Unformatted text preview: PADP 8670 Fertig 10 Possible Final Exam Questions Fall 2011 UGA I will randomly choose one of the questions numbered 1 through 5 and one of the questions numbered 6 through 10 for the final exam. 1. Consider the market for beets. The world price of beets is $1 per pound and, at that price, 20 million pounds of US-produced beets are sold per month and 10 million pounds are imported from abroad. Assume that the supply and demand in a closed US market would result in a price of $1.25 per pound and a quantity sold of 25 million pounds. Beet producers argue that their market should be protected from foreign competition. Some producers request a tariff of $.50 per pound on imported beets; others request a price floor, which would set the minimum price of beets at $1.50 per pound. When the price is $1.50, the US demand is 20 million pounds . a. Using 2 clearly labeled graphs, demonstrate the outcomes from each of these policies on the market (price and quantity) for domestically produced beets. b. Which policy will domestic beet producers prefer? Which will foreign beet producers prefer? Which will consumers prefer? In your opinion, which policy is preferable, and why? 2. Empirical evidence suggests that the Earned Income Tax Credit (EITC) raises the labor supply of single women but depresses the labor supply of married women. Using labor-leisure diagrams, try to predict/explain this phenomenon with economic theory. Make the following assumptions: a. Temporary Aid for Needy Family (TANF) serves as a safety net ensuring an income of $10,000 a year if earnings are below $10,000 (e.g. if earnings are $3000, TANF would provide $7000). b. If the EITC did not exist, there would only be the TANF program as a safety net for poor households. c. EITC provides 40% of earnings from work (not earnings from TANF) up until about $17,000. After that, EITC provides a smaller and smaller percentage of earnings from work (phases out) until $40,000. d. Husbands, wives, and single mothers all have the same earning potential if they work all available hours, they would earn $40,000 a year each. e. Preferences for a household obey the basic rules of well-behaving indifference curves and generally are tangent to the budget line somewhere in the middle. 3. Empirical evidence suggests that the labor supply curve is not a linear, upward sloping curve, but instead is backward-bending as shown below. What does this empirical evidence imply about the relative sizes of the income and substitution effects for low-wage vs. high-wage people? Explain with words and labor-leisure diagrams. W" LS" L" 4. President Obama has proposed a payroll tax cut as part of the American Jobs Act. Normally, payroll taxes to fund social security are paid by employees and employers; each pays 6.2 percent of annual earnings (up to $110,100, although you can ignore the cap for this question), yielding a combined rate of 12.4%. The proposed jobs act would cut both the employer
and the employee payroll tax in half such that each pays only 3.1%. Assume that the elasticities of demand and supply are roughly the same, unless I indicate otherwise below. Use labor supply and demand graphs as well as your own words to answer the following. HINT: The y- axis on the labor supply and demand graphs is the wage paid by the employer (not the after-tax wage). a. What are the expected effects of this tax cut on wages and employment? b. Would the expected effects of this tax cut be different for industries with primarily minimum wage workers? c. Would this proposal have different effects on employment and after-tax earnings if the payroll cut were only on the employee side? That is, would the effects be different if the employee payroll tax were 0% and the employer payroll tax remained at 6.2%? d. How does your answer to part a differ if both of the following were true: the labor supply were inelastic and the labor demand were elastic? 5. The federal government wants states to offer a minimum level of social safety net services (S*) and will provide a cash grant as an inducement. The federal government is deciding among 2 different mechanisms for providing the grant: a matching grant, or a block grant to be provided only after the state has surpassed a minimum spending level (Smin) on safety net programs. Assume that S* equals the maximum amount the state could afford without a grant; that the block grant adds about a third of the state's original budget; and that Smin is set such that when the block grant is added to Smin, the state will be spending S*. Use graphs to illustrate your answers. a. Which mechanism is the cheapest way to induce S*? Explain how you can tell this from the graph. b. Which of these mechanisms is preferred by states? Explain how you can tell this from the graph. 6. The state of Georgia wants to encourage employment and child development in low- income families with children by subsidizing quality childcare. In addition, the state would like to reduce information asymmetry about childcare quality. The proposed policy will create a rating system for childcare providers registered with the state and will provide low-income families with larger subsidies to attend childcare facilities with higher ratings relative to facilities with low ratings. a. What do you expect the effect of this policy to be on the employment of mothers, the price of child care facilities with high quality ratings, the average quality of child care facilities in the state, and the effect on children's future educational outcomes? Explain your reasoning. b. Name at least one way that this policy induces a trade-off between equity and efficiency. Name at least one way that this policy avoids a trade-off between equity and efficiency. 7. Most local governments provide public parks as an amenity to community citizens. a. Describe 2 possible efficiency rationales for the public provision of parks. b. What would the Tiebout model offer as the rationale for the public provision of parks? c. Why might it be the case that governments provide parks as opposed to contracting with private companies to provide parks to citizens? 8. The HOPE scholarship in Georgia was instituted in 1993 in response to middle-class anxiety about college costs. The HOPE scholarship covers tuition, fees and book expenses for any high-school graduate earning an A- average or better (as of 2011). Once in college, students must maintain at least an A- average to keep their scholarship. Discuss the expected effects of this program in each of the following areas: a. The selection of courses by HOPE scholarship students (i.e., how many classes they take, the types of classes they take, and the incentive to withdraw in the middle of the semester). b. The demand for enrollment at Georgia colleges. c. The enrollment of students from disadvantaged backgrounds (specifically, for students where the affordability of college is an issue). 9. In the country of Sylvania, there are two kinds of people: red and blue. Red people on average earn more than do blue people. There is a good deal of overlap, however: there are some red people who earn very little and some blue people who earn a lot. The government of Sylvania is considering two different policies to reduce the amount of inequality. Policy A is to give a subsidy to all people who have low earnings. Policy B is to give a subsidy to all blue people. Compare these two policies in terms of their consequences for poverty-reduction and for efficiency. 10. David Leonhardt has written an essay titled "The Battle over the Soda Tax" (NY Times 5/18/2010). a. Analyze the arguments made by Leonhardt in favor of a soda tax in your own words (using economic terms where appropriate). b. Also analyze the arguments described by Leonhardt against a soda tax. c. Does your analyses lead you to the same or different policy recommendation than Leonhardt? Explain your reasoning. ...
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