If you have choice you may do any two of problems 1-3 for 15 points each. Cross
out the one you do not do. If you do not have choice, do all three problems at 10
points each.
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a. Please calculate the
equilibrium price and
quantity of pickles.
(You may do this
through calculation,
algebra or graphing.)
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b. If the government 7
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tax on pickles, what
price will consumers c3 =p
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c. If the government places a 50 O/ge$cec,se
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on pickles, what price will the
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d. If the government places a 50 % excise tax on pickles, what will the quantity
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be?
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e. What share of the tax do the firms pay and what share do the consumers pay?
(There are several ways to arrive at the answer, but show your work.)
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ci2. a. What is the current highest marginal tax rate under the United States Personal
Income tax system?
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b. Suppose that Mario is a highly
paid married plumber that can make
$50 per hour before taxes and can
work up to 100 hours per week. Let
us assume he is in the top tax
bracket. Draw his budget line in the
graph provided, with income on the
vertical axis and leisure on the
horizontal. Number and label the
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axes.
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c. Draw an indifference curve showing him working 40 hours per week. Label it I1.
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d. Suppose we reduce Mario's marginal tax rate by ten percentage points, e.g., if you
answered 50 % in part a) it is now 40 %. Draw his new budget line.
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e. Draw a new indifference curve that is consistent with the first one. Label it 12.
f What impact did this have on the number of hours Mario worked? (Both direction and
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g. How does Mano's dehavlor compare to t e actua ev~denceof the impact of the personal
income tax on the labor supply of married males?
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h. Suppose we reduced the taxes for Mrs. Mario as well. According to the evidence, is the
effect on her greater, less or the same as on him?
3. a. Suppose my neighbor has a home that they recently bought for $300,000. Our property
tax rate in Worthington is about 70 mils. How much do they pay in property taxes each
year? (Hint: there is one other piece of information you need to remember to give the
correct answer and Worthington is in Ohio.)
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b. Suppose the property tax in Delaware is 50 mils. What is the Tiebot model? Use the
Delaware and Worthington tax rates in formulating your answer.
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c. In general, is the property tax progressive? Explain.
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d. The property tax is quite unpopular. Cite two reasons why people dislike it is so much.
(Note: in light of part c, do not use the degree of progressiveness.)
e. Give an example, real or hypothetical, of land or property that would not be subject to a
property tax.
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f. My wife wants to redo the kitchen. Does the property tax impact our decision? Explain.
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Part 11. Shorter Problems. Do all 11. Six points each.
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4. Suppose George's marginal benefit of cigars is MB = 10 -9. The cost is $2, but
each cigar causes $4 of negative externalities.
a. What is the number of cigars George wishes to consume?
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b. What is the socially optimal number of cigars?
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c. What is a Pigouvian tax? At what level should it be set?
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5 . a. Please carefully define the term public good.
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c. The City of Delaware has a large public swimming pool with a daily fee. Is this a publlc
good? Explain.
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6.a. Briefly describe Medicare. Who does it serve, what does it give them and how is it funded?
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c. We have discussed six reasons for the government to intervene in the economy as well as two
other reasons. Cite two that are used to justify the government provision of health care. In a
sentence, note how each may be viewed as a reason. (Do not, however, use adverse
selection.)
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7. a, HOW is Social Security funded in the United States?
b. How are social security benefits determined in the United States?
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c. Suppose your grandmother would 11kelo sell her home but is reluctant to do so as she is
afraid that it will wind up reducing her social security benefits. What would you advise
her to do? Why?
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Tax Credit?
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d. Does Medicaid reduce the official poverty rate? Explain.
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9. Suppose that roads are a public good that are
provided by state governments. Let us suppose that
Ohio could have as much as $500 million spent on
roads. Show the budget line for $500 million
dollars of roads (horizontal axis) vs. private
consumption (vertical axis.) Label it AB. Number GBJ
and label both axes as well.
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b. Draw an indifference curve that shows Ohio
spending $300 million on roads. Label it 11.
c. Suppose the federal government gives a $300 million block grant to Ohio for roads. Show the
;L new budget line and label it CD.
d. What is the new amount spent on roads? Use an indifference curve to show this amount and
label the curve 12.
10. a. Please explain in words what excess burden represents.
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taxlpoll tax? Would it have a large excess burden?
11. a. What is the difference between an estate tax and an inheritance tax?
b. What impact does an estate tax have on the type of assets people tend to hold? Explain.
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c. What is the relation of the gift and the estate taxes in the United States?
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12. Suppose that Caledonia has a tax system identical to the United States. The only difference
is the tax rate there is:
Taxable Income
0-$10000
$10,000 and up
Tax
10 % of taxable of income
$1,000 + 20 % of the amount of taxable income over $10,000
Suppose the standard deduction is $5,000 for a single person and the personal exemption is
$3,200. Sarah has income of $40,000. Among her expenditures are $4,000 on interest on her
mortgage, $200 of interest on her gasoline credit card, $2,500 in charitable donations and $350
in political expenses.
a. Calculate how much she owes in taxes.
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b. What is her marginal tax rate?
c. What is her effective tax rate?
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13. a. What impact does the United States Corporate Income Tax have on debt vs. equity
financing? Explain.
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c. Suppose that the Acme Anvil Corporation buys a machine that is supposed to last ten years.
What impact does this have on their Corporate Income Tax? Does it take ten years to get all of
their tax breaks? Explain.
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14. a. In The Coming Generational Storm what do they see as the coming problem?
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