PROBLEM SET #
3
(
4
0
points total)
INSTRUCTIONS: You must show all of your work where calculations are required and you must include a brief explanation of approximately
5
0 words for written answers to receive full credit:
1
.
Resource Markets (
10
pts): Suppose you are the President of Fraggle Rock Co., a producer of musical compact discs (CDs). Assume Fraggle Rock Co. operates in a perfectly competitive product and perfectly competitive resource market. The market price (P) for each CD is given at
$10
and the market wage rate (w) for labor is given at $1
6
0 per worker.
0
—
$10
$10
$10
$10
$10
$10
$10
$10
$10
$10
# units of labor 
Total Product 
Marginal Product (MP) 
Product Price (P) 
Total Revenue (TR) 
Marginal Revenue Product (MRP) 

0 
— 
$10 
$0 

1 
30 

2 
5 8 

3 
84 

4 
108 

5 
130 

6 
150 

7 
168 

8 
184 

9 
198 

10 
210 
a. Fill in the columns in the table above for MP, TR, and MRP (6pts).
b. Based on the data above and using the MRP = MRC Rule, find the # of units of labor that this firm should hire (L*). How do you know? (4pts)
2. Taxes (10pts):
Below is a marginal tax table from 2010 for a single taxpayer in Springfield, Waylan Smithers. : You must show all of your work where calculations are required and you must include a brief explanation of approximately 50 words for written answers to receive full credit:
Schedule X — Single
$0 $11,000 $43,000 $105,000 $260,000
If taxable income is over– 
But not over– 
The 
$11,000 
9% 

$43,000 
14% 

$105,000 
24% 

$26 0,000 
35% 

No limit 
45% 
a. (4pts) Suppose Mr. Smithers earned
$12
0,000 in 2010.
i) Using the table above, what would his total tax payment be?
ii) What would his average tax rate be? Please round your answer to the nearest 10th of a percent.
b. (4pts) Suppose Mindy Simmons earned $75,000 in 2010.
i) Using the table above, what would her total tax payment be?
ii) What would her average tax rate be? Please round your answer to the nearest 10th of a percent.
c. (2pt) Is this an example of a progressive, regressive, or proportional tax? How do you know?
3. Income Inequality (10pts):
Below, you are given some income information for two economies, Monster Island and Bedrock, as given below. Assume each economy has exactly 5 people. You must show all of your work where calculations are required and you must include a brief explanation of approximately 50 words for written answers to receive full credit:
Income:
FredTOTAL
Citizens of Monster Island 
Income: 
Citizens of Bedrock 

Scooby Doo 
$6 
Fred 
$130 

$40 
Barney 
$60 

Shaggy 
$22 
Betty 
$8 5 

Daphne 
$100 
Wilma 
$18 5 

Velma 
$32 
Dino 
$40 

TOTAL 
$20 0 
$500 
a. (6pts) In the tables below for each country, fill in the columns with:
i) the citizens names (each representing one quintile), ranking from poorest to richest;
ii) Calculate the % of total income each quintile earned.
iii) Calculate the cumulative % of total income to derive the points for their Lorenz curves. You must show all of your work to receive full credit.
0.0%
0.0%
100.0%
Monster Island 

Quintiles: 
i) Quintile/ Citizen name: 
Cumulative % of households 
ii) Quintiles % of Total income 
iii) cumulative % of total income 

—————– 
0.0% 

Poorest 20% 
20.0% 

2nd 20% 
40.0% 

3rd 20% 
60.0% 

4th 20% 
80.0% 

Richest 20% 
100.0% 

TOTAL  100.0% 
Quintiles:
i) Quintile/ Citizen name:
Cumulative % of households
ii) Quintiles % of Total income
iii) cumulative % of total income
—————–
0.0%
0.0%
0.0%
Poorest 20%
20.0%
2nd 20%
40.0%
3rd 20%
60.0%
4th 20%
80.0%
Richest 20%
100.0%
TOTAL
100.0%
100.0%
Bedrock 
b. (2pts) On one graph, construct each country’s Lorenz curve (you don’t need to submit the graph). Which country’s income distribution is more equal? How do you know?
c. (2pts) Which country would have the lower Gini coefficient? Why?
4. Monopsony labor market (10pts): Suppose Guillen Co., a company producing baseballs, has monopsony power. Assume you are given the following information for Guillen Co. You must show all of your work where calculations are required and you must include a brief explanation of approximately 50 words for written answers to receive full credit:
$0
$0
—
—
$6
2 3$10
4$32
$20
$22
Units of Labor (L) 
Wage Rate (w) 
Total Labor Costs (TLC) 
Marginal Resource (Labor) Cost (MRC) 
Marginal Revenue Product (MRP) 
$39 

$8 
$38 

$35 

$12  
$14 
$29 

$16 
$26  
$18 
$23 

$20  
$17 
a. (6pts) Write down the formulas for TLC and MRC and then fill in the columns in the table above for TLC and MRC.
b. (2pt) Based on the data above and using the MRP = MRC Rule, find the profit maximizing units of labor the monopsony would hire (L*) and the wage rate (w*) the monopsony would pay. How do you know?
c. (2pt) If instead, this were a perfectly competitive labor market, how many workers would be hired, and what would the perfectly competitive market wage rate be? How do you know?