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Consider the Earned Income Tax Credit policy described in lecture. All else equal, what is the implication for labor supply Answer

Consider the Earned Income Tax Credit policy described in lecture. All else equal, what is the implication for labor supply if:

  1. The EITC supplement rate increases from (about) 30% to 60%?The Earned Income Tax Credit (EITC) is a largely successful component of American labor and antipoverty policy, increasing the ability of workers in low-paying jobs to support themselves and their families. Work remains to improve the EITC’s effectiveness including expanding eligibility and increasing participation among those already eligible. If there is rise in the EITC supplement rate from 30% to 60%, then the labor supply will increase because they will have more tax credits. Lower income groups will have more disposable income and hence they would be encouraged to work more to get good earnings for their living.
  2. AnswerThe phase-out rate increases?Phase-out rate means there are different EITC rate at different income slabs. If there is rise in the phase-out rate then there will be fall in the labor supply because people having higher income have to pay higher taxes and hence their net wages will fall. It will discourage workers to work more.
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Mary Rhodes, operations manager at Kansas Furniture, has received the following estimates of demand requirements Answer

Mary Rhodes, operations manager at Kansas Furniture, has received the following estimates of demand requirements:

July Aug. Sept. Oct. Nov. Dec.
1,000 1,200 1,400 1,800 1,800 1,600
  1. a) Assuming stockout costs for lost sales of $100 per unit, inventory carrying costs of $25 per unit per month, and zero beginning and ending inventory, evaluate these two plans on an incremental cost basis:
  • Plan A: Produce at a steady rate (equal to minimum requirements) of 1,000 units per month and subcontract additional units at a $60 per unit premium cost.
  • Plan B: Vary the workforce, which performs at a current production level of 1,300 units per month. The cost of hiring additional workers is $3,000 per 100 units produced. The cost of layoffs is $6,000 per 100 units cut back.

Ans:

 

Plan A
Month Demand Production End of period Inventory Sub Contract Units Inventory Cost Subcontract Cost
June 1000
July 1000 1000 0 0 0 0
August 1200 1000 0 200 0 12000
September 1400 1000 0 400 0 24000
October 1800 1000 0 800 0 48000
November 1800 1000 0 800 0 48000
December 1600 1000 0 600 0 36000
Total Cost   $ 168000

 

 

 

Plan B
Month Demand Production Hire Layoff Hire Cost Layoff Cost
June 1300
July 1000 1000 0 300 0 18000
August 1200 1200 200 0 6000 0
September 1400 1400 200 0 6000 0
October 1800 1800 400 0 12000 0
November 1800 1800 0 0 0 0
December 1600 1600 0 200 0 12000
Total Cost 24000 30000

Total Cost in Plan B = 30000+24000 = $ 54000

 

  1. b) Which plan is best and why?

Ans:

Comparing both the plan, we find that Plan B is better.