week 10 Flashcards
graph labour market
graph capital market
demand for physical capital is
a derived demand
what is the marginal product of capital? (MPk)
what is the marginal revenue product of capital
what is the demand for capital?
what does demand for capital look like
if firm purchase capital, there is an?
implicit rental price
what is the implicit cost of capital?
opportunity cost of financial capital invested in the firm
what is implicit rental price
depreciation cost + interest cost
what is implicit rental rate?
implicit rental price/ price of capital
what is the depriciation cost?
interest paid
implicit rental price or user cost of capital
implicit rental rate
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
what happens to implicit rental rate when interest rises
interest rate rises –> implicit rental rate rises —> qty of KD falls
how do firms interact with capital markets?
via capital markets, firms obtain financial capital to buy physical capital
what may they finance with
equity: issues stocks or shares
debt: issue corporate bonds, take out loan
return on stocks
dividend + capital gain (loss)
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
formula for rate of return on stock
return on stock/share price
what is 1 next year not the same as 1 dollar today
why is 1 dollar worth more than 1 dollar two years from now
show relationship between supply of goods and capital market
why do expected return on financial assets?
due to risk
or option 3: If i flip a coin
H (50% chance), you win 0
T (50% chance), you win 10,000
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
consider investment options
demonstrate expected return on a graph
what is the efficient market hypothesis?
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
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?
work 1 more hour, gross wage = $20/h
after-tax wage = 16.20/h ($20 x (1-0.19))
what is excise tax
symbols used for income tax
magnitutde of income tax depends on
- Size of Tax
- Elasticities of LS and LD
economic incident of tax in the labour market
what does tax look like in the labour market?
deadweight loss of tax is bigger when
tax (t) is bigger
what happens to tax revenue when tax rises?
show what happens to tax revenue as tax rises
what proposition is there for transfers?
tax the rich and give to the poor
when does ws = wb
formula for ws post-tax/transfer change
describe allocation of time in the labour market
what do we use income for?
low income workers with $10/h. no income tax is levied (t=0%)
Display on a graph where there are no transfers
ws = Wb equal because they do not have to pay income tax
what did both US & the UK have?
a
under minimum income guarantee, assuming IG = 200/ week
how will this affect someone earning 150/wk and 160/wk?
Assuming wage rate is 10/h and
A works 15 hours and B works 24 hours,
and IG = 200,
Show on graph and how this will affect A
Describe how this will affect someone who earns less than 200 per week
Anyone previously working between 0-20hrs have no incentive to work (e=100%), e.g. anne
Assuming wage rate is 10/h and
A works 15 hours and B works 24 hours,
and IG = 200,
Show on graph and how this will affect B
Describe how this will affect someone who earns earns more than 200 perweek
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
describe the extreme case of poverty trap
what is the effective tax rate
The effective tax rate is the average rate at which an individual is taxed on earned income,
describe the poverty trap
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.
elaborate on the poverty trap
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.
describe less extreme case of poverty trap
if transfers reduced by $2 for every $3 of labour income so
labour income= 0, transfers= 200
labour income =300, transfers = 0
what would ws be?
what about e?
Less extreme case: gradual withdrawal of transfers and welfares
what effect would ws= 3.33 have on B who works for 24 hours
and originally earned $10/h for 24h with total income of 24
his new total income= 200 + (3.33x24) = 280
He is at B’= (24h, $280)
If he works 1 less hour, he gives up ws= 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
Less extreme case: gradual withdrawal of transfers and welfares
what effect would ws= 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)
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
what are ways of lessening work incentives of means-tested welfare payments?
by
- phasing out payments more slowly
- paying less welfare
but other problems emerge
