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introduction to economic
The Micro Economy Today 14th Edition Bradley Schiller, Karen Gebhardt - Solutions
(b) What is the cumulative marginal tax rate at(i) Wages under $500?(ii) Wages over $500?
(a) How much will someone earning $800 a month receive in(i) Food stamps?(ii) Housing assistance?(iii) Cash welfare?
Cash welfare: $400 per month 2 0.67 (Wages above $500)
9. Suppose the benefit formulas for various welfare programs are Food stamps: $400 per month 2 0.30 (Wages)Housing assistance: $1,000 per month 2 0.25 (Wages)
8. If older workers have a tax elasticity of labor supply equal to 0.20, by how much will their work activity decline when they reach the Social Security earnings test limit? (Assume explicit taxes of 20 percent below that limit.) %
7. (a) On the following graph, depict the wages, income, and Social Security benefits at different hours of work for a worker aged 62–64 who earns $15 per hour and is eligible for $15,000 in Social Security benefits.(b) What is the total income if the person works 1,000 hours per year?(c) What is
6. How large a monthly Social Security check will a retiree get if her maximum benefit is $1,600 per month and she continues working for wages of $2,000 per month?
What is the marginal wage replacement rate for(c) The $30,000-per-year worker?(d) The $80,000-per-year worker?
5. According to the benefit formula in Table 20.2, how large will the Social Security benefit be for a worker who had prior earnings of(a) $30,000 a year?(b) $80,000 a year?
4. What is the breakeven level of income for Social Security as depicted in Figure 20.6?
Identify here and label on the graph the following points:A—welfare benefit when wages 5 0 (a) How much is that benefit?B—welfare benefit when wages 5 $10,000 (b) How much is that benefit?C—breakeven level of income (c) What is that income level?
Wage rate 5 $10 per hour Welfare benefit 5 $5,000 2 0.5(Wages . $3,000)
3. Draw a graph showing how benefits, total income, and wages change under the following conditions:
Food stamps 5 $6,000 2 0.30(Wages)(a) How high can wages rise before all food stamps are eliminated?(b) If the welfare benefit formula in Problem 1 applies, what is the combined marginal tax rate of both welfare and food stamps for wages above $2,000?
2. A welfare recipient can receive food stamps as well as cash welfare benefits. If the food stamp allotment is set as follows,
Benefit 5 $4,800 2 0.67(Wages . $2,000)(a) What is the marginal tax rate on(i) The first $2,000 of wages?(ii) Wages above $2,000?(b) How large is the benefit if wages equal(i) $0?(ii) $2,000?(iii) $6,000?(c) What is the breakeven level of income in this case?
Suppose the welfare benefit formula is
9. Why don’t we give poor people more cash welfare instead of in-kind transfers like food stamps, housing assistance, and Medicaid? LO20-
8. Who pays the economic cost of Social Security? In what ways? LO20-2
7. How would the distribution of income change if Social Security were privatized? LO20-1
6. Should the Social Security earnings test be eliminated?What are the benefits and costs of doing so? LO20-2
5. In what ways do younger workers pay for Social Security benefits received by retired workers? LO20-2
4. Once someone has received TANF welfare benefits for a total of five years, he or she is permanently ineligible for more TANF benefits. Should this person receive any further assistance? How will work incentives be affected?LO20-2
3. If poor people don’t want to work, should they get welfare?What about their children? LO20-3
2. What’s so hard about guaranteeing everyone a minimal level of income support? What problems arise? LO20-2
1. If we have to choose between compassion and incentives, which should we choose? Do the terms of the trade-off matter? LO20-3
The core policy dilemma is to find an optimal balance between compassion (transferring more income) and incentives (keeping people at work contributing to total output). LO20-3
The Social Security retirement program creates similar work disincentives. It provides an income floor for people who don’t work and imposes a high marginal tax rate on workers aged 62–64. LO20-2
The benefit reduction that occurs when wages increase is an implicit marginal tax. The higher the marginal tax rate,(1) the less the incentive to work but (2) the smaller the welfare caseload. LO20-3
Welfare programs reduce work incentives in two ways.They offer some income to people who don’t work at all, and they also tax the wages of recipients who do work via offsetting benefit reductions. LO20-2
The basic goal of transfer programs is to alter the market’s FOR WHOM outcome. Attempts to redistribute income may, however, have the unintended effect of reducing total income. This is the core equity versus efficiency dilemma. LO20-2
Most transfer payments come from social insurance programs that cushion the income effects of specific events, such as aging, illness, or unemployment. Welfare programs are means-tested; they pay benefits only to the poor. LO20-1
Income transfers are payments for which no current goods or services are exchanged. They include both cash payments such as welfare checks and in-kind transfers such as food stamps and Medicare. LO20-1
How do transfer payments alter market behavior?
