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1、SAMPLE MIDTERM EXAM IPart I is worth 36 points. Part II is worth 24 points.Part I.(6 points each). Indicate whether each of the following statements is true, false, or uncertain, and explain your answer. Your grade will depend primarily on the quality of your explanation. If a word or phrase is unde
2、rlined, your answer must include a concise definition of the word or phrase.1.A consumption-efficient allocation of resources is socially desirable.2.Suppose that everyone has a utility function that depends only on his or her income. Then the value of a utilitarian social welfare function is maximi
3、zed when everyone has the same after-tax income.3.Under the 1996 welfare reform, each state receives a fixed grant from the federal government to pay for its income maintenance policies. However, for each dollar of its own money that the state spends on welfare, the federal grant is reduced by a dol
4、lar.4.Under the Social Security system, an individuals retirement benefits are directly proportional to the amount of payroll taxes that he or she has paid into the system.5.Former President Clinton once proposed that individuals between the ages of 55 and 64 be allowed to buy into the Medicare syst
5、em if they so choose. This is a good example of how social insurance can solve the adverse selection problem.6.Political economy models of bureaucratic behavior assume that a bureaucrats goal is to maximize the welfare of the citizens.Part II.Your answers to the following questions should take advan
6、tage of the relevant economic tools.7.(10 points) Several months ago, the newspaper USA Today published an article that was critical of the large amount of money that the government spends to subsidize the energy industry. In response, a spokesman for the industry observed, “Some of the alleged subs
7、idies dont even go to the industry. For example, the government provides money to low-income families to help pay heating bills.” Evaluate this response carefully. Your answer should include an appropriate graphical model.8.(14 points) Stanley and Wendy both operate factories along a lake. Stanley p
8、roduces an output X. In the process, he pollutes the lake, which increases the costs of production for Wendy. Assume that the total damages to Wendy increase in proportion to the amount of X that Stanley produces.a. Draw a sketch that depicts this situation.b. Show the amount that Stanley produces,
9、and show the socially efficient amount for Stanley to produce.c. On the diagram, show the Pigouvian tax that will induce Stanley to produce the efficient amount, and the amount of revenues collected by the tax.SAMPLE MIDTERM EXAM I: SUGGESTED ANSWERSPart I.(6 points each)1.False. An allocation of co
10、mmodities is said to be consumption-efficient when the only way to make one consumer better off is to make another worse off, given fixed quantities of the various commodities. We cannot know whether such an allocation is socially desirable without explicit ethical judgments relating to equity.2.Fal
11、se. A utilitarian social welfare function says that social welfare is a function of the utilities of everyone in society. Even if all that utility depends on is income (so that incentive issues are not relevant), additional assumptions are needed to get the result. These include identical utility fu
12、nctions and diminishing marginal utility of income.3.False. Each state gets a grant from the federal government, but the grant is not reduced by the amount that the state spends on welfare.4.False. The schedule that relates benefits received to payroll taxes paid is progressive. As a lifetime taxes
13、increase, benefits increase less than in proportion.5.False. Adverse selection occurs when the people who are most likely to benefit from a given insurance policy are also the ones who are most likely to purchase it. Under the Clinton plan, enrollment is optional in this age group. Those who are mos
14、t like to be sick are the ones who would be most likely to participate, so the program does not solve the adverse selection problem.6.False. While it is not clear exactly what objective bureaucrats have, political models generally assume that bureaucrats are trying to maximize their own utility, whi
15、ch is related to the size of the agency they administer.Part II.7.(10 points) Just as is the case for a tax, it does not matter which side of the market a subsidy is applied to. The beneficiary depends on the elasticities of the demand and supply curves. This can be illustrated either with a supply-
16、demand diagram or a formula which shows that the equilibrium outcome is independent of whether the subsidy is received by producers or consumers.8.(14 points) This is essentially the model of Figure 5.4 in the text, except that the marginal damage curve is horizontal (because the problem stipulates
