Please Answer D through F

1. (14 Points) In the labor market for mechanics, car repair companies achieve a normal profits, but must pay total compensation packages (fringe benefits and wages) with value determined by the market. Due to competition, firms in this market must pay $50,000 in wages if they provide no fringe benefits to employees. One firm which hires workers from this labor market, Stanford Automotive Repair, can pay $2 in fringe benefits for every $1 an employee is willing to forego in wages. (a) (2 Points) In class we listed 3 reasons why Stanford Automotive Repair could provide fringe benefits at twice the rate it can provide wages. Please list 2 of those reasons, and explain each briefly. (b) (2 Points) If a mechanic wants to receive fringe benefits worth $50,000, what is the maximum wage that Stanford Automotive Repair would be willing to pay them? (c) (4 Points) Please graph the employer isoprofit curve and the worker indifference curve for the mechanic in part (b) Be sure to label how much the mechanic is earning in both wages and fringe benefits. For parts (d), (e), and (f) below, suppose that Congress authorizes the Social Security Administration to tax fringe benefits at the same rate that it taxes regular wages. (d) (2 Points) How would this policy change impact the indifference curve you drew in part (c)? (Hint: Recall the reasons that we said that wages and fringe benefits were substitutes) (e) (2 Points) How would this policy change impact the isoprofit line you drew in part (c)? Assume that the policy change does not change the value of the market total compensation package. (f) (1 Point) Argue that, in spite of the change to the firm's isoprofit line from part (e), Stanford Automotive repair will still be able to offer fringe benefits at a more favorable rate than it offers money wages. 1. (14 Points) In the labor market for mechanics, car repair companies achieve a normal profits, but must pay total compensation packages (fringe benefits and wages) with value determined by the market. Due to competition, firms in this market must pay $50,000 in wages if they provide no fringe benefits to employees. One firm which hires workers from this labor market, Stanford Automotive Repair, can pay $2 in fringe benefits for every $1 an employee is willing to forego in wages. (a) (2 Points) In class we listed 3 reasons why Stanford Automotive Repair could provide fringe benefits at twice the rate it can provide wages. Please list 2 of those reasons, and explain each briefly. (b) (2 Points) If a mechanic wants to receive fringe benefits worth $50,000, what is the maximum wage that Stanford Automotive Repair would be willing to pay them? (c) (4 Points) Please graph the employer isoprofit curve and the worker indifference curve for the mechanic in part (b) Be sure to label how much the mechanic is earning in both wages and fringe benefits. For parts (d), (e), and (f) below, suppose that Congress authorizes the Social Security Administration to tax fringe benefits at the same rate that it taxes regular wages. (d) (2 Points) How would this policy change impact the indifference curve you drew in part (c)? (Hint: Recall the reasons that we said that wages and fringe benefits were substitutes) (e) (2 Points) How would this policy change impact the isoprofit line you drew in part (c)? Assume that the policy change does not change the value of the market total compensation package. (f) (1 Point) Argue that, in spite of the change to the firm's isoprofit line from part (e), Stanford Automotive repair will still be able to offer fringe benefits at a more favorable rate than it offers money wages