Department of Economics, SUFFOLK UNIVERSITY
Jonathan Haughton
ECONOMICS 101: Applied Microeconomics
ASSIGNMENT 10
Answers to this assignment are due back by Friday, December 11, 2015. Please feel free to work on the
answers in groups of not more than three, and to hand in joint work.
Reminder: If you prefer, for every three quizzes that I have listed for you take on line at MyEconLab,
you make skip one related written homework assignment.
1.
Wage Differentials
The following wage differentials are observed in the US today. Explain (I) why each of these differentials
persists, and (2) whether or not it is consistent with the competitive model of wage determination.
a.
b.
c.
d.
e.
2.
a.
Among workers with no more than a high school education working in the same plant, 35-year-olds
receive higher wages than 25-year-olds.
Workers in the South receive lower wages than their counterparts in the Northeast.
African-American workers receive, on average, lower wages than Caucasian Americans.
Workers whose jobs involve the direction and management of others must typically be paid more
than their subordinates, even if training and educational pre-requisites are the same for both.
Wages for union members are higher than those for non-union workers, in the same occupation.
Taxation
Consider the following four tax systems:
Income p.a. ($)
Tax paid: tax A
Tax paid: tax B
Tax paid: tax C
Tax paid: tax D
b.
c.
10,000
400
500
600
150
20,000
280
800
1,200
400
50,000
160
1,700
3,000
1,350
100,000
130
2,900
6,000
3,100
Which of these three taxes are progressive, proportional, or regressive? Explain.
Explain briefly the ability to pay and the benefit principles of taxation.
For each of the following taxes, indicate whether they are proportional, progressive or regressive in
the US; and which principle of taxation applies best. Justify your answer briefly, using the Web or
other sources as needed.
i.
A graduated income tax.
ii.
A sales tax that is levied at 10% on all goods except food.
iii.
An excise tax on gasoline.
iv.
An excise tax on cigarettes.
Ec 102, PS 10
Fall 2015
Page 1 of 2
3.
Present Value
a.
A rich aunt is going to leave you $145,200 in exactly two years, but now you are broke (or more
exactly, you need the money for tuition). If the interest rate is 10%, how much can you borrow now,
based on your ability to repay in two years?
b.
The list price of a car you want to buy is $16,000. Sales representative A offers it to you for $15,200.
Salesperson B won't reduce the price, but will let you pay in a year. From whom should you buy the
car
i.
if the interest rate is 10%?
ii.
if the interest rate is 4%?
Explain why, and show any calculations.
4.
More on Present Value
You are about to graduate and are wondering what career to pursue. You have narrowed the choice to
three alternatives:
a. Go to work as a junior-level executive and work your way up.
b. Go to business school, get an MBA, and work as an executive then.
c. Go to graduate school, get a PhD in economics (eventually), and teach as a university professor.
You face the following expected cost and return streams. Assume each period is of equal length.
[Although this example is a bit simple-minded, it captures the choices quite well.]
Option A
Option B
Option C
a.
b.
Time 1
30,000
-20,000
-10,000
Time 2
34,000
50,000
-10,000
Time 3
38,000
60,000
30,000
Time 4
42,000
80,000
41,000
Calculate the net present value of each choice, assuming
i.
an interest rate of 10%, and
ii.
an interest rate of 20%.
Show your calculations.
Why might someone choose Option C?
Ec 102, PS 10
Fall 2015
Page 2 of 2