1. [3 points] In 201? the Trump administration decreased individual income taxes. a. Clearly explain whether equilibrium product prices and quantities rise or fall in response to lower individual income taxes. Illustrate the effects of such a policy in a general product market Properly label all lines. b. Assume the substitution effect is larger than the income effect. Clearly explain whether equilibrium wages and employment rise or fall in response to lower individual income taxes. Illustrate the effects ofsuch a policy in a general labor market. Properly label all lines. [4 points] U.S. payroll taxes are split evenly between employees and employers {each party pays 6.2% for a total payroll tax rate of 12.4%]. Suppose a senator proposes decreasing the tax burden on working families by changing the payroll tax such that firms pay 3.296 and workers only pay 4.2%. Is this policy change likely to achieve the senator's goal of increasing aftertax earnings for workers? Briefly explain why or why not. [3 points] Suppose the Dayton local goyemment is forced to decrease non-payroll spending on public infrastructure projects due to tight budget restrictions and a decline in revenues. a. Clearly explain whether equilibrium product prices and quantities rise or fall in Dayton in response to this policy change. Illustrate the effects of the policy in a general product market Properly label all lines. b. Clearly explain whether equilibrium wages and employment rise or fall in response to this policy change. Illustrate the effects of the policy in a general labor market Properly label all lines graph. [2|] points] Suppose a low-skill labor market in a [yen state is dened by the following equations, where E represents the quantity of employment and w represents the hourly wage rate. The minimum wage in that state is currently 58 per hour. Labor Demand: E = 22,0li 1,000\": Labor Supply: E = 3,l]l]w fulfill!) a. Given the labor supply and demand equations, is this $3 minimum wage a binding or nonbinding price floor? Briey explain your answer. b. Solve for the current level of low-skill employment in the state with the 55 minimum wage. c. Suppose the gouemment increases the state minimum wage to $10 per hour. Assuming no demand response, calculate it} the additional employment loss, [ii] the additional unemployment, and {iii} the additional deadweight loss created by this increase in minimum wage. [Hintyou are starting from the level of employment in [b] with the 53 minimum wage]. d. A number of empirical studies nd no evidence of minimum wage increases generating signicant loss in employment. Briefly explain the economic reasons behind these ndings. e. Briey explain one economic argument in favor higher minimum wages being an effective anti poyerty tool, and one economic argument against minimum wages as an antipoIrerty tool
