Reference no: EM13914406

Problem 1. Consider the market for beets. The world price of beets is $1 per pound and, at that price, 20 million pounds of US-­-produced beets are sold per month and 10 million pounds are imported from abroad. Assume that the supply and demand in a closed US market would result in a price of $1.25 per pound and a quantity sold of 25 million pounds. Beet producers argue that their market should be protected from foreign competition. Some producers request a tariff of $.50 per pound on imported beets; others request a price floor, which would set the minimum price of beets at $1.50 per pound. When the price is $1.50, the US demand is 20 million pounds .

a. Using 2 clearly labeled graphs, demonstrate the outcomes from each of these policies on the market (price and quantity) for domestically produced beets.

b. Which policy will domestic beet producers prefer? Which will foreign beet producers prefer? Which will consumers prefer? In your opinion, which policy is preferable, and why?

Problem 2. Empirical evidence suggests that the Earned Income Tax Credit (EITC) raises the labor supply of single women but depresses the labor supply of married women. Using labor-leisure diagrams, try to predict/explain this phenomenon with economic theory. Make the following assumptions:

a. Temporary Aid for Needy Family (TANF) serves as a safety net ensuring an income of $10,000 a year if earnings are below $10,000 (e.g. if earnings are $3000, TANF would provide $7000).

b. If the EITC did not exist, there would only be the TANF program as a safety net for poor households.

c. EITC provides 40% of earnings from work (not earnings from TANF) up until about $17,000. After that, EITC provides a smaller and smaller percentage of earnings from work (phases out) until $40,000.

d. Husbands, wives, and single mothers all have the same earning potential - if they work all available hours, they would earn $40,000 a year each.

e. Preferences for a household obey the basic rules of well-­-behaving indifference curves and generally are tangent to the budget line somewhere in the middle.

Problem 3. President Obama has proposed a payroll tax cut as part of the American Jobs Act. Normally, payroll taxes to fund social security are paid by employees and employers; each pays 6.2 percent of annual earnings (up to $110,100, although you can ignore the cap for this question), yielding a combined rate of 12.4%. The proposed jobs act would cut both the employer and the employee payroll tax in half such that each pays only 3.1%. Assume that the elasticities of demand and supply are roughly the same, unless I indicate otherwise below. Use labor supply and demand graphs as well as your own words to answer the following. HINT: The y- axis on the labor supply and demand graphs is the wage paid by the employer (not the after-­-tax wage).

a. What are the expected effects of this tax cut on wages and employment?

b. Would the expected effects of this tax cut be different for industries with primarily minimum wage workers?

c. Would this proposal have different effects on employment and after-­-tax earnings if the payroll cut were only on the employee side? That is, would the effects be different if the employee payroll tax were 0% and the employer payroll tax remained at 6.2%?

d. How does your answer to part a differ if both of the following were true: the labor supply were inelastic and the labor demand were elastic?

Problem 4. The federal government wants states to offer a minimum level of social safety net services (S*) and will provide a cash grant as an inducement. The federal government is deciding among 2 different mechanisms for providing the grant: a matching grant, or a block grant to be provided only after the state has surpassed a minimum spending level (Smin) on safety net programs. Assume that S* equals the maximum amount the state could afford without a grant; that the block grant adds about a third of the state's original budget; and that Smin is set such that when the block grant is added to Smin, the state will be spending S*. Use graphs to illustrate your answers.

a. Which mechanism is the cheapest way to induce S*? Explain how you can tell this from the graph.

b. Which of these mechanisms is preferred by states? Explain how you can tell this from the graph.