1、3. Under the 1996 welfare reform, each state receives a fixed grant from the federal government to pay for its income maintenance policies. However, for each dollar of its own money that the state spends on welfare, the federal grant is reduced by a dollar.4. Under the Social Security system, an ind
2、ividuals retirement benefits are directly proportional to the amount of payroll taxes that he or she has paid into the system.5. Former President Clinton once proposed that individuals between the ages of 55 and 64 be allowed to buy into the Medicare system if they so choose. This is a good example
3、of how social insurance can solve the adverse selection problem.6. Political economy models of bureaucratic behavior assume that a bureaucrats goal is to maximize the welfare of the citizens.Part II. Your answers to the following questions should take advantage of the relevant economic tools.7. （10
4、points） Several months ago, the newspaper USA Today published an article that was critical of the large amount of money that the government spends to subsidize the energy industry. In response, a spokesman for the industry observed, “Some of the alleged subsidies dont even go to the industry. For ex
5、ample, the government provides money to low-income families to help pay heating bills.” Evaluate this response carefully. Your answer should include an appropriate graphical model.8. （14 points） Stanley and Wendy both operate factories along a lake. Stanley produces an output X. In the process, he p
6、ollutes the lake, which increases the costs of production for Wendy. Assume that the total damages to Wendy increase in proportion to the amount of X that Stanley produces.a. Draw a sketch that depicts this situation.b. Show the amount that Stanley produces, and show the socially efficient amount fo
7、r Stanley to produce.c. On the diagram, show the Pigouvian tax that will induce Stanley to produce the efficient amount, and the amount of revenues collected by the tax.SAMPLE MIDTERM EXAM I: SUGGESTED ANSWERSPart I. （6 points each）1. False. An allocation of commodities is said to be consumption-eff
8、icient when the only way to make one consumer better off is to make another worse off, given fixed quantities of the various commodities. We cannot know whether such an allocation is socially desirable without explicit ethical judgments relating to equity.2. False. A utilitarian social welfare funct
9、ion says that social welfare is a function of the utilities of everyone in society. Even if all that utility depends on is income （so that incentive issues are not relevant）, additional assumptions are needed to get the result. These include identical utility functions and diminishing marginal utili
10、ty of income.3. False. Each state gets a grant from the federal government, but the grant is not reduced by the amount that the state spends on welfare.4. False. The schedule that relates benefits received to payroll taxes paid is progressive. As a lifetime taxes increase, benefits increase less tha
11、n in proportion.5. False. Adverse selection occurs when the people who are most likely to benefit from a given insurance policy are also the ones who are most likely to purchase it. Under the Clinton plan, enrollment is optional in this age group. Those who are most like to be sick are the ones who
12、would be most likely to participate, so the program does not solve the adverse selection problem.6. False. While it is not clear exactly what objective bureaucrats have, political models generally assume that bureaucrats are trying to maximize their own utility, which is related to the size of the a
13、gency they administer.Part II. 7. （10 points） Just as is the case for a tax, it does not matter which side of the market a subsidy is applied to. The beneficiary depends on the elasticities of the demand and supply curves. This can be illustrated either with a supply-demand diagram or a formula whic
14、h shows that the equilibrium outcome is independent of whether the subsidy is received by producers or consumers.8. （14 points） This is essentially the model of Figure 5.4 in the text, except that the marginal damage curve is horizontal （because the problem stipulates that the total damage is direct
15、ly proportional to the amount of output）.SAMPLE FINAL EXAM IThe maximum number of points is 110. Please answer every question. Your answers should make use of the tools of economics and the material presented in this course, including diagrams and/or formulae where appropriate.You are advised to inc
16、lude a minimum of irrelevant material in your answers. Points will be subtracted for all incorrect statements you make.Part I. （40 points）Indicate whether each of the following statements is true, false, or uncertain, and explain your answer. Your grade will depend primarily on the quality of your e
17、xplanation. If a word or phrase is underlined, your answer must include a concise definition of the word or phrase.1. “I promise to lower income tax rates. And I wont have to cut spending, because the lower rates will induce so much economic activity that tax revenue will rise.” This promise would b
18、e more credible coming from a candidate for governor of a state than from a candidate for president of the country.2. Over time, health care costs in the United States have been increasing. This is due primarily to the fact that the population has been aging.3. Suppose that a public good is provided
19、 in a Pareto-efficient amount. It is possible that different members of society will place different values on the last unit of the public good that they consume.4. Rent-seeking models of government behavior assume that the goal of policymakers is to maximize a social welfare function.5. In a pay-as
20、-you-go social security system, the dependency ratio equals the replacement ratio.6. Under the Hall-Rabushka flat tax, each individual completes a tax return that includes his or her wages and capital income, no deductions are allowed, and total income is taxed at a constant rate.7. Consider a tax s
21、ystem that is neutral with respect to marital decisions. In general, such a system will lead to a situation in which two families with equal total family incomes will pay different amounts of tax.8. Under current law, corporations may deduct payments of interest to their bondholders. Disallowing thi
22、s deduction would bring the tax base into closer alignment with the Haig-Simons definition of income.Part II.9. （12 points） What is the Tiebout model? What are the key assumptions behind the model? Are they realistic?10. （6 points） In Russia, the prices of commodities such as food and clothing are s
23、et in a free market, but housing is heavily subsidized by local governments. A twobedroom apartment in Moscow, for example, might rent for $1.50 per month. （Utilities and other fees increase the cost to about $35.） “Because of subsidized rents, some tenants live in larger apartments than they need a
24、nd might not otherwise afford.” Explain how this situation relates to the concept of excess burden, and illustrate with a diagram.11. （6 points） In 1997, House Republicans proposed that capital gains be indexed for inflation. Newsweeks Wall Street editor stated that this was unfair to wage earners:
25、“Inflation pushes up salaries, too. But would paychecks get the same generous treatment? Nope. No inflation indexing.” Sloan, 1997, page 59. Compose a letter to Newsweek in which you comment on this statement.12. （9 points） According to conventional welfare economics, under what conditions is a gove
26、rnment intervention in the economy appropriate? （There is no need to explain the conditions; just list them. Be specific; dont simply answer “market failure.”） In one of the budgets that he submitted to Congress, former President Clinton proposed a multi-million dollar program to subsidize training
27、to day-care workers. Consider each criterion you listed above and indicate whether or not it provides a rationale for this government intervention.13. （9 points） In the current debate over the public policy toward the tobacco industry, some politicians seem particularly interested in punishing the i
28、ndustry for its bad behavior, and other politicians are primarily interested in deterring smoking. Consider the following two policy options: 1） a large lump-sum tax that must be paid by the tobacco companies; 2） a large unit tax on cigarettes. Which tax is more suitable for achieving each objective
29、? Explain carefully.14. （9 points） “It is undesirable for an economy to be to the right of the peak of the Laffer Curve, because the peak depicts the socially optimal tax rate.” Comment on this statement.15. （7 points） The Hope Scholarship credit is a tax credit of $1,500 per student for qualified e
30、xpenses associated with each of the first two years of higher education. The credit is phased out linearly for AGIs between $80,000 and $100,000. （Thus, when AGI exceeds $100,000 the family is ineligible for the credit.） Consider a family in the 28 percent tax bracket that has two children who qualify （i.e., the family is eligible for a $3,000 tax credit）. What is the familys effective marginal tax rate between $80,000 and $100,000?16. （12 points） In a recent op-ed piece in an undergraduate newspaper, a student once
