UT ECO 321 - Problem Set 3_Ch 9 to 12 (3 pages)

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Problem Set 3_Ch 9 to 12



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Problem Set 3_Ch 9 to 12

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3
School:
University of Texas at Austin
Course:
Eco 321 - Public Economics
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Economics 321 Public Economics Prof Marika Cabral TA Katherine Keisler Fall 2017 UT Austin Problem Set 3 due Mon October 23 1 Ch 9 In a recent study Americans stated that they were willing to pay 70 billion to protect all endangered species and also stated that they were willing to pay 15 billion to protect a single species Which problem with Lindahl pricing does this demonstrate Explain 2 Ch 9 Alfie Bill and Coco each value police protection differently Alfie s demand for the public good is Q 60 5P Bill s demand is Q 80 4P and Coco s demand is Q 100 10P If the marginal cost of providing police protection is 12 5 what is the socially optimal level of police provision Under Lindahl pricing what share of the tax burden would each of the three people pay 3 Ch 9 Carrboro has three equal sized groups of people 1 type A people consistently prefer more police protection to less 2 type B people prefer high levels of police protection to low levels and they prefer low levels to medium levels 3 type C people prefer medium levels to low levels which they in turn prefer by a modest amount to high levels a Which types of people have single peaked preferences Which have multipeaked preferences b Will majority voting generate consistent outcomes in this case Why or why not 4 Ch 10 The identical citizens of Boomtown have 3 million to spend either on park maintenance or private goods Each unit of park maintenance costs 10 000 a Graph Boomtown s budget constraint b Suppose that Boomtown chooses to purchase 150 units of park maintenance Draw the town s indifference curve for this choice c Now suppose that the state government decides to subsidize Boomtown s purchase of park maintenance by providing the town with 1 unit of maintenance for every 2 units the town purchases Draw the new budget constraint Will Boomtown purchase more or fewer units of park maintenance Will Boomtown purchase more or fewer units of the private good Illustrate your answer and explain 5 Ch 10 Think about two public goods public schools and food assistance for needy families Consider the implications of the Tiebout model Which of the goods is more efficiently provided locally Which is more efficiently provided centrally Explain 6 Ch 10 The state of Delaland has two types of town Type A towns are well to do and type B towns are much poorer Being wealthier type A towns have more resources to spend on education their demand curve for education is Q 100 3P where P is the price of a unit of education Type B towns have a demand curve for education that is given by Q 100 6P a If the cost of a unit of education is 10 per unit how many units of education will the two types of town demand b In light of the large discrepancies in educational quality across their two types of town Delaland decides to redistribute from type A towns to type B towns In particular type A towns by 5 for each unit of education they provide and they give type B towns 5 for each unit of education they provide What are the new tax prices of education in the two towns How many units of education do the towns now purchase c Delaland wants to completely equalize the units of education across towns by taxing type A towns for each unit of education they provide and subsidizing type B towns for each unit of education they provide It wants to do this in such a way that the taxes on type A towns are just enough to finance the subsidies on type B towns If there are 4 type A towns for every 5 type B towns how big a tax should Delaland levy on type A towns How big a subsidy should they provide to type B towns 7 Ch 11 Suppose that a family with one child has 30 000 per year to spend on private goods and education and further suppose that all education is privately provided Draw this family s budget constraint Suppose now that an option of free public education with spending of 5 000 per pupil is introduced to this family Draw three different indifference curves corresponding to the following three situations a a free public education would increase the amount of money that is spent on the child s education b a free public education would decrease the amount of money that is spent on the child s education and c a free public education would not affect the amount of money spent on the child s education 8 Ch 11 Suppose you want to evaluate the effectiveness of vouchers in improving educational attainment by offering a voucher to any student in a particular town who asks for one What is wrong with simply comparing the educational performance of the students receiving vouchers with those who do not receive vouchers What would be a better way to study the effectiveness of vouchers 9 Ch 11 Many state constitutions explicitly require that states provide an adequate level of school funding How might raising this level of adequacy actually lead to reduced overall levels of educational spending 10 Ch 12 Suppose that you have a job paying 100 000 per year With a 10 probability next year your wage will be reduced to 80 000 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 the actuarially fair insurance premium be 11 Ch 12 Small companies typically find it more expensive on a per employee basis to buy health insurance for their workers as compared with larger companies Similarly it is usually less expensive to obtain health insurance through an employer provided plan than purchasing it directly from an insurance company even if your employer requires you to pay the entire premium Use the ideas from this chapter to explain these observations 12 Ch 12 Chimnesia has two equally sized groups of people smokers and nonsmokers Both types of people have utility U ln C where C is the amount of consumption that people have in any period So long as they are healthy individuals will consume their entire income of 50 000 If they need medical attention and have no insurance they will have to spend 20 000 to get healthy again leaving them with only 30 000 to consume Smokers have a 15 chance of requiring major medical attention while non smokers have a 5 chance Insurance companies in Chimnesia can sell two types of policy The low deductible L policy covers all medical costs above 5 000 while the high deductible H policy only covers medical costs above 10 000 a What is the actuarially fair premium for each type of policy and for each group b If insurance companies can tell who is a smoker and who is


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