04 Jun Question Question 1 ?Suppose that currently the government provi
Question
Question 1
?Suppose that currently the government provides everyone with a guaranteed income of $12,000 per year, but this benefit level is reduced by $1 for each $1 of work income. The government is considering changing this policy such that the benefit level is reduced by $1 for every $2 of work income. What effect would this policy have on work effort? Explain your answer.
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Question 2?
Describe the effects of raising the maximum benefit level for unemployment insurance on the savings rate of high-income workers. How big are the consumption-smoothing benefits of this policy change likely to be? Are there other potential benefits of raising this maximum benefit level?
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Question 3?
Consider two metropolitan areas, one that has many small school districts and one that has only a few large school districts. How are the efficiency and equity effects of introducing a voucher system likely to differ across these two areas?
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Question 4?
Suppose that the world is populated by people who are identical in every dimension except for their savings behavior. People live for two periods, earning $500 in the first period and nothing in the second period. The income tax on labor earnings and interest income is 40% and the interest rate earned on savings is 8%. There are two types of people. “Hand-to-Mouth” consumers consume everything in the first period, and “Smoothers” split their consumption exactly equally between the two periods.
a) How much tax would Hand-to-Mouth consumers pay in each of the two periods? How much tax would Smoothers pay in each of the two periods?
b) Suppose the income tax is replaced by an 80% consumption tax. In this system, for every $1 in consumption, the person is charged $0.80 in tax. How much tax will each type of consumer pay in each period now?
c) Compare the present value of the taxes paid by the two types of consumers under the two types of tax system. W
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