《财政学》(第七版)课后题答案

Instructor'sManualtoaccompanyPublicFinanceSeventhEditionSuggestedAnswerstoDiscussionQuestions

andSampleExamsbyHarveyS.RosenMarch2004?McGraw-Hill/lrwin2004SuggestedAnswerstoDiscussionQuestionsSomeofthequestionshavenosingle“correctanswer—reasonablepeoplecangooffindifferentdirections.Insuchcases,theanswersprovidedheresketchonlyafewpossibilities.Chapter1a. Putin'statementisconsistentwithanorganicconceptionofgovernmentIndividualsandtheirgoalsarelessimportantthanthestate.Rehnquistmakesaclearstatementofthemechanisticviewofthestate.a.Apersonwithanorganicconceptionofthestatemightreactfavorably,arguingthatevenifanindividualownerisworseoffbecausehemustshowonlyFrenchmovies,thenationisbetteroffbecauseitachievesmoreunity.Alibertarianwouldcertainlyrejectthispolicyandthereasoningbehindit--thereisno“nationalnterestindependentoftheinterestsofindividuals,andpeopleshouldhavetherighttoruntheirlivesinthewaythattheyprefer--includingseeingwhatevermoviestheywant.ASocialDemocratwouldtrytobalaneethesetwoaims,anditishardtopredicthowheorshewouldcomeout.Mechanisticviewofgovernmentsaysthatthegovernmentisacontrivaneecreatedbyindividualstobetterachievetheirindividualgoals.Withinthemechanistictradition,peoplecoulddisagreeontheobesitytax.Libertarianswouldsaythatpeoplecandecidewhatisbestforthemselves.Theydonotneedproddingfromthegovernment.Incontrast,socialdemocratsmightbelievethatpeoplearetooshortsightedtoknowwhatisgoodforthem,sothatgovernment-providedinducementsareappropriate.a.Ifthesizeofgovernmentismeasuredbydirectexpenditures,themandatedoesnotdirectlyincreaseit.Costsofcomplianee,however,maybehighandwouldappearasanincreaseina “regulatorybudget.”It'hardtosaywhetherthisrepresentsanincreaseordecreaseinthesizeofgovernment.OnepossibilityisthatGDPstayedthesame,andgovernmentpurchasesofgoodsandservicesfell.Anotheristhatgovernmentpurchasesofgoodsandservicesgrew,butataslowerratethantheGDP.Onemustalsoconsidercoincidentfederalcreditandregulatoryactivitiesandstateandlocalbudgets.Thefederalbudgetwoulddecreaseifgrants-in-aidwerereduced.However,ifstateandlocalgovernmentsoffsetthisbyincreasingtaxes,thesizeofthegovernmentsectorasawholewouldnotgodownasmuchasonewouldhaveguessed.

