1. It is difficult to ascertain precisely the decline in the value of most assets as they grow older. As exception is automobiles. Assume that a new car costs $5000; that its value at the end of one year is $4000, at the end of two years $3000, at the end of three years $2000; and that it loses $250. In value for each of the following eight years. What is the true economic depreciation? What is the present discounted value of this, assuming a 5% after-tax interest rate? What will be the depreciation allowances under the current system? What is the present discounted value of these depreciation allowances? (Cars are treated as 5-year assets).

2. Supporters of accelerated depreciation in 1981 acknowledged that it favored heavy industry ("smokestack America") but argued that this was desirable. Why do economist tend to look askance at such arguments? Can you identify any major market failures? If it were decided to subsidize these industries, in what other ways might it be done?

3. In the debate concerning repeal of the provision allowing capital gains on assets passed on to ones heirs to escape taxation, some have reasoned that death is not voluntary, and therefore one should not tax capital gains upon death. Evaluate