On April 1 1992, NJ increased its minimum wage to $5.05, at the time the highest minimum wage in the country. David Card and Alan Krueger saw an opportunity to understand how the minimum wage affects employment. They surveyed fast food restaurants in February 1992 (before increase) and November 1992 (after increase) in both NJ and in PA (which did not change its minimum wage in this time period). The survey asked how many employees they had. They then ran the following regression:

Employees = α + β1NJ + β2November + β3(NJ × November) + ϵ

Where NJ = 1 if the restaurant is in NJ and = 0 if in PA; November = 1 if the response is from November (after increase) and = 0 if response is from February (before increase); Employees are the number of full-time employees. They estimated that: βˆ 3 = 2.76 with a standard error of 1.36

a) What is the t-statistic for the estimate of βˆ 3? Given that our sample size is large, how is the t-statistic distributed? How do you know this?

b) Is βˆ 3 significant at the 5% level? How do you know? Why did you make the comparison you did to answer this?

c) How do you interpret β3?

d) Why were (some) economists surprised by this result?

In order to raise revenues, the government has decided to levy taxes (T) on luxury goods purchased by taxpayers with earnings higher than the average income. The demand and supply curves of yacht before taxes are follows: (20 points total) QS=0.5P QD=600-P A. Compute the existing equilibrium price (P*) and quantity (Q*). (2 points) B. i. State the new equation of demand curve. (2 points) ii. Compute new equilibrium quantity (Q’). (2 points) iii. Compute market price received suppliers (PS). (1.5 points) iv. Compute the price paid by consumers (PD) after taxation. (1.5 points) C. Compute consumer surpluses (CS), producer surplus (PS), and total surplus (TS) before tax. (2 points) D. Compute consumer surpluse (CS’), producer surplus (PS’), tax revenues (TR) and total surplus (TS’) after tax. (T=300) (3 points) E. Estimate dead-weight loss (DWL) of a tax (T=300) and state why taxes cause dead- weight loss. (3 points) F. State the function of tax revenues with respect to T. Draw the graph and its implication. Evaluate the tax policy at T=400. (3 points)

1.Matt recently deposited $30,000 in a savings account paying a guaranteed interest rate of 4 percent for the next 10 years. If Matt expects his marginal tax rate to be 22 percent for the next 10 years, how much interest will he earn after-tax after the fourth year of his investment if he withdraws enough cash every year to pay the tax on the interest he earns?  

2. Dana intends to invest $25,000 in either a Treasury bond or a corporate bond. The Treasury bond yields 5 percent before tax and the corporate bond yields 6 percent before tax. Dana’s federal marginal rate is 25 percent and her marginal state rate is 5 percent. What is the amount by which the yield on the corporate bond exceeds the yield on the Treasury bond.  Assume that Dana itemizes her deductions and that any state income tax would be fully deductible.  

3.Hayley recently invested $40,000 in a public utility stock paying a 3 percent annual dividend. If Hayley reinvests the annual dividend she receives net of any taxes owed on the dividend, how much will her investment be worth in four years if the dividends paid are qualified dividends? (Hayley’s marginal income tax rate is 32 percent.)

Part II. Researchers are testing the effects of a new diet program on n = 10 healthy participants. One topic that researchers are interested in are overall attitudes towards dieting. They are interested in knowing if the new diet program will change the participants attitudes towards dieting. Participants rated their attitude about diets before and after the diet program.

1. The first thing you must do is determine which t – test you need to run. Once you have made that decision, you can proceed to answer b-d

2. Using symbols, state the null and alternative hypothesis

c) Is there significant difference between the two groups? Calculate Cohens D and report the value (this calculation will be done manually) Is the effect size that you calculated small, medium, or large?

4. Report the confidence interval from the SPSS output. Interpret the confidence interval. You may use the slides from last lecture as a reference.

d. Create a figure

The Millenium Villages Project (MVP) and the controversy around the measurement of its impacts. This question will explore that more thoroughly as a way of getting you to think more deeply about the causal inference methods.

(a.) The MVP aims to tackle all the root causes of poverty at once by implementing multi- faceted assistance: medical centers, education initiatives, support for improved agricul- tural productivity, etc. Describe one advantage and one disadvantage of an evaluation of the package as a whole compared with an evaluation of the individual component interventions.

(.b) Putting that critique aside, suppose that we are interested in measuring the effect of being a Millenium Development Village (the “treatment” variable, D) on the incidence of mortality for children under 5 years (child mortality). Using both notation and a short description, describe the

i. true causal effect for village i
ii. average counterfactual outcome for villages that never get MVP support

iii. average causal effect for villages with MVP support

(c.) Suppose that a researcher decides to do a “before-after” comparison of the mortality rate in 2009 in MVP villages with the mortality rate in 2006 in the same villages. Write down the assumption needed for the before-after comparison to represent the true causal effect of MVP support. Is this assumption likely to be satisfied?

