Chap008 - Part 2 Analysis of Public Expenditure Chapter 8...

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Part 2 – Analysis of Public Expenditure Chapter 8 – Expenditure Programs for the Poor 1. a. Note that the figure below shows the correct shape of the budget constraint, but the numbers themselves are outdated. With a wage rate of $10 per hour, Elizabeth earns $100. Because the deduction in California is $225, none of her earnings are counted against the $645 welfare benefit. Thus, her total income is $745 (=$100+$645). b. The actual welfare benefits collected by a person equals B=G-t(Earnings-D), where B=actual benefits, G=welfare grant, t=tax rate on earned income, and D=standard deduction. Thus, (Earnings-D) is the net earnings that are taxed away in the form of reduced benefits. When benefits equal zero (B=0), the expression becomes 0=G-t(Earnings-D), which collapses to: Earnings=G/t+D. This is known as the “breakeven formula.” In the California context here, the expression becomes Earnings=$645/0.5 + 225, or Earnings=$1,515. With a wage rate of $10 per hour, this corresponds to 151.5 hours of work per month. c. The diagram shows the correct shape of the budget constraint, but the “577” figure should be replaced with “645” and the “9” hours should be replaced with “22.5”. d. The diagram above shows one possibility – in this case, Elizabeth is both working and on welfare – but she collects a reduced welfare benefit in this case. 2. One could gather data on the earnings of those in the program, as well as earnings data from nonparticipants. Regress the earnings variable on demographic variables and other factors that determine earnings (such as education and experience), and a variable that indicates whether the individual participated in the training program. Factors that affect local employment conditions, such as unemployment levels, may help explain earnings, 26
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Part 2 – Analysis of Public Expenditure but they may also explain participation in the program. The econometric strategy should be chosen carefully to account for this. 3.
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This note was uploaded on 12/18/2010 for the course ECON 2003 taught by Professor Tong during the Fall '10 term at Uni. Southampton.

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Chap008 - Part 2 Analysis of Public Expenditure Chapter 8...

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