04 Jun Question Econ411 Homework Assignment 2 Spring 2015
Question
Econ411
Homework Assignment 2
Spring 2015
Name:
1. In an article on how exercise improves health, the New York Timesreported on an observational study that found that each hour spent running added two hours to a person’s life expectancy [Brody, 2006]. A week later, a letter to the editor questioned whether the results really proved anything about the impact of exercise on health, and suggested that “those with a strong hearth and good health are otherwise more likely to enjoy running and do it more regularly.” How does this challenge to the exercise study relate to the problems faced by economists trying to assess the causal effects of economic policy? How could you design an experimental study to estimate the impact of running on life expectancy?
2. In New York State, an individual’s unemployment benefits depend on her previous earnings—the higher the earnings, the higher the benefits, up until a maximum benefit level is reached. In 1989, the state legislator and governor unexpectedly increased the maximum level. This led to an increase in benefits for high earners, but no change in benefits for low earners {Meyer and Mok, 2007]. How might a researcher take advantage of this scenario to conduct a difference-in- difference quasi-experiment to estimate the effect of unemployment benefits on unemployment durations? Be sure to describe both treatment group and the control group. What is the key assumption required for this quasi-experiment to generate unbiased estimates of the effect of unemployment insurance on unemployment duration?
3. In the following figure, the number of parties that Cassanova gives per month is measured on the horizontal axis, and dollars are measured on the vertical axis. is the marginal cost of providing parties and is Cassanova’s marginal benefit schedule from having parties.
a. Graphically show how many parties Cassanova will host.
b. Suppose there is a fixed marginal benefit, $b, per party to Cassanova’s friends. Illustrate this on your graph.
c. What is the socially optimal level of parties? How could the Social Committee induce Cassanova to throw this number of parties?
d. On your graph, show the optimal subsidy per party and the total amount paid to Cassanova. Who gains and loses under this plan?
4. The private marginal benefit associated with a product’s consumption is PMB =360 – 4Qand the private marginal cost associated with its production is PMC= 6Q. Furthermore, the marginal external damage associated with this good’s production is MD= 2Q. To correct the externality, the government decides to impose a tax of Tper unit sold. What tax Tshould it set to achieve the social optimum?
5. Suppose that two firms emit a certain pollutant. The marginal cost of reducing pollution for each firm is as follows: and , where and are the amounts (in tons) of emissions reduced by the first and second firms, respectively. Assume that in the absence of government intervention, Firm 1 generates 100 units of emissions and Firm 2 generates 80 units of emissions.
a. Suppose regulators decide to reduce total pollution by 40 units. In order to be cost effective, how much should each firm cut its pollution?
b. What emissions fee should be imposed to achieve the cost effective outcome? How much would each firm pay in taxes?
c. Suppose that instead of an emissions fee, the regulatory agency introduces a tradable permit system and issues 140 permits, each of which allows the emission of one ton of pollution. Firm 1 uses its political influence to convince the regulatory agency to issue 100 permits to itself and only 40 permits to Firm 2. How many, if any, permits are traded between the firms? What is the minimum amount of money that must be paid (total) for these permits? By how many tons does each firm end up reducing its pollution?
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