Assignment

1. Supporters of a voucher system in the education market would be good for two groups of students: the worst off and the best off under the current system. Why might this be the case?

2. The U.S Department of Education regularly conducts the National Assessment of Educational Progress (also known as the "Nation's Report Card) to monitor student achievement in subjects such as reading, writing, and math. Visit their data website. Compare the progress from 1998 to 2003 of students in your home state (I am from Oregon, so I will look at Oregon's progress) with students from another state of your choosing. If you are from another country, choose any two states to compare. In which subject areas or grade levels has your state compared most favorably with the other state?

3. Suppose that you're currently earning $65,000 per year. Suppose there is a 5% probability that your income will be reduced to $25,000 for the year. (a) What is your expected income next year? (b) Suppose that you could insure yourself against the risk of reduced consumption next year. What would be the actuarially fair premium be?

4. Your utility function is U=(C)^0.5 , where C represents the amount of consumption that you have in any given period. Your income is $50,000 per year, and there is a 2% chance that you will be involved in a catastrophic accident that will cost you $40,000 next year. (a) What is your expected utility next year? (b) Calculate an actuarially fair insurance premium. What would your expected utility be if you purchased the actuarially fair insurance premium? (c) what is the most that you would be willing to pay for insurance, given your utility function?

5. In order to be eligible to qualify for workers' compensation, a claimant's injury must be verified by a physician of the claimant's choosing. Suppose that the workers' compensation policy changes so that only government assigned physicians could verify injury claims. What is likely to happen to the rate of reported on the job injury? Explain.

6. Suppose Mr. and Mrs. Duca both work and earn the same amount each year. This makes their household a two-earner household. The Long household only has one earner. Mrs. Long is the only person in the household working and earning income while Mr. Long is a stay at home dad. Consider the way that spousal benefits are treated in the Social Security System to address the following questions. (a) How do the relative rates of return on Social Security payroll taxes compare for the two families? (b) After the kids go off to college, Mr. Long considers working a part time job. How might the Social Security System of taxes and benefits affect his decision? (c) Assume both the Ducas and Longs have retired and they are receiving Social Security benefits. By what fraction will these benefits fall for each of these families if one member of the household dies? What implications does this have for relative consumption smoothing in these households?

7. The Social Security Administration website has a link to a publication entitled Social Security Programs throughout the World. The European version. Pick any two countries in Europe and compare the key attributes of their social security programs. Which of these two countries do you think will have the greater rate of early retirement? Why?

8. Ben earns $12 per hour if he works and can work at most 24 hours a day for the 30 days in a month. (a) Draw his budget constraint to show the monthly consumption-leisure trade off. (b) Suppose the government introduces a welfare program that guarantees $600 per month in income and reduces the benefit by $1 for each $1 of labor income. Draw Ben's new budget constraint. You must include labels and exact numbers on the axes in order to receive full credit.

Note: You can draw both budget constraints on the same graph if you would like.

9. Mariela lives in Genovia, a place where they impose a 5% tax rate on the first $20,000 of taxable income, 20% on the next $30,000, and 50% on all taxable income above $50,000. Genovia provides a $5,000 exemption per family member. If Mariela's family has two members and earns $60,000 per year, calculate the family's marginal and average tax rates.

10. Why do most analysts assume that payroll taxes in the US are borne by workers rather than by employers?

11. The following equation represents the demand for New Belgium Beer: Q=2000-300P

The following equation represents the supply for New Belgium Beer: Q=-100+100P

(a) Who bears the statutory incidence of a $2 per unit excise tax on the sale of beer? Who bears the economicincidence of the tax? (b) Suppose the government decides to force stores to pay the tax directly. What will happen to the "sticker price" on New Belgium Beer? How will the size of the consumer tax burden change?

12. The government is considering taxing sellers on different categories of goods: 2% milk, all dairy products, and all food products. Which of these three taxes would you expect to have the largest impact on the stickers prices of the taxed products?

13. The market demand for Pizza Casbah is represented by the following equation: Q=240-6P

The market supply fir Pizza Casbah is represented by the following equation:Q=-40+2P

(a) Calculate the deadweight loss of a $4 per unit tax levied on the owners of Pizza Casbah. (b) How does deadweight loss change if the tax is levied on the consumer instead?

14. Luxury goods often have a much higher elasticity of demand than staple goods such as food and clothing. Why, then, are governments more likely to tax luxuries than these staple goods? Explain.