Question

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.

1. Discuss the situations under which the employment effects in a given industry will be larger.
2. 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.
3. 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?
4. In which direction does the scale effect change the firm’s desired employment level and capital stock?
5. 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?

Answer 1

Many states provide firms with an​ "investment tax​ credit" that effectively reduces the price of capital. In​ theory, these credits are designed to stimulate new investment and thus create jobs. Critics have argued that if there are strong factor substitution effects​, these subsidies could reduce employment in the state.

Correct Answer:- Investment tax credits reduce the cost of capital relative to the cost of labor.

Reason:- Investment tax credit reduces the cost of capital and thus provides an impetus for the investment.

Answer:- Goods produced by the economic system that are used as inputs in the production of future goods and services are

Correct Answer:- capital goods.

Reason:- Capital goods are those which are used in production of products for business purpose.

Answer:- Firms that offer to pay for college tuition for their employees are investing in​ ________ capital.

Correct Answer:- human

Reason:- human capital investment means the firms are paying to the individuals to be more trained and skilled so that they can be employed in future.

Answer:- A clothing manufacturer produced​ 5,000 sweaters, but sold only​ 4,000 of them. The remaining​ 1,000 sweaters would be classified as

Correct Answer:- part of the firmʹs tangible capital.

Reason:- Inventory are treated as the part of tangible capital

Answer:- The measure of a​ firm's ________ is the current market value of its​ plant, equipment,​ inventories, and intangible assets.

Correct Answer:- capital stock

Reason:- Capital stock includes both tangible and intangible assets of the firm.

Answer:- Capital goods yield benefits

Correct Answer:- over their life span.

Reason:- Capital goods provide the various advantages throughout their life span.

Answer:- The term investment as it is used by an economist refers to

Correct Answer:- the creation of new capital.

Reason:- Investment is when there is a creation of new capital assets.

Answer:- The market in which households supply their savings to firms that demand funds in order to buy capital goods is the​ ________ market.

Correct Answer:- capital

Reason:- Capital market is one where capital goods are bought and sold.

Answer:- You are asked to lend a friend​ $20,000 for a year. At the end of the year your friend agrees to pay you​ $21,000. The interest rate on this loan is

Correct Answer:- 5%

Reason:- 1000 = (2000*I*1)/100

I=1000/20 =5%

Answer:- You borrow​ $40,000 at an interest rate of​ 5% to open Organic​ Foods, an​ all-natural food store.

You will earn an economic profit if the return on your investment is

Correct Answer:- greater than​ 5%

Reason:- The economic profit is obtained inly when the rate of return is More than the interest rate.