## How the tax credit will affect price and quantity , Managerial Accounting

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1. In order to boost the housing market throughout 2009 and into 2010, the federal government offered a tax credit to first-time home buyers and some repeat buyers.

a.  Show graphically how the tax credit will affect price and quantity over the period prior to May 1, 2010 when the tax credit is in effect.

b.  Show graphically how the tax credit will affect price and quantity after the May 1, 2010 expiration of the tax credit.

2.  As the manager of a local hotel chain, you have hired an econometrician to estimate the demand for one of your hotels (H). The estimation has resulted in the following demand

function:  QH =2,000-PH -1.5 Pc -2.25PSE +0.8PCH +.01M , where  PH is the price of a room at your hotel,  PC is the price of concerts in your area,  PSE  is the price of sporting events in your area,  PCH is the average room price at other hotels in your area, and  M is the average income in the United States. What would be the impact on your firm of

a. A \$500 increase in income?

b. A \$10 reduction in the price charged by other hotels?

c. A \$7 increase in the price of tickets to local sporting events?

d. A \$5 increase in the price of concert tickets, accompanied by an \$8 increase in income? (2.5 points)

3. You have been hired to replace the manager of a firm that used only two inputs, capital and labor, to produce output. The firm can hire as much labor as it wants at a wage of \$5 per hour and can rent as much capital as it wants at a price of \$50 per hour. After you look at the company books, you learn that the company has been using capital and labor in amounts that imply a marginal product of labor of 50 and a marginal product of capital of 100. Do you know why the firm hired you? Explain.

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