How are transfer benefits computed?
How much income do income transfer programs redistribute?
LO20-3 The trade-offs between equity and efficiency
LO20-2 How transfer programs affect labor supply and total output.
LO20-1 The major income transfer programs.
For the incidence of this tax,(h) What is the increase in unit labor cost to the employer?(i) What is the reduction in the wage paid to labor?
Supplied 1 2 3 4 5 6 8 10 12 14 17 20 Demanded 20 18 16 14 12 10 8 6 5 4 3 2(b) How many workers are employed in equilibrium?(c) What wage are they paid?(d) Now suppose a payroll tax of $2 per worker is imposed on the employer. Draw the“supply 1 tax” graph that results.(e) How many workers are
12. How much more in taxes did a millionaire have to pay when the top marginal tax rate was increased from 35 to 39.6 percent(a) On the graph shown below, draw the supply and demand for labor represented by the following data:Wage $1 2 3 4 5 6 7 8 9 10 11 12 Quantity of labor
11. Following are hypothetical data on the size distribution of income and wealth for each quintile(one-fifth) of a population:Quintile Lowest Second Third Fourth Highest Income 5% 10% 15% 25% 45%Wealth 2% 8% 12% 20% 58%a) On the graph on the next page, draw the line of absolute equity; then draw a
10. What is the effective tax rate with Dick Armey’s proposed flat tax (p. 420) for a family of four with earnings of(a) $30,000? %(b) $50,000? %(c) $100,000? %
9. What percentage of income is paid in Social Security taxes by a worker earning(a) $40,000? %(b) $80,000? %(c) $200,000? %(d) What kind of tax is this? (A: progressive; B: regressive; C: proportional)
8. If the tax elasticity of labor supply were 0.16, by how much would the quantity of labor supplied increase among people in the top U.S. tax bracket if the highest marginal tax rate in the United States were reduced to the level of Hong Kong’s (World View, p. 419)? %
7. By how much might the quantity of labor supplied decrease if the tax elasticity of supply were 0.20 and the marginal tax rate increased from 35 to 45 percent? %
6. If the tax elasticity of supply is 0.15, by how much will the quantity supplied decrease when the marginal tax rate increases from 34 to 38 percent? %
Which taxpayer has(a) The highest nominal tax rate?(b) The highest effective tax rate?(c) The highest marginal tax rate?
Taxpayer Income and Deductions Income Tax A $ 20,000 $ 4,000 B 40,000 16,000 C 80,000 34,000 D 200,000 110,000
5. Using Table 19.1, compute the taxable income and taxes for the following taxpayers:Gross Exemptions Taxable
4. Use Table 19.1 to compute the taxes on a taxable income of $200,000.(a) What is the marginal tax rate? %(b) What is the average tax rate? %
3. In 2010 what was the Obamas’(a) Nominal tax rate? %(b) Effective tax rate? %
2. If there were no deduction for charitable contributions, how much more tax would the Obamas have paid in 2010? $
1. How much more income tax would President Obama have paid in 2010 (News, p. 413) if he had used no “loopholes”? (Use the tax rates in Table 19.1.) $
. If U2’s tax bill falls by $1 million when the band relocates to the Netherlands (World View, p. 411), who really pays for the band’s charitable contributions? LO19-3
9. What share of taxes should the rich pay (see Figure 19.4)? Should the poor pay any taxes? LO19-3
8. Is a tax deduction for tuition likely to increase college enrollments? How will it affect horizontal and vertical equities? LO19-3
How do families vary the quantity of labor supplied when tax rates change? LO19-3