Theinflationerodestherealvalueofthedebtby0.032x 332billionor1©.6£billion.Thisfigureshouldbeincludedasrevenuetothegovernment.Thefederalgovernmentgrewby$450billion.However,becausethepricelevelwentupby16percent,intermsof2001dollarsthisamountedtoadecreaseof$224billion(=$1.86trillion-1.16x$1.41trillion).AsaproportionofGDP,federalspendingin1993was21.2percentandin2001itwas18.2percent.Hence,bybothmeasures,thesizeofgovernmentfell.Togetamorecompleteanswer,onewouldwantdataonthepopulation(tocomputerealspendingpercapita).Also,itwouldbeusefultoaddinexpendituresbystateandlocalgovernments,toseeifthetotalsizeofgovernmentfell.Also,althoughitwouldbehardertomeasure,onewouldwanttotrytogainsomesenseofhowtheregulatoryburdenontheeconomygrewduringthistimeperiod.Chapter2Therealitythatastronomersaretryingtounderstandisnotinflueneedbyany “pothatastronomersmightimplement.Moreover,theparameterswithwhichastronomersmustdealareconstantovertime,whiletheparametersineconomicscanchangeacrosstimeandspace.Achangeinthemarginaltaxratechangestheindividual 'snetwage.Thisgeneratesanincomeeffectandasubstitutioneffect.Aslongasleisureisanormalgood,theseeffectsworkinoppositedirections.Hence,onecannottellaprioriwhetherlaborsupplyincreasesordecreases.Onecouldasktaxpayerstodescribehowtheywouldchangetheirbehaviorundertheproposal,butitishardtoimaginethatthiswouldyieldusefulresults.Inasocialexperiment,acontrolgroupwouldconfrontthestatusquo,andanexperimentalgroupwouldfacethenewtaxregime.Thisisclearlyinfeasible.Econometricinvestigationoflaborsupplyseemsthebestapproach,particularlyifdataassociatedwithpastchangesintaxratescanbebroughttobearontheproblem.Generally,economicoutcomesareaffectedbyanumberofvariables.Economistscannotperformcontrolledrandomizeexperiments,whichmakesitdifficulttoassesshowanysinglevariableaffectsagivenoutcome.Similarly,brainimpairmentmaybeduetoanumberoffactors.Ecstasyusersclearlyarenotarandomsampleofthepopulation.Hence,onedoesnotknowwhetherbrainimpairmentisduetoEcstasyorsomevariablethatiscorrelatedwithEcstasyuse.Thetextpointsoutthepitfallsofsocialexperiments:theproblemofobtainingarandomsampleandtheproblemsofextendingresultsbeyondthescopeoftheexperiment.Participantsinthestudyhadfoundittotheiradvantagetobeapartoftheexperiment,whichmayhaveresultedinaself-selectedpopulationunrepresentativeofthewidergroupofhealthcareconsumers.Further,physicians'“standarcpracticesarelargelydeterminedbythecircumstancesofthepopulationasawhole,nottherelativelysmallexperimentalgroup.Thereappearstobeaweakrelationshipbetweendeficitsandinterestrates.Indeed,itmightappearthatwhenlargedeficitsleadtolowerinterestrates.However,onewouldneedmoredatatoinvestigatethisquestion.OnewouldwanttolookatdeficitsrelativetoGDP.Onewouldliketocontrolforotherfactorsthatcanaffectinterestrates,suchasmonetarypolicyandthelevelofeconomicactivity.Chapter3a.Inthisparticularinsuraneemarket,onewouldnotexpectasymmetricinformationtobemuchofaproblem-theprobabilityofafloodiscommonknowledge.Moralhazardcouldbeanissue-peoplearemorelikelytobuildnearabeachiftheyhavefloodinsuranee.Still,onewouldexpectthemarketforfloodinsurancetooperatefairlyefficiently.Thereissubstantialasymmetricinformationinthemarketsformedicalinsuranceandmalpracticeinsurance.Forefficientconsumption,thepricemustbeequaltothemarginalcost,andtheeffectofinsurancemaybetoreducetheperceivedpriceofmedicalcareconsumption.Thatwouldleadtoconsumptionabovetheefficientlevel.Becauseoftherolesofregulation,insurance,andtheshiftingofcostsfromtheuninsuredtotheinsured,thereislittlereasontoexpectthemarkettobeefficient.Inthestockmarketthereisgoodinformation,andthousandsofbuyersandsellers.Weexpect,ingeneral,efficientoutcomes.Fromanationalstandpoint,thereisagooddealofcompetitionandinformation.Theoutcomewilllikelybeefficient.However,somefirmsmightexercisesomemarketpower.Studentloanmarketsmaybeimperfectbecauseofasymmetricinformation--studentknowsbetterthanlenderwhetherhewillworkhardenoughtorepaytheloan.Carinsurancemarketsmaybeimperfectbecauseofasymmetricinformation.Driverswhoknowtheyareparticularlyaccidentpronewillbeparticularlylikelytowantcarinsurance(orpolicieswithgreatercoverage).Pointarepresentsanequalallocationofwater,butitisnotefficientbecausethereisnotangency.Point_bisanefficientallocation(butnottheonlyone).

