04 Jun Question 1. True False Statements/Questions
Question
1. True False Statements/Questions
Explain your answer fully based on what was discussed in class (no more than 10 lines per question), since all the credit is based on the explanation.
a) In the basic life cycle model, individuals save optimally for retirement so no government retirement program is needed.
b) A funded retirement program is better than an unfunded retirement program when r > n + g.
c) Because of moral hazard, social insurance cannot provide full insurance.
d) With single peaked preferences, the median voter delivers an ecient level of public good provision.
e) What is the logic behind Obamacare’s mandate for individuals to get insurance?
f) A transfer of $1m for education funding from the federal government to the local government has the same impact on local education spending as $1m transfer for police funding from the federal government to the local government.
2. Public Goods
Oakland is considering building a new basketball arena for the Golden State Warriors. Assume the city has two residents: Curry and Thompson. Oakland will fund the new stadium solely from the individual contributions of these residents. Each of the two residents has a utility function over private goods (xi) and total stadium size (S), of the form:
Ui(xi; S) = ln(xi ???? 5) + ln(S ???? 5)
The total size of the arena is determined by the total number of seats built, S, and is the sum of the number of seats paid for by Curry and Thompson: S = sc + st. Curry has an income of $100 and Thompson has an income of $80. Both the private good and an arena seat have a price of $1.
Note: For any fraction or decimal answers, you may choose to round o or keep as is.
(a) How many seats will be built if the government does not intervene? How many are paid for by Curry? By Thompson?
(b) What is the socially optimal number of seats? If your answer diers from (a), explain why.
(c) Suppose the city of Oakland is not happy with the private equilibrium and decides to provide 30 seats in addition to what Curry and Thompson choose to provide on their own.
Thompson and Curry each pay a $15 lump-sum tax to pay for the 30 seats. What is the new total number of seats? How does your answer compare to (a)? Did Oakland achieve the social optimum with this plan? Why or why not?
(d) Suppose instead, starting from the situation in part (a), an anonymous fan pays for 30 seats. What is the new total number of seats? How many are provided by Curry? By Thompson? How does this compare to the level of provision in (c)? If there are any similarities or dierences, explain why.
(e) Propose a mechanism the government could use to achieve the social optimum.
3. Forced Saving Programs. Consider a forced savings policy and how it aects two types of people – patient and myopic. Both types have the following problem:
max
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