Chapter_13_v2

Chapter_13_v2 - Part 3 Public Expenditure: Social Insurance...

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Part 3 – Public Expenditure: Social Insurance and Income Maintenance Chapter 13 – Expenditure Programs for the Poor 1. a. 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. d. See graph above. The diagram shows one possibility – in this case, Elizabeth is both working and on welfare – but she collects a reduced welfare benefit in this case. 2. This method would not provide accurate results because it does not adequately control for the reason why children with similar economic and demographic characteristics did not choose to participate, thereby including selectivity bias. One might choose instead to compare areas that implemented head start with areas that did not and complete a difference-in-difference method or randomize which Head Start applicants were admitted to the program, comparing the admitted children to those who applied but were denied. 645 22.5
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Part 3 – Public Expenditure: Social Insurance and Income Maintenance 3. a. Without the program in effect, Lois’s budget constraint is the line AD. With the program in effect, her budget constraint is ABCD. The grant is reduced to zero if Lois works 20 hours per month since her hourly wage rate is $10. b.
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Chapter_13_v2 - Part 3 Public Expenditure: Social Insurance...

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