AD: 1)2)AD: 1)2)Themarginairateoftransformationbetweenforeignanddomesticmovesdependsontherationoftheirpricesbeforetaxesandsubsidies.Becauseofthewedgecreatedbythetaxesandsubsidies,thetwopriceratiosaredifferent.Therefore,themarginalrateofsubstitutionandmarginairateoftransformationarenotequal,andtheallocationofresourcesisinefficient.a.Socialindiffereneecurvesarestraightlineswithslopeof-.Asfarassocietyisconcerned,the“util”toAugustusisequivalenttothe_ivia. “util”toSocialindiffereneecurvesarestraightlineswithslopeof—Thisreflectsthefactthatsocietyvaluesa “util”toAugustustwiceasmuchasa “utiluLUluLUlItishardtoseeanyredistributiveorefficiencygaintoaprogramoffreeconcerts.Ifyoubelievethatyoucan “improve”people'stastesbyexposingthemtoclassicalmusic,thertheremaybeameritgoodjustification.a.Itishardtoseeamarketfailurehere.TheCoastGuardcansetarescuefeeequaltothemarginalcostofarescue.Welfareeconomicsprovideslittlebasisforsuchasubsidy.Asymmetricinformationisprobablynotaprobleminamarketlikethis,so itishardtoseewhytheprivateinsurancemarketisnotallowedtofunction.Itishardtoimagineabasisinwelfareeconomicsforthisregulation.Thisisnotanefficientpolicy.Iftheproblemisthattoomuchwater is beingconsumed,thentheansweristoincreasethepriceofwater.Onthatbasis,peoplecandecidewhetherornottheywanttoiletsthatrequirelesswater.[needanswer]Thesetofpossibleallocationsisastraightline100unitslong.EveryallocationisParetoefficient,becausetheonlywaytomakeonepersonbetteroffistomakeanotherpersonworseoff.Itwouldseemthatmarketsareagoodsocialorderbythiscriterion.Everyoneactsselfishly(i.e.,maximizeshisownutility)buttheresultisaParetoefficientallocationofresources.Thisassumes,ofcourse,thatalltheconditionsfortheFirstFundamentalTheoremaremet.BecausetheMRSdoesnotequaltheMRT,theallocationisnotParetoefficient.TomoveMRSinthedirectionofequalingMRT,thereshouldbemorecrumpetsandlesstea.a. False.True.True.False.Chapter4a.Wildernessareaisanimpurepublicgood-atsomepoint,consumptionbecomesnonrival.Waterisrivalinconsumptionandexcludable.Hence,itisnotapublicgood.Medicalschooleducationisaprivategood.Televisionsignalsarenonrivalincompetition.AnInternetsiteisnonrivalinconsumption(althoughitisexcludable).

WeassumethatCheetah'utilitydoesnotenterthesocialwelfarefunction;henceherallocationoflaborsupplyacrossactivitiesdoesnotmatter.Thepublicgoodispatrol;theprivategoodisfruit.Recallthatefficiency requiresMRStarzan +MRSJANE=MRT.MrsTarzan二mrsjane=2.ButMRT=3.ThereforeMRStarzan+MRSJANEMRT.Toachieveanefficientallocation.Cheetahshouldpatrolmore.Apurepublicgoodisnonrivalinconsumption,thusitisnecessarytodeterminewhetherornotthisisthecasewiththehighway.Thatis,iftheadditionalcostofanotherperson“consuming”thehighwayiszero,thenitisapublicgood.So,aslongtheshighwayisnotcongested,thenitcanbeconsideredtobeapublicgood.However,addinganothermotoristtoanalreadycongestedroadwaycancausetrafