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Eco 370 Hw Solution Essay

958 words - 4 pages

Answers to Homework 2 (30) 1. Continuing from the Question 4 on Homework 1, suppose the following Earned Income Tax Credit (EITC) scheme is put in place. For those whose earned income (i.e. labor income) is less than $100 per week the government gives 20 cents on every dollar earned. For those who earn more than $100 the government gives them $80 per week. Based on the answers to question 4(d) of the first homework, how does this affect the labor supply and earnings of Shelly? Explain your answers. From homework 1, Shelly will work 32 hours. We expect her to be on the flat part of the EITC schedule. This is equivalent to an increase in her non-labor income, V, of $100 per week. So tangency ...view middle of the document...

Thus, someone who had not been working faces a wage that is 40 percent higher than it otherwise was. This increase may be enough to encourage the person to start working. For example, if a worker’s reservation wage is $10.00 per hour but the only job she can find pays $8.00 per hour, she will not work. Under the earned income tax credit, however, the worker views this same job as paying $11.20 per hour, which exceeds her reservation wage. Furthermore, the EITC cannot encourage a worker to exit the labor force, as the benefits of the EITC are received only by workers.

(50) 3. Trans-Fat Corp. is setting up a small Twonky factory in Albany. Table 1 shows the hourly output in Twonkies associated with each level of employment. Table 1 Workers Output 1 5 2 11 3 18 4 26 5 35 6 43 7 50 8 56 9 61 10 65 11 68 12 70

(a) Tabulate and plot the marginal productivity and average productivity of labor curves for the factory. Worker 0 1 2 3 4 5 6 7 8 9 10 11 12 Output Marginal Product 5 6 7 8 9 8 7 6 5 4 3 2 Average Product 5.00 5.50 6.00 6.50 7.00 7.17 7.14 7.00 6.78 6.50 6.18 5.83

5 11 18 26 35 43 50 56 61 65 68 70

(b) If a Twonky retails for $2 each. How many workers would the firm hire if the wage was $12/hr? wage rate = price * marginal product of labor $12 = $2 * MPe MPe = 6 Then, the firm will hire 8 workers.

(c) Plot out the short run labor demand curve for the factory for wages between $4 and $20/hr.

For the firm’s hiring...

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