Pacific Jewel Airlines is a U.S.-based air freight firm with a wholly owned subsidiary in Hong Kong. The subsidiary, Jewel Hong Kong, has just completed a long-term planning report for the parent company, in which it has estimated the following expected earnings and payout rates for 2014.

Earnings before interest and taxes $10,000

Less interest expense $1,000

Earnings before taxes $9,000

The current Hong Kong corporate tax rate on this category of income is 16.5 percent. Hong Kong imposes no withholding taxes on dividends remitted to U.S. investors (per the Hong Kong-United States bilateral tax treaty). The U.S. corporate income tax rate is 35 percent. The parent wants to repatriate 75 percent of net income as dividends.

1)Calculate the net income available for distribution by the Hong Kong subsidiary in 2014.

2)What is the expected amount of the dividend to be remitted to the U.S. parent next year?

3)After estimating the theoretical U.S. tax liability on the expected dividend (what is often terms gross-up in the U.S.), what is the total dividend after tax, including all Hong Kong and U.S. taxes, expected next year?

4)What is the effective tax rate on this foreign-sourced income next year?

Pacific Jewel Airlines is a U.S.-based air freight firm with a wholly owned subsidiary in Hong Kong. The subsidiary, Jewel Hong Kong, has just completed a long-term planning report for the parent company, in which it has estimated the following expected earnings and payout rates for 2014.

Earnings before interest and taxes           $10,000

Less interest expense                                    $1,000

Earnings before taxes                                   $9,000

The current Hong Kong corporate tax rate on this category of income is 16.5 percent. Hong Kong imposes no withholding taxes on dividends remitted to U.S. investors (per the Hong Kong-United States bilateral tax treaty). The U.S. corporate income tax rate is 35 percent. The parent wants to repatriate 75 percent of net income as dividends.

1. Calculate the net income available for distribution by the Hong Kong subsidiary in 2014.
2. What is the expected amount of the dividend to be remitted to the U.S. parent next year?
3. After estimating the theoretical U.S. tax liability on the expected dividend (what is often terms gross-up in the U.S.), what is the total dividend after tax, including all Hong Kong and U.S. taxes, expected next year?
4. What is the effective tax rate on this foreign-sourced income next year?

Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 40 percent to 50 percent. The firm currently has $3.8 million worth of debt outstanding. The cost of this debt is 7 percent per year. The firm expects to have an EBIT of $1.37 million per year in perpetuity and pays no taxes.

a. What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

b. What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

c. What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

d. What is the expected return on the firm’s equity after the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

1-

A machine fills cereal boxes. A random sample of 6 boxes had a mean of 20.25 oz. The distribution is assumed to be NORMAL with KNOWN standard deviation of 0.21 oz.

Find a 99% Confidence Interval UPPER LIMIT?

Note: Enter X.XX AT LEAST ONE DIGIT BEFORE THE DECIMAL, TWO AFTER and round up. Thus, 27 is entered as 27.00, 3.5 is entered as 3.50, 0.3750 is entered as 0.38

2-

A machine fills cereal boxes. A random sample of 6 boxes had a mean of 20.25 oz. The distribution is assumed to be NORMAL with KNOWN standard deviation of 0.21 oz.

Find a 80% Confidence Interval UPPER LIMIT?

Note: Enter X.XX AT LEAST ONE DIGIT BEFORE THE DECIMAL, TWO AFTER and round up. Thus, 27 is entered as 27.00, 3.5 is entered as 3.50, 0.3750 is entered as 0.38

3-

A machine fills cereal boxes. A random sample of 6 boxes had a mean of 20.25 oz. The distribution is assumed to be NORMAL with KNOWN standard deviation of 0.21 oz.

Find the SAMPLE SIZE required to obtain a 0.1 Margin of Error for a 95% confidence interval.

Note: Enter X INTEGER with NO DECIMAL and round up. Thus, 7 is entered as 7, 3.5 is entered as 4, and 0.375 is entered as 0

A company is thinking about changing its credit policy to attract customers away from competitors. The present policy calls for a 1.37/10, net 30 cash discount. The new policy would call for a 3.48/10, net 50 cash discount. Currently, 21% of its customers are taking the discount, and it is anticipated that this number would go up to 60% with the new discount policy. It is further anticipated that annual sales would increase from a level of $427k to $686k as a result of the change in the cash discount policy. The average inventory carried by the firm is based on an EOQ. Assume sales increase from 16k to 21.3k units. The ordering cost for each order is $200 and the carrying cost per unit is $1.82 – these values will not change with the discount. Each unit in inventory has an average cost of $11. Cost of goods sold equates to 69% of net sales, general and administrative expenses are 16% of net sales, and interest payments of 14% will only be necessary for the increase in the accounts receivable and inventory balances*(see information below). Taxes will be 36% of before-tax income. Note: The term “k” is used to represent thousands (× $1,000).

Required: Calculate the percentage in earnings after taxes (EAT) between the current policy (before the discount) and the new policy (after the discount).