7. If the tax elasticity of supply were zero, how high could the tax rate go before people reduced their work effort?
5. How might a flat tax affect efficiency? Fairness? LO19-3
4. What loopholes reduced President Obama’s 2010 tax bill (see News, p. 413)? What’s the purpose of those loopholes? LO19-1
3. Do inequalities stimulate productivity? In what ways?Provide two specific examples. LO19-3
2. Why are incomes distributed so unevenly? Identify and explain three major causes of inequality. LO19-3
1. What goods or services do you and your family receive without directly paying for them? How do these goods affect the distribution of economic welfare? LO19-2
A flat tax is a nominally proportional tax system. A personal exemption and the exclusion of capital income can render a flat tax progressive or regressive, however. A flat tax reduces the government’s role in resource allocation
There is a trade-off between efficiency and equality. If all incomes are equal, there’s no economic reward for superior productivity. On the other hand, a more equal distribution of incomes might increase the productivity of lower-income groups and serve important noneconomic goals as well. LO19-3
Mildly progressive federal income taxes are offset by regressive payroll, state, and local taxes. Overall, the tax system redistributes little income; most redistribution occurs through transfer payments. LO19-2
Marginal tax rates were reduced greatly in the 1980s and have alternately risen and fallen since. LO19-1
The progressivity of the federal income tax is weakened by various loopholes (exemptions, deductions, and credits)that create a distinction between nominal and effective tax rates and cause vertical and horizontal inequities.LO19-2
The trade-off between equity and efficiency is rooted in supply incentives. The tax elasticity of supply measures how the quantity of available resources (labor and capital)declines when tax rates rise. LO19-3
Personal incomes are distributed quite unevenly in the United States. At present, the highest quintile (the top 20 percent) gets half of all cash income, and the bottom quintile gets less than 4 percent. LO19-3
The size distribution of income tells us how incomes are divided up among individuals. The Lorenz curve is a graphic summary of the cumulative size distribution of income. The Gini coefficient is a mathematical summary.LO19-3
The distribution of income largely determines access to the goods and services we produce. Wealth distribution is important for the same reason. LO19-3
How do taxes affect the rate and mix of output?
How do taxes alter that distribution?
How are incomes distributed in the United States?
LO19-3 The nature of the equity–efficiency trade-off.
LO19-2 What makes taxes more or less progressive.
LO19-1 How the U.S. tax system is structured.
(a) A federal court finds Google guilty of antitrust violations. Which way (right or left) did(i) Demand shift?(ii) Supply shift?
12. Illustrate with demand and supply shifts the impact of the following events on stock prices:
11. How much interest accrued each day on the immediate cash payoff of the MegaMillions jackpot?(See Table 18.1.)
10. What is the current yield on a $1,000 bond with a 5 percent coupon if its market price is(a) $900?(b) $1,000?(c) $1,100?
9. Compute the market price of the GM bonds described in Table 18.5 if the yield falls to 20 percent.
8. What was the expected return on Columbus’s expedition, assuming that he had a 50 percent chance of discovering valuables worth $1 million, a 25 percent chance of bringing home only$100,000, and a 25 percent chance of sinking?
7. What is the present discounted value of $10,000 that is to be received in 2 years if the market rate of interest is(a) 0 percent?(b) 5 percent?(c) 10 percent?
6. If the market rate of interest is 4 percent, what is the present discounted value of $1,000 that will be paid in(a) 1 year?(b) 5 years?(c) 10 years?
5. At the closing price for the first day of Alibaba stock trades, what was(a) The P/E ratio?(b) The cash rate of return?
4. According to the data in Table 18.3,(a) How much profit per share did Intel earn? $(b) How much of that profit did it pay out in dividends? $
3. According to the data in Table 18.3,(a) How much profit per share did Google earn? $(b) How much of that profit did it pay out in dividends? $
2. If a $24 per share stock has a P/E ratio of 12 and pays out 40 percent of its profits in dividends,(a) How much profit is it earning per share? $(b) How large is its dividend? $(c) What is the implied rate of cash return? %
1. If an $80 stock pays a quarterly dividend of $1, what is the implied annual rate of return? %
10. Why do people say “a dollar today is worth more than a dollar tomorrow”? LO18-1
9. Could Facebook have become a premier social networking site without venture capitalists? How? LO18-2
8. What is the price of Alibaba (BABA) stock today? How much has it risen or fallen from its closing price on the first day of public trading (News, p. 393)? What might explain this change? LO18-4
7. What considerations might have created the difference between the coupon rate and current yield on GM bonds(Table 18.5)? LO18-3
6. How does a successful IPO affect WHAT, HOW, and FOR WHOM the economy produces? LO18-2
5. Why is it considered riskier to own stock in a software company than to hold U.S. Treasury savings bonds?Which asset will generate a higher return? LO18-4
4. If you could finance a new venture with either a stock issue or bonds, which option would you choose? What are their respective (dis)advantages? LO18-2
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