Updated 02/14/2002
Question 1. Consider the MPL curve depicted below. Draw a production function whose MPL corresponds to the graph. Label points A, B, and C on your graph and explain why you located points A, B, and C where you did on your graph.
Question 2. Consider the MRS curve depicted below. Draw an indifference curve whose MRS corresponds to the graph. Label points A, B, and C on your graph and explain why you located points A, B, and C where you did on your graph.
Question 3. Consider George W. Bush's proposed tax cut.
1. Read the Fortune article about the proposed Bush Tax Cut. Assume Bush is proposing changing the changes in the marginal tax rate shown in the table below.
A. Draw before tax production functions for 3 individuals--one who makes $25,000 working full-time, $70,000 full time, and $150,000 full time. It is easiest if you draw each on a separate graph and make them large.
B. Draw after tax production functions for the same three individuals under the current marginal rates. How is the slope (MPL) of the production function at different levels of work effort changed by the existence of an income tax? What is the effect of an increasing marginal rate on the incentive to work?
C. Draw after tax production functions for the same three individuals under the proposed new rates. How is the slope (MPL) of the production function at different levels of work effort changed by the proposed changes in the marginal income tax rate? What is the effect of the proposed changes in the marginal rate on the incentive to work?
D. Use indifference curves to show the effect of the proposed new rates on work effort and output. Does the size of the effect on output depend on whether leisure is a normal or inferior good? Explain.
| Income | Current Marginal Tax Rate | Proposed New Rate |
| 0-$10,000 | 15% | 0% |
| $10,001-$40,000 | 15% | 10% |
| $40,001-$80,000 | 25% | 18% |
| $80,001+ | 40% | 30% |
2. Consider the analysis by the Citizens for Tax Justice. Does it matter whether those with higher incomes get a bigger tax reduction that those with lower incomes? Will giving a bigger tax cut to those producing more output increase of decrease the effect of a given size tax cut on GDP and employment? Explain.