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ec-18 - Homework#7 E201 Spring 2009 The problems below draw...

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Homework #7 E201 Spring 2009 The problems below draw from your growing knowledge of economics and the material in Chapters 6, 7, and 8. 1. If the government places a $500 tax on luxury cars, will the price paid by consumers rise more than $500, less than $500, or exactly $500? Explain. 2. The FICA tax funds Social Security programs. Congress established a 15.3% FICA tax rate; by law, the tax burden is split 50-50 between employer and employee. So, 7.65% of the employee’s earnings on each paycheck is deducted for FICA taxes, and 7.65% of the employee’s earnings is paid in FICA taxes by the employer. Is the economic incidence of the FICA tax shared equally by employer and employee? Explain. 3. It is a hot a day and Bert is very thirsty. Here is the value he places on a bottle of water: Value of first bottle $7 Value of second bottle 5 Value of third bottle 3 Value of fourth bottle 1 If the price of a bottle of water $4, how many bottles does Bert buy? How much consumer surplus does Bert get from his purchases? 4. Ernie owns a water pump. Because pumping large amounts of water uses more resources than pumping small amounts, the cost of producing rises as he pumps more.
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