overnight getaways that provides her with a higher level of utility than before.

If the marginal utilities per dollar are unchanged, her new choice will likely involve purchasing more of both goods, up to the point where her marginal utility per dollar spent is equalized for both goods.

However, if her preferences or the marginal utilities change, she may choose a different combination that maximizes her utility with the new budget constraint.