Suppose government put a tax on renting capital so that firms need to pay τ fraction...

Suppose government put a tax on renting capital so that firms need to pay τ fraction of their capital rental expenses as a tax to government. Drive first-order conditions for capital and labor by solving firm’s maximization problem. What happens in labor, capital and financial markets in short run and long run? Explain in detail by showing the changes in the relevant markets.

Solutions

Expert Solution

The government has put a tax on renting capital. This will dis-incentivize them to hire/take renting capital and they would opt for labor more. Hence this tool is used by the government in places where unemployment is hurting the economy.

1st order condition for capital and labor solving firm’s maximization problem will give the result that the firm will hire labor till the time when the Marginal cost of hiring labor plus tax equals the marginal cost of capital. But here we have assumed that the extra cost of substitution is zero and there is no hidden cost.

Note: For reference, short-run are in black pen and the long run is in blue pen.

Rahul Sunny answered 5 months ago

Next > < Previous

Related Solutions

Suppose government puts a tax on investment at rate τ. That is, you get only 1...

Suppose government puts a tax on investment at rate τ. That is, you get only 1 − τ apple tree next period if you invest one apple this period. Derive the investment demand equation (analog of Equation 4.1 in Lecture 5). What would be the effect of this tax on net exports and real exchange rate in an open economy in long run and very-long run? Explain in detail by showing the changes in the relevant markets.

Suppose government puts a tax on investment at rate τ. That is, you get only 1...

Suppose government puts a tax on investment at rate τ. That is, you get only 1 − τ apple tree next period if you invest one apple this period. Derive the investment demand equation. What would be the effect of this tax on net exports and real exchange rate in an open economy in long run and very-long run? Explain in detail by showing the changes in the relevant markets. Seriously?! thats how the question is asked in the assignment!...

Suppose government puts a tax on consumption at rate τc, that is, τc fraction of consumption...

Suppose government puts a tax on consumption at rate τc, that is, τc fraction of consumption purchases goes to the government. What happens to IS and LM curves, aggregate demand, consumption, net exports, real exchange rate, nominal exchange rate, and price level in the short run and from short run to long run? Answer these questions under ﬁxed and ﬂoating exchange regimes separately. Assume an open market economy.

Suppose you are advising the government on sales tax. Should the government tax inelastic goods such...

Suppose you are advising the government on sales tax. Should the government tax inelastic goods such as food and medicine or inelastic goods such as Netflix and Hulu subscriptions if the goal of the tax is not to be distortionary? (In which scenario would the tax have the smallest effect on quantity).

Suppose you have some money to invest-for simplicity, $1-and are planning to put a fraction w...

Suppose you have some money to invest-for simplicity, $1-and are planning to put a fraction w into a stock market mutual fund and the rest, (1-w), into a bond mutual fund. Suppose that a $1 invested in a stock fund yields Rs, after one year and a $1 invested in a bond fund yields Rb. Rs and Rb are random variables with expected value of 10% and 8% respectively, and standard deviation of 4% and 2% respectively. The correlation between...

Suppose you have some money to invest-for simplicity, $1-and are planning to put a fraction w...

Suppose you have some money to invest-for simplicity, $1-and are planning to put a fraction w into a stock market mutual fund and the rest ( 1− w ), into a bond mutual fund. Suppose that a $1 invested in a stock fund yields ??after one year and a $1 invested in a bond fund yields Rb . ?? and Rb are random variables with expected value of 9% and 7% respectively, and standard deviation of 4% and 2% respectively....

A carbon tax makes the individuals and firms to pay for the full social cost of...

A carbon tax makes the individuals and firms to pay for the full social cost of carbon pollution. Do you think the carbon tax is a good policy to reduce greenhouse gas emissions in Australia? Why or why not? Whenever appropriate, you should supplement your answers with suitable diagrams. (Hint: What are the pros and cons of a carbon tax? how to draw a diagram????????

Consider the Solow grow model. Suppose for each unit of savings, the government consumes a fraction...

Consider the Solow grow model. Suppose for each unit of savings, the government consumes a fraction τ , so only the fraction 1 − τ would accumulate the capital stock. In other words, the law of motion for capital becomes: K1= (1 − δ)K + (1 − τ )sY where δ is the depreciation rate, s is the saving rate, and Y is aggregate output. Suppose production function is Y = zF(K, N). Follow the same steps we did in...

Consider the Solow grow model. Suppose for each unit of savings, the government consumes a fraction...

C++ For this question alone, put in everything (headers and so on) you need to make...

C++ For this question alone, put in everything (headers and so on) you need to make it compile. Assume the following functions have already been defined, write a main() that uses them to fill a vector with random integers, remove the smallest and largest integers from the vector, save the result in a file called "trimmed.txt" void fillRandom(vector & nums, int howMany); // fill with specified number of integers int minValue(vector nums); // return smallest value in vector int maxValue(vector...

Subjects