UT ECO 321 - Problem Set 4 Ch13-16 (4 pages)

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Problem Set 4 Ch13-16



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Problem Set 4 Ch13-16

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Pages:
4
School:
University of Texas at Austin
Course:
Eco 321 - Public Economics

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Economics 321 Public Economics Prof Marika Cabral Fall 2017 UT Austin Problem Set 4 1 Ch 13 Consider two households the Smiths and the Joneses The Smiths are a two earner household both Dick and Jane Smith work and earn the same amount each year The Joneses are a one earner household Sally Jones works while Harry Jones is a homemaker and stay at home dad Use the way spousal benefits are treated in the Social Security system to address the following 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 Harry considers taking a small part time job How might the Social Security system of taxes and benefits affect his decision c Suppose that both families have retired and have started to receive 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 two households 2 Ch 13 Lalaland is an extremely stable country with 200 000 residents half of whom are young workers and half of whom are retirees At the end of each year the 100 000 retirees die the 100 000 young workers retire and 100 000 new young workers are born Workers earn a total of 5 000 for the year Lalaland operates a pay as you go social security system where each current worker is taxed 2 500 and the revenue collected is used to pay a 2 500 pension to each retiree The neighboring country Gogovia is larger and more dynamic Gogovia has an active stock market that Lalalandians can invest in and earn a 10 rate of return It also has an active banking sector which will gladly lend the Lalalandian government money charging them 10 interest per year Lalaland is considering moving to a system of personal accounts where each Lalalander would take her 2 500 and invest it in Gogovian markets and earn a much higher rate of return The government would borrow 250 million 2 500 100 000 from Gogovian bankers to pay for current retirees It would then tax retirees each year by just enough to pay the interest on this debt Would this new system be better or worse for Lalaland 3 Ch 13 Consider an economy that is composed of identical individuals who live for two periods These individuals have preferences over consumption in periods 1 and 2 given by U ln C1 ln C2 They receive an income of 100 in period 1 and an income of 50 in period 2 They can save as much of their income as they like in bank accounts earning an interest rate of 10 per period They do not care about their children so they spend all their money before the end of period 2 Each individual s lifetime budget constraint is given by C 1 C2 1



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