17、that the total damage is directly proportional to the amount of output).SAMPLE FINAL EXAM IThe maximum number of points is 110. Please answer every question. Your answers should make use of the tools of economics and the material presented in this course, including diagrams and/or formulae where app
18、ropriate.You are advised to include a minimum of irrelevant material in your answers. Points will be subtracted for all incorrect statements you make.Part I.(40 points)Indicate whether each of the following statements is true, false, or uncertain, and explain your answer. Your grade will depend prim
19、arily on the quality of your explanation. If a word or phrase is underlined, your answer must include a concise definition of the word or phrase.1.“I promise to lower income tax rates. And I wont have to cut spending, because the lower rates will induce so much economic activity that tax revenue wil
20、l rise.” This promise would be more credible coming from a candidate for governor of a state than from a candidate for president of the country.2.Over time, health care costs in the United States have been increasing. This is due primarily to the fact that the population has been aging.3.Suppose tha
21、t a public good is provided in a Pareto-efficient amount. It is possible that different members of society will place different values on the last unit of the public good that they consume.4.Rent-seeking models of government behavior assume that the goal of policymakers is to maximize a social welfa
22、re function.5.In a pay-as-you-go social security system, the dependency ratio equals the replacement ratio.6.Under the Hall-Rabushka flat tax, each individual completes a tax return that includes his or her wages and capital income, no deductions are allowed, and total income is taxed at a constant
23、rate.7.Consider a tax system that is neutral with respect to marital decisions. In general, such a system will lead to a situation in which two families with equal total family incomes will pay different amounts of tax.8.Under current law, corporations may deduct payments of interest to their bondho
24、lders. Disallowing this deduction would bring the tax base into closer alignment with the Haig-Simons definition of income.Part II.9.(12 points) What is the Tiebout model? What are the key assumptions behind the model? Are they realistic?10.(6 points) In Russia, the prices of commodities such as foo
25、d and clothing are set in a free market, but housing is heavily subsidized by local governments. A twobedroom apartment in Moscow, for example, might rent for $1.50 per month. (Utilities and other fees increase the cost to about $35.) “Because of subsidized rents, some tenants live in larger apartme
26、nts than they need and might not otherwise afford.” Explain how this situation relates to the concept of excess burden, and illustrate with a diagram.11.(6 points) In 1997, House Republicans proposed that capital gains be indexed for inflation. Newsweeks Wall Street editor stated that this was unfai
27、r to wage earners: “Inflation pushes up salaries, too. But would paychecks get the same generous treatment? Nope. No inflation indexing.” Sloan, 1997, page 59. Compose a letter to Newsweek in which you comment on this statement.12.(9 points) According to conventional welfare economics, under what co
28、nditions is a government intervention in the economy appropriate? (There is no need to explain the conditions; just list them. Be specific; dont simply answer “market failure.”) In one of the budgets that he submitted to Congress, former President Clinton proposed a multi-million dollar program to s
29、ubsidize training to day-care workers. Consider each criterion you listed above and indicate whether or not it provides a rationale for this government intervention.13.(9 points) In the current debate over the public policy toward the tobacco industry, some politicians seem particularly interested i
30、n punishing the industry for its bad behavior, and other politicians are primarily interested in deterring smoking. Consider the following two policy options: 1) a large lump-sum tax that must be paid by the tobacco companies; 2) a large unit tax on cigarettes. Which tax is more suitable for achievi
31、ng each objective? Explain carefully.14.(9 points) “It is undesirable for an economy to be to the right of the peak of the Laffer Curve, because the peak depicts the socially optimal tax rate.” Comment on this statement.15.(7 points) The Hope Scholarship credit is a tax credit of $1,500 per student
32、for qualified expenses associated with each of the first two years of higher education. The credit is phased out linearly for AGIs between $80,000 and $100,000. (Thus, when AGI exceeds $100,000 the family is ineligible for the credit.) Consider a family in the 28 percent tax bracket that has two chi
