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Flashcards in week 10 Deck (54)
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1
Q

graph labour market

A
2
Q

graph capital market

A
3
Q

demand for physical capital is

A

a derived demand

4
Q

what is the marginal product of capital? (MPk)

A
5
Q

what is the marginal revenue product of capital

A
6
Q

what is the demand for capital?

A
7
Q

what does demand for capital look like

A
8
Q

if firm purchase capital, there is an?

A

implicit rental price

9
Q

what is the implicit cost of capital?

A

opportunity cost of financial capital invested in the firm

10
Q

what is implicit rental price

A

depreciation cost + interest cost

11
Q

what is implicit rental rate?

A

implicit rental price/ price of capital

12
Q

what is the depriciation cost?

interest paid

implicit rental price or user cost of capital

implicit rental rate

A

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

13
Q

what happens to implicit rental rate when interest rises

A

interest rate rises –> implicit rental rate rises —> qty of KD falls

14
Q

how do firms interact with capital markets?

A

via capital markets, firms obtain financial capital to buy physical capital

15
Q

what may they finance with

A

equity: issues stocks or shares
debt: issue corporate bonds, take out loan

16
Q

return on stocks

A

dividend + capital gain (loss)

17
Q

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

A
18
Q

formula for rate of return on stock

A

return on stock/share price

19
Q

what is 1 next year not the same as 1 dollar today

A
20
Q

why is 1 dollar worth more than 1 dollar two years from now

A
21
Q

show relationship between supply of goods and capital market

A
22
Q

why do expected return on financial assets?

A

due to risk

23
Q

or option 3: If i flip a coin

H (50% chance), you win 0

T (50% chance), you win 10,000

A

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

24
Q

consider investment options

A
25
Q

demonstrate expected return on a graph

A
26
Q

what is the efficient market hypothesis?

A

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

27
Q

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?

A

work 1 more hour, gross wage = $20/h

after-tax wage = 16.20/h ($20 x (1-0.19))

28
Q

what is excise tax

A
29
Q

symbols used for income tax

A
30
Q

magnitutde of income tax depends on

A
  1. Size of Tax
  2. Elasticities of LS and LD
31
Q

economic incident of tax in the labour market

A
32
Q

what does tax look like in the labour market?

A
33
Q

deadweight loss of tax is bigger when

A

tax (t) is bigger

34
Q

what happens to tax revenue when tax rises?

A
35
Q

show what happens to tax revenue as tax rises

A
36
Q

what proposition is there for transfers?

A

tax the rich and give to the poor

37
Q

when does ws = wb

A
38
Q

formula for ws post-tax/transfer change

A
39
Q

describe allocation of time in the labour market

A
40
Q

what do we use income for?

A
41
Q

low income workers with $10/h. no income tax is levied (t=0%)

Display on a graph where there are no transfers

A

ws = Wb equal because they do not have to pay income tax

42
Q

what did both US & the UK have?

A

a

43
Q

under minimum income guarantee, assuming IG = 200/ week

how will this affect someone earning 150/wk and 160/wk?

A
44
Q

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

A

Anyone previously working between 0-20hrs have no incentive to work (e=100%), e.g. anne

45
Q

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

A

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

46
Q

describe the extreme case of poverty trap

A
47
Q

what is the effective tax rate

A

The effective tax rate is the average rate at which an individual is taxed on earned income,

48
Q

describe the poverty trap

A

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.

49
Q

elaborate on the poverty trap

A

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.

50
Q

describe less extreme case of poverty trap

A
51
Q

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?

A
52
Q

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

A

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

53
Q

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)

A

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

54
Q

what are ways of lessening work incentives of means-tested welfare payments?

A

by

  1. phasing out payments more slowly
  2. paying less welfare

but other problems emerge