Chapter 12 (INPUTS INCOMES & INEQUALITY)

Question 1

Income

Answer 1

What you earn is a FLOW

Flow: amount PER unit of time

Income for labour, capital and land = price of input x quantity of input

Question 2

Wealth

Answer 2

Total value of assets you own is a STOCK

Stock: FIXED amount at a moment in time

Question 3

Key concepts for explaining input incomes

Answer 3

1. Marginal revenue product for labor
2. Present value for capital
3. Economic rent for land (MRP)

Question 4

Marginal product

Answer 4

Additional output from hiring one more unit of labour

• when business hire additional labourers there is DIMINISHING MARGINAL PRODUCTIVITY as you add more of a variable input to fixed inputs, the marginal product of the variable input externally diminishes

Question 5

Marginal revenue product (MRP)

Answer 5

Additional revenue from selling output produced by an additional labourer
- marginal product x price of output
- marginal revenue product diminishes for additional labourers

Question 6

Present value

Answer 6

Present value of FUTURE AMOUNT of money is the amount that if invested today will grow as large as the future amount, taking account of earned interest

money available in n years / (1 + interest rate)^n

Revenues available in the future are not worth as much as revenues today because today’s revenues earn interest

Smart investment choice: present value of future earnings> price of the investment

Present value converts the flow of future earnings into a stock concept

Question 7

Economic rent

Answer 7

Income paid to any input in relatively inelastic supply
- land is a classic example of an input in inelastic supply
- high input prices cause high output prices

Income for any input in elastic supply, for example land or superstar talent is economic rent, which is determined by DEMAND ALONE

Economic rents can persist because owners of inelastic ally supplied inputs are like mini monopolists with barriers to entry

Question 8

Human capital

Answer 8

Increased earning potential from work experience on the job training, education

Question 9

Progressive taxes

Answer 9

Increases and income increases

Federal and provincial tax systems use progressive taxes

Question 10

Regressive taxes

Answer 10

Tax rate decreases as income increases

Question 11

Proportional (flat rate) taxes

Answer 11

Tax rate the same regardless of income

Question 12

Marginal tax rate

Answer 12

Rate on additional dollar of income

Question 13

Transfer payments

Answer 13

Payments by government to households

Question 14

Average market income for he middle 20% in 2010

Answer 14

$49700

With tax: $46,300

Question 15

Poorest average market income for 20% in 2010

Answer 15

14600

With tax: $3100

Question 16

Richest average market income for 20% in 2010

Answer 16

$166,800

With tax: $135,500