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1. Many states use the Investment Tax Credit (ITC) as a way to encourage businesses to invest in new capital equipment. Through the ITC, firms can reduce their tax burden by buying new capital equipment. This effectively reduces the price of capital goods.
2. Discuss the situations under which the employment effects in a given industry will be larger.
3. Consider a firm that uses both labor and capital in production. The price of capital is $20 per unit and the wage rate is $15 per hour. Draw the firm's isocost line assuming a total production cost of $150.
4. Suppose that the ITC reduces the price of capital by 10% to $18 per unit. In which direction does the substitution effect change the firm's desired employment level and capital stock?
5. In which direction does the scale effect change the firm's desired employment level and capital stock?
6. If capital and labor are complements, which effect is stronger in terms of changes in the demand for labor in response to the ITC, the scale effect or the substitution effect?