Instructions: This problem set is due at the beginning of class on the date noted above. You are encouraged to…

Instructions: This problem set is due at the beginning of class on the date noted above. You are encouraged to work in groups but must hand in your own work. Copying answers will be considered cheating as in the University guidelines and dealt with accordingly. Write your answers on a separate piece of paper (not here). Exercise 1. 1.1. What does the substitution effect do to an individual’s willingness to supply labor if wages rise? What are they substituting away from? 1.2. What does the income effect do to individual’s willingness to supply labor if wages rise? Why? 1.3. If a worker supplies more labor as wages rise, which effect (substitution or income) is stronger? 1.4. If a worker can produce 10 tacos in an hour and the price of a taco is $.50, what is the maximum wage a firm will pay the worker? 1.5. If we assume diminishing returns to labor, what happens to the productivity of workers (MPL) as the firm hires more and more labor? How does this affect the wage the firm is willing to pay as they hire more? 1.6. What happens to the quantity of labor supplied if a minimum wage is implemented? What happens to the quantity of labor demanded? 1.7. Who gains from the minimum wage law? Who loses? Exercise 2. 2.1. As interest rates fall, what happens to a household’s desire to save money (supply loanable funds)? What happens to investors desire to borrow and pursue new investment projects (demand loanable funds)? 2.2 . What do savers expect in return for supplying loanable funds? 2.3. If savers instead purchase stocks in a firm in an IPO, what do the savers expect in return for their purchase (name two things)? 2.4. If firms don’t give back all of their profits to shareholders in the form of dividends, what can the firm do with the remainder? How do shareholders feel about this? Why? 1 ECON 202 Principles of Microeconomics Fall 2012 Colorado State University Problem Set 4 Chris Slootmaker Due in Recitation December 6/7 2.5. What two things do savers expect in return for their savings if they purchase bonds from a firm or government? 2.6. How does perceived risk affect the current yield of a bond (think risk that a country/firm will default/go out of business as perceived by savers)? Exercise 3. For this exercise, use the marginal tax rate information for the federal income tax on page 412 of your text. 3.1. If an individual’s annual income is $120,000, how much will they pay in taxes. 3.2. What is their marginal tax rate? 3.3. What is their average tax rate? 3.4. Suppose this person can deduct $50,000 from their total income. What is their taxable income? 3.5. What will be their nominal tax rate? What will be their effective tax rate? 3.6. If another individual earns $80,000 and is not able to deduct anything, what will be their nominal tax rate? What will be their effective tax rate? Exercise 4. Answer each of the following in a couple of sentences (2-3). 4.1. How does the federal income tax use marginal tax rates to reduce income inequality? 4.2. Why is the federal income tax system considered progressive? How do deductions change this progressivity? 4.3. Why might higher income households be more likely to pursue deductions? 4.4. Are sales taxes progressive, regressive, or neutral? Explain. 4.5. How do higher income taxes affect workers decision to supply labor? What does this mean for efficiency?