- 1 - Economics 321: Public Economics Prof. Marika Cabral TA: Katherine Keisler Fall 2016 UT Austin Problem Set 5 (due Tues Nov 15) 1. An individual can earn $12 per hour if he or she works. Draw the budget constraints that show the monthly consumption–leisure trade-off under the following three welfare programs. a. The government guarantees $600 per month in income and reduces the benefit by $1 for each $1 of labor income. b. The government guarantees $300 per month in income and reduces that benefit by $1 for every $3 of labor income. c. The government guarantees $900 per month in income and reduces that benefit by $1 for every $2 in labor income, until the benefit reaches $300 per month. After that point, the government does not reduce the benefit at all. 2. Consider the major changes in the welfare system that occurred in the 1996 welfare reform, described in section 17.5. Which of these changes are likely to reduce the number of people on welfare? Which of these changes are likely to increase the number of people on welfare? 3. Jackie spends her money on food and all other goods. Right now, she has an income of $600 per month. Compare two alternative welfare programs in which she could participate: program A would provide her with a monthly check of $300 and program B would provide her with $400 a month in credits that can be spent only on food. a. Draw Jackie’s budget constraints in each of these two cases. b. Draw representative indifference curves that would reflect each of these three scenarios (see the graph in a). (i) Jackie prefers program A to program B. (ii) Jackie prefers program B to program A. (iii) Jackie is indifferent between the two programs. 4. The nation of Fishkasar has a tax rate of 10% on the first 20,000 walops (the national currency) of taxable income, then 25% on the next 30,000 walops, then 50% on all tax- able income above 50,000 walops. Fishkasar provides a 4,000-walop exemption per family member. a. Jamil’s family has three members and earns 50,000 walops per year. Calculate the family’s marginal and average tax rates.- 2 - b. Boba’s family has five members and earns 85,000 walops per year. Calculate the family’s marginal and average tax rates. c. Suppose that Fishkasar changed its tax code to a flat tax of 30% with an 8,000- walop per family member exemption. Would this change in the tax system make the system more progressive, more regressive, or neither? 5. Suppose that the U.S. personal income tax system became a “flat tax” system, in which all taxpayers paid a certain percentage of their incomes in tax, and in which there are no exemptions or deductions. In which way(s) could this flat tax be more regressive than the present U.S. system? In which ways could it be more progressive than the present system? 6. The largest tax break for most Americans is the mortgage interest tax deduction, which allows home owners to deduct from their taxable income the amount of money they pay in interest to finance their homes. This tax break is intended to encourage home ownership. Compare this tax deduction to a uniform tax credit for home ownership on equity and efficiency grounds. 7. Why do most analysts assume that payroll taxes in the United States are borne by workers rather than by employers? 8. The demand for rutabagas is Q = 2,000 – 100P and the supply of rutabagas is Q = –100 + 200P. a. Who bears the statutory incidence of a $2 per unit tax on the sale of rutabagas? Who bears the economic incidence of this tax? b. Governor Sloop decides that instead of imposing the $2 sales tax described above, the government will instead force stores to pay the tax directly. What will happen to the “sticker price” on rutabagas? How will the size of the consumer tax burden change? 9. The demand for football tickets is Q = 360 – 10P and the supply of football tickets is Q = 20P. Calculate the gross price paid by consumers after a per-ticket tax of $4. Calculate the after-tax price received by ticket