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Unformatted text preview: leading think tank on the island disagrees, putting out the following press release: “Proposal A does not make economic sense. There is a tradeoff between maximizing the population size and maximizing surplus that is needed to purchase weapons and other capital equipment necessary for Chalfinia’s defense. More immigrants will simply reduce the wage in Chalfinia and, accordingly, will reduce the amount of resources that we have available to purchase weapons.” Who is right: the think tank or the government economists? Does the answer depend on Chalfinia’s current population size? Briefly explain. 4 Name (Last, First): SID: SECTION 2: PENSION THEORY [22 POINTS] Imagine a world in which: • People work from age 30 until age 60, retire at 60 and no one dies before age 90, when everyone dies. • The population is neither growing nor shrinking. • Workers produce 400 units of a perishable good over their working lives. Retirees do not work at all. In the questions that follow, be sure to show your work and clearly label all of the terms that you use in constructing your answer (for example, let Wt = workers, Rt = Retirees and Yt = young people). 1. What is the dependency ratio, excluding young people? [2 points] 2. Now, continuing to assume that the population is neither growing nor shrinking, what is the dependency ratio if we include young people? [2 points] 3. Now, we will assume that people arrive at this world at age 30 so that young people are not a part of the dependency ratio. a. Derive the social budget constraint. Be sure to show the formula you used. [3 points] b. What is the maximum number of units each worker can consume? [1 point] c. What is the maximum number of units each retiree can consume? [1 point] 5 Name (Last, First): SID: d. What is the endowment point in this world? [1 point] 4. Suppose the government introduces a social security program wherein each retiree is guaranteed a pension of 100 units. a. What is the tax rate? [2 points] b. Oh no! The introduction of a new pesticide causes infertility. The birth rate falls by half. One century later, what is the...
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