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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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 r Y1 Y2 1 r Individuals choose consumption in each period by maximizing lifetime utility subject to this lifetime budget constraint a What is the individual s optimal consumption in each period How much saving does he or she do in the first period parts b c continued on next page b Now the government decides to set up a social security system This system will take 10 from each individual in the first period put it in the bank and transfer it to him or her with interest in the second period Write out the new lifetime budget constraint How does the system affect the amount of private savings How does the system affect national savings total savings in society What is the name for this type of social security system c Suppose instead that the government uses the 10 contribution from each individual to start paying out benefits to current retirees who did not pay in to a social security when they were working It still promises to pay current workers their 10 plus interest back when they retire using contributions from future workers Similarly it will pay back future workers interest on their contributions using the contributions of the next generation of workers An influential politician says This is a free lunch we help out current retirees and current and future workers will still make the same contributions and receive the same benefits so it doesn t harm them either Do you buy this argument If not what is wrong with it 4 Ch 14 Workers compensation benefits vary across states and types of injuries How can you employ this information to estimate the elasticity of injury with respect to workers compensation benefits generosity 5 Ch 14 The empirical evidence on unemployment spell durations suggests that workers who leave unemployment earlier that is find or take a job sooner have no higher postunemployment wages than do workers who leave unemployment later This result could be interpreted as evidence that the quality of the job match does not improve as the unemployment spell grows longer a What does this interpretation of the evidence imply about the moral hazard costs of unemployment insurance b An alternative explanation for this evidence is that workers with longer unemployment spells are less qualified than are workers with shorter unemployment spells How could you empirically distinguish between this explanation and the explanation put forth in a 6 Ch 14 You are hired by the presidential administration to review the unemployment insurance UI program which currently replaces approximately 45 of a worker s wages for 26 weeks after she loses her job Consider two alternative reforms of the current UI system The first is to experience rate firms fully so that the taxes firms pay are set exactly equal to the benefits their workers receive benefits remain at 45 of wages The second is a system of individual full experience rating the government would loan individuals 45 of their wages while unemployed but they would have to pay this back when they get new jobs a Contrast the effects of these alternative policies on unemployment durations and the likelihood of worker layoffs b What are the consumption smoothing properties of each alternative policy 7 Ch 15 An individual s demand for physician office visits per year is Q 30 1 10 P where P is the price of an office visit The marginal cost of producing an office visit is 200 a If individuals pay full price for obtaining medical services how many office visits will they make per year Parts b c continued on next page b If individuals must pay only a 50 copayment for each office visit how many office visits will they make per year c What is the deadweight loss to society associated with not charging individuals for the full cost of their health care 8 Ch 15 Matt is an employee at a


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