1. My old state New Hampshire is 1 of just 7 states that either offers no income tax or has a limited system (they don't tax wage income but do tax income from dividends and interest). Assume that there are no minimum wage laws and that the market is allowed to reach equilibrium. Also assume that the demand for labor and supply of labor are both unit elastic.

a.Show me New Hampshire's labor market at equilibrium under the current law. Label the equilibrium wage W = $10 and equilibrium employment L. Be sure to properly label everything! Also in the real world, who is the supply of labor and who is the demand of labor?

b.Now suppose that New Hampshire decides to join their 43 other peers in enacting an income tax on wages. Imagine they enact a flat tax of $4 on all wages and further that firms are the ones who have to pay this tax. On a supply and demand graph, show me how will this new law will initially impact New Hampshire's labor market? Label the new equilibrium wage W^Tax and the new equilibrium employment L^Tax.

c.What is the value in terms of dollars of W^Tax? Also how much of the income tax did firms pay? How much of the income tax did workers pay?

d.Based on your answers above, why does New Hampshire currently not charge an income tax on wages? Briefly explain your answer (i.e. write a couple of sentences making your point).

(15 points) 2. A common policy across states are mandatory motorcycle helmet and seatbelt laws i.e. you have to wear a helmet/seatbelt or you'll get a fine/lose your license (my old state New Hampshire is the only state currently without either).

a.Draw me the private marginal benefit curve and private marginal cost curve for New Hampshire without any laws in place. I've labeled the axes for you in the standard price/quantity fashion we're used to. Label the equilibrium price P and the equilibrium quantity Q.

b.However, those were just the private marginal curves. On the same graph above, draw and label the social marginal cost curve. In the space below, briefly explain (i.e. a couple sentences) to me why you drew it where you did. In particular, tell me what the external costs are by offering some actual examples.

c.Again on the graph in part A., shade in the dead weight loss that New Hampshire has by not recognizing the external costs to not wearing seatbelts (you do not have to calculate it). Pretend I know nothing about economics (well hopefully pretend) and intuitively explain to me what this area means/shows.

d.There's a professor at the University of Hartford who argues that there is a small positive consequence to more/more deadly car crashes and that's through increased organ donation. Again on the graph in part a., illustrate what he's talking about by finding the socially optimal equilibrium. Label price at your final point, P^Efficient and quantity Q^Efficient. How does this affect the dead weight loss problem you showed New Hampshire suffered from before?

(15 points) 3. In class we talked about the issues plaguing Irwindale, CA, home of the Siracha manufacturing complex where the spices that go into delicious Siracha are floating around the town and bothering residents. Assume this creates a negative externality of $1 per bottle.

a.Ignoring the social issues associated with Siracha manufacturing, assume the equilibrium price of Siracha is $3 and 1,000 bottles are bought at the price. Draw this market equilibrium on a supply and demand graph and label it E^M. On this same graph, illustrate what the social equilibrium should be and label it E^S. What would that socially efficient price be? (You can guess logically as to what the socially efficient quantity should be as well). Be sure to label all the curves/axes appropriately as well.

b.A potential solution could be to impose a price floor. Define what a price floor is and illustrate on a new graph here where the price floor would be set and how that would impact the market. What would the final price and quantity be?

c.A different solution would be to impose a tax on Siracha. Assuming the elasticity of supply and elasticity of demand are equal, illustrate on a new graph here how the tax should be set and how it would impact the market. What would the final price and quantity be?

d.Imagine the town of Irwindale, CA can't decide between these two options and comes to you for your economic expertise. Which of these should you suggest? In a few sentences, explain to me why that is your answer?

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e.Finally, explain to the town why there will still be some positive level of spice pollution for the town in either case.