Economics homework help. Public Finance
Spring 2020

 
 

• The world has two goods: boogie bombs (B) and chug jugs (C).

Ninja is born with an endowment (B=100, C=20) and has a fixed marginal utility of 1 for a boogie bomb ( )  and 0.5 for a chug jug bomb ( )  . His total utility is given by
Tfue is born with (B=5, C=50) and has a marginal utility of  for a boogie bomb and    for a chug jug. His utility is given by .
The total endowment must satisfy ,
 

1. Define (in 1 sentence) the concept of Pareto Efficiency
2. b) Is the initial distribution Pareto efficient? If not explain a Pareto improvement.

 

1. c) Is Ninja having (103, 66) Pareto efficient? Will the market wind up at that point? Explain why or why not?

 

1. d) If we want to increase Tfue’s utility, explain why it would make more sense to transfer him dollars rather to try and force a higher price for chug jugs. [Limit 2-3 sentences].

 
 
 
 
 
 

• Suppose the supply of Yeezys is given by Q=2P-5 and demand by Q=40-P

1. What is the equilibrium price and quantity? Draw a diagram to illustrate.

 
Yeezys are ugly AF. Each pair generates a marginal damage to society of $7.5.

1. Draw the social marginal cost curve.

 

1. What is the deadweight loss of the private equilibrium?

 
 

1. How much revenue would the socially optimal Pigouvian tax on those busted shoes generate?

 
 

3. You are part of the city council and have to vote on a new proposed $20 tax on iPads tomorrow. Your staff estimated that the elasticity of demand for iPads is -2 and the elasticity of supply is 6. What will be the incidence of the tax on consumers? What about on producers?

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

4. Jeff Bezos’ has 40 hours a week to allocate. His utility function is given by where C is consumption and l  is leisure. He therefore has a marginal utility of leisure of and a marginal utility of consumption of 1.

Jeff’s wage is $36 billion per year –so in billions–  Jeff faces the following budget constraint is:
.

1. How much labor will Jeff supply (in terms of the tax rate t)?

 
 
 
 
 

1. The income and substitution effects of higher taxes on Mr. Bezos’s labor supply go in opposite directions. Which effect dominates?

 
 
 
 
 

1. What tax rate t would maximize the revenue made from Jeff Bezos, given this labor supply? If stuck, you can round to the nearest 0.1 and then guess and check.

 

1. Explain why Emmanuel Saez wants to raise poor Jeff’s tax rate to the revenue maximizing level. Specifically, why does he want to raise Jeff’s tax rate to the revenue maximizing level but not raise most people’s tax rate to that level?

 
 
 
 
 

5. Jeff Bezos can buy a lot of things, but he can’t buy Danny’s full head of hair. Mrs. Bezos would like to hire Danny for some light modeling (paying $1,000). In 2017, the Federal Corporate Income Tax Rate is 35%. Danny’s marginal tax rate is 35%, and the dividend tax rate is 15%.

 

1. How much more money will Danny make if he earns this money as personal income (directly or via a pass-through entity) as opposed to setting up a C-Corporation and funneling it through there?

 
 

1. The TCJA lowered the corporate rate to 21%. If this was the only change, how would this impact Danny’s decision whether or not to incorporate as a C-Corp?

 
 
 

1. The TCJA also allows pass-through businesses to deduct 20% of their business income. How does this impact your answer to part (b) – including the new corporate tax rate? How much after tax money can Danny make?

 
 
 
 
 
 
 
 
 

6. The Free Application for Federal Student Aid paperwork is quite complex. It is used to allocate Federal student aid like Pell grants. Sue Dynarkski reports the following statistics.

 
 
She further shows that she can predict, with extremely high accuracy, how much the Federal government will give someone in Pell grants using only the student’s family’s adjusted gross income and the students’ family size.
Note: In case it’s hard to see, the simulated change is pretty small relative to the overall amount of aid for each group.

1. Explain why it might still be optimal for the government to require people to fill out the complicated FAFSA forms, if a simple formula would produce the same result in terms of grants pre student?

 
 
 

1. First-generation college students are much more likely to file FAFSA forms late. How, if at all, does this affect the likelihood – in your estimation – that this is optimal?

 
 
 
 

7. Dan Weiss and David Benioff run a show called Game of Thrones. If they come up with a good ending, it will earn $100. If they cannot come up with a good ending, and just let everyone survive the main battle and use a deus ex machina crap to kill the Night King, it will earn $49.

The odds of finding a good ending are 2/3 if they work hard and 1/3 if they do not. Their utility function is
if they work hard and  if they don’t.
 
 

1. What is Dan and David’s expected utility? Will they bother working hard?

 
 
 
 
 
 

1. Suppose, instead of Dan and David working by themselves, they are employees of a risk-neutral company called HBO. HBO gets to keep the profits ($100 or $49) and pays them a salary. Suppose HBO can observe whether they work hard and can make salary non-contingent or contingent on effort and/or profits, if it desires. HBO is a profit maximizing company, so it will give them just enough utility to work. What salary will HBO pay? Does this salary come with risk? Upon what is this salary contingent?

 
 
 
 
 

1. Suppose HBO now cannot observe whether Dan and David work hard. It can now only make salary payments non-contingent or contingent on profits. What kind of agency problem is this? Explain why they will not try under the contract in part (b).

 
 
 
 
 

1. Find HBO’s best contract for the showrunners assuming they cannot observe effort and can only make salary contingent on profits (and they do still want them to work hard).

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

8. Ben Handel, Amitabh Chandra, and Jon Kolstad look at the impact of a firm shifting its employees from a first-dollar coverage plan onto a high deductible health insurance plan (HDHP).

 
 
They compare to a market average (Truven). What type of agency problem is evident in this graph? Would this problem be solved by government provided health care? Explain in at most 4 sentences.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

9. Cardi B famously asked the important question, “So you know the government is taking 40 percent of my taxes. And, Uncle Sam, I want to know what you’re doing with my f***ing tax money.”

 
I now ask the very same question.
 
 
 
The categories are: “Net Interest Payments”, “Education Welfare & Housing”, “Social Security”, “Other”, “National Defense”, “Unemployment & Disability”, and finally, “Health (including Medicare)”.
 
Match the correct category to the share of Federal Spending.
A.
B.
C.

1. Net Interest Payments – a Freebie!

E.
F.
G.

Economics homework help