week 10

Question 1

graph labour market

Answer 1

Question 2

graph capital market

Answer 2

Question 3

demand for physical capital is

Answer 3

a derived demand

Question 4

what is the marginal product of capital? (MP_k)

Answer 4

Question 5

what is the marginal revenue product of capital

Answer 5

Question 6

what is the demand for capital?

Answer 6

Question 7

what does demand for capital look like

Answer 7

Question 8

if firm purchase capital, there is an?

Answer 8

implicit rental price

Question 9

what is the implicit cost of capital?

Answer 9

opportunity cost of financial capital invested in the firm

Question 10

what is implicit rental price

Answer 10

depreciation cost + interest cost

Question 11

what is implicit rental rate?

Answer 11

implicit rental price/ price of capital

Question 12

what is the depriciation cost?

interest paid

implicit rental price or user cost of capital

implicit rental rate

Answer 12

depreciation cost: 20m

finance purchase at interest rate i =5%

interest paid or foregone = 8

implicit rental price or user cost of capital = 20+8=28m

Question 13

what happens to implicit rental rate when interest rises

Answer 13

interest rate rises –> implicit rental rate rises —> qty of K_D falls

Question 14

how do firms interact with capital markets?

Answer 14

via capital markets, firms obtain financial capital to buy physical capital

Question 15

what may they finance with

Answer 15

equity: issues stocks or shares
debt: issue corporate bonds, take out loan

Question 16

return on stocks

Answer 16

dividend + capital gain (loss)

Question 17

calculate the capital gain/loss and return on stock and rate of return on stock

purchase 1 share in Oz bank

price of share = 100

over next year you expect dividend of $5

and share price to rise to 110

Answer 17

Question 18

formula for rate of return on stock

Answer 18

return on stock/share price

Question 19

what is 1 next year not the same as 1 dollar today

Answer 19

Question 20

why is 1 dollar worth more than 1 dollar two years from now

Answer 20

Question 21

show relationship between supply of goods and capital market

Answer 21

Question 22

why do expected return on financial assets?

Answer 22

due to risk

Question 23

or option 3: If i flip a coin

H (50% chance), you win 0

T (50% chance), you win 10,000

Answer 23

Expected earnings for option 1: 1000

expected earnings for option 2: (0.5 x 0) + (0.5 x 2000) = 1000

Expected earnings for option 3: (0.5 x 0) + (0.5 x `10,000) = 5000

You would choose option 1 over option 2 because there is less risk for the same expected return. As investors are risk averse, they will choose the option with the lowest risk. Option 3 has higher expected return but there is greater risk, compared to option 1

Question 24

consider investment options

Answer 24

Question 25

demonstrate expected return on a graph

Answer 25

Question 26

what is the efficient market hypothesis?

Answer 26

current stock price reflects all relevant information information about current and future earning prospects OR elimination of profit opportunities in financial markets as share prices adjust quickly to new information

Question 27

how much tax does a student who earns 20k/ year pay? find average tax rate and marginal tax rate what if they work 1 more hour?

Answer 27

work 1 more hour, gross wage = $20/h after-tax wage = 16.20/h ($20 x (1-0.19))

Question 28

what is excise tax

Answer 28

Question 29

symbols used for income tax

Answer 29

Question 30

magnitutde of income tax depends on

Answer 30

1. Size of Tax 2. Elasticities of L^S and L^D

Question 31

economic incident of tax in the labour market

Answer 31

Question 32

what does tax look like in the labour market?

Answer 32

Question 33

deadweight loss of tax is bigger when

Answer 33

tax (t) is bigger

Question 34

what happens to tax revenue when tax rises?

Answer 34

Question 35

show what happens to tax revenue as tax rises

Answer 35

Question 36

what proposition is there for transfers?

Answer 36

tax the rich and give to the poor

Question 37

when does w_s = w_b

Answer 37

Question 38

formula for w_s post-tax/transfer change

Answer 38

Question 39

describe allocation of time in the labour market

Answer 39

Question 40

what do we use income for?

Answer 40

Question 41

low income workers with $10/h. no income tax is levied (t=0%) Display on a graph where there are no transfers

Answer 41

w_s = W_b equal because they do not have to pay income tax

Question 42

what did both US & the UK have?

Answer 42

a

Question 43

under minimum income guarantee, assuming I_G = 200/ week how will this affect someone earning 150/wk and 160/wk?

Answer 43

Question 44

Assuming wage rate is 10/h and A works 15 hours and B works 24 hours, and I_G = 200, Show on graph and how this will affect A Describe how this will affect someone who earns less than 200 per week

Answer 44

Anyone previously working between 0-20hrs have **_no incentive to work_** (e=100%), e.g. anne

Question 45

Assuming wage rate is 10/h and A works 15 hours and B works 24 hours, and I_G = 200, Show on graph and how this will affect B Describe how this will affect someone who earns earns more than 200 perweek

Answer 45

some individuals earning more tahn 200/wk e.g. Bob may choose not to work They may prefer X over B because X has 24 hrs more leisure - GOOD but 40 less income/goods - BAD If goods outweights bad, Bob may choose not to work

Question 46

describe the extreme case of poverty trap

Answer 46

Question 47

what is the effective tax rate

Answer 47

The effective tax rate is the **_average rate at which an individual is taxed on earned income_**,

Question 48

describe the poverty trap

Answer 48

the poverty trap refers to the position when **_means-tested benefit payments are reduced as income rises_**, combined with income tax and other deductions, with the _effect of discouraging higher paid work_ whether that involves working longer hours or acquiring skills.

Question 49

elaborate on the poverty trap

Answer 49

taxation and welfare systems can jointly contribute to keep people on social insurance because the withdrawal of means tested benefits that comes with **entering low-paid work** causes there to be **no significant increase in total income**. An individual sees that the opportunity cost of returning to work is too great for too little a financial return, and this can create a perverse incentive to not work.

Question 50

describe less extreme case of poverty trap

Answer 50

Question 51

if transfers reduced by $2 for every $3 of labour income so labour income= 0, transfers= 200 labour income =300, transfers = 0 what would w_s be? what about e?

Answer 51

Question 52

Less extreme case: gradual withdrawal of transfers and welfares what effect would w_s= 3.33 have on B who works for 24 hours and originally earned $10/h for 24h with total income of 24

Answer 52

his new total income= 200 + (3.33x24) = 280 He is at **B'= (24h, $280)** If he works 1 less hour, he gives up **w_s= 3.33** Given e= 66.7 or 2/3, his incentive to work is much lower and he works less Thinking on the margin intially bob works 24 hours **MB(=$10) = MC (24th hour)** now with high effective tax rate **MB(=3.33)** so he works less

Question 53

Less extreme case: gradual withdrawal of transfers and welfares what effect would w_s= 3.33 have on C who works for 33 hours and originally earned $10/h for 33h with total income of 330 C=(33h, $330)

Answer 53

She might prefer B' to C B' has 9 more hours of leisure -GOOD but $50 less in income/goods - BAD if good outweighs bad, she works less

Question 54

what are ways of lessening work incentives of means-tested welfare payments?

Answer 54

by 1. phasing out payments more slowly 2. paying less welfare but other problems emerge