ECON10004 Introductory Microeconomics Assignment 1 Tutor...

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ECON10004: Introductory Microeconomics Assignment 1
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Tutor name: ECON10004: INTRODUCTORY MICROECONOMICS Question 1
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Tutor name: ECON10004: INTRODUCTORY MICROECONOMICS a. The bonus payment cap will impose a price ceiling in the labour market for banking executives. The price ceiling is a government-imposed price control to limit the maximum price charged for a product. As the price ceiling is assumed to be binding, the payment of $500,000 is assumed to be lower than the equilibrium price payment, as otherwise there would be no impact on the market. In this scenario, according to the law of supply, a lower price would decrease quantity supplied, and simultaneously, according to the law of demand, a lower price would increase quantity demanded. This contrived change would cause a shortage, which is the difference between Q D and Q S . Therefore, the price ceiling imposed upon the market would decrease quantity supplied, increase quantity demanded, and cause a shortage of banking executives.
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Tutor name: ECON10004: INTRODUCTORY MICROECONOMICS b. The tax hike would decrease supply, and cause supply to shift leftwards on the diagram. There is a decrease in supply as executives are less willing to work, since their income after tax has decreased. In this scenario, there will be excess demand at the original price, thereby resulting in a shortage. As such, supply expands and demand contracts, thus creating a new equilibrium point with a higher income and a lower quantity.
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Tutor name: ECON10004: INTRODUCTORY MICROECONOMICS c. From these statements alone, it appears that the supply of labour is inelastic, as banking executives are not motivated by money but instead by the “the sheer challenge of the job”, meaning a decrease in income would trigger a smaller decrease in quantity. Therefore, the tax income hike will have a larger burden on banking executives; thus, the tax income hike will appear more appealing, as the public believes banking executives are being “overpaid”.
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