33、ldren who qualify (i.e., the family is eligible for a $3,000 tax credit). What is the familys effective marginal tax rate between $80,000 and $100,000?16.(12 points) In a recent op-ed piece in an undergraduate newspaper, a student once argued that the U.S. should move to a privatized Social Security
34、 system. To finance the payment of benefits to the elderly during the transition, he proposed raising the federal tax on gasoline by $2.50 per gallon.a.One justification the student gave for the gasoline tax is that driving leads to “higher prices for good and services.” According to the theory of e
35、xternalities, if this fact is true, is it alone a justification for taxing gasoline? Explain carefully.b.The student noted an alternative policy for financing benefits during the transition would be a federal sales tax. However, he characterized that option as “unimaginative (sic)What good would a s
36、ales tax do? Discourage buying?” On the basis of efficiency, which is to be preferred, a gasoline tax or an equal yield general sales tax? Explain carefully what you mean by “efficiency” in your answer. Which tax would be fairer? Again, explain your definition of “fair.”c.The student also noted that
37、 gasoline taxes are much higher in Europe than in the U.S., and that consequently, “Europeans do a fraction of the driving that Americans do for noneconomic purposes, but they make nearly as many trips to work and for other economic purposes.” What does the student mean by the distinction between “e
38、conomic” and “noneconomic” uses of gasoline? Suppose that it were possible to tax these two uses of gasoline at different rates. In order to minimize excess burden, how would you set the tax rates?SAMPLE FINAL EXAM I: SUGGESTED ANSWERSPart I.(5 points each)1.True. The effect of a tax reduction on ta
39、x revenues depends upon the elasticity of the taxed activity with respect to the tax rate. The elasticity of a factor of production to a state is greater than the elasticity of a factor to the country as a whole, because a factor can migrate from a state in response to a tax increase. This is easier
40、 than migrating from the country. That said, even for a state, it is not clear the elasticity is sufficiently large that a tax decrease would be self-financing.2.False. The graying of American is not sufficient to explain the long-term increase in health care costs. Many investigators believe that t
41、he main cause is changes in technology.3.True. The condition for the efficient provision of a public good is that the sum of the marginal rates of substitution equal the marginal rate of transformation. This does not require that MRSs be the same. Put another way, everyone must consume the same quan
42、tity of a public good, but there is no need for everyone to value the last unit by the same amount.4.False. Rent-seeking models assume that individuals seek to use the political system to obtain financial returns that are above the market rate of return (“rents”). In general, this is not consistent
43、with maximizing a social welfare function.5.False. The dependency ratio is the ratio of the number of people being supported by social security to the number of workers. The replacement ratio is the ratio of social security benefits to prior earnings. The correct statement is that, under a pay-as-yo
44、u-go system, the dependency ratio times the replacement ratio equals the social security tax rate.6.False. Under the Hall-Rabushka flat tax, each individuals tax return includes only his or her wage income. There is an exemption depending on family size. There is a business-level tax at the same rat
45、e; the base of the business tax is revenues minus purchases of material inputs minus wages.7True, providing that marginal tax rates vary with income.8.According to the Haig-Simons criterion, income during a given period is the increase in potential to consume. According to this criterion, business i
46、ncome must be measured net of the expenses incurred in producing it. Interest is such an expense. Hence, according to H-S principles, it is appropriate for business to deduct interest and for it to be taxable at the individual level. The statement is false.Part II.9.(12 points) The Tiebout model sho
47、ws that, under certain assumptions, the ability of individuals to move among jurisdictions produces a market-like solution to the local public goods problem. The Tiebout model assumes the government activities generate no externalities, individuals are completely mobile, people have perfect informat
48、ion with respect to each communitys public services and taxes, there are enough different communities so that each individual can find one with public services meeting her demands, the cost per unit of public services is constant, and that public services are financed by a proportional property tax. The assumptions obviously are not totally realistic. However, there is a lot of mobility in the American economy, and several of the empirical implications of the model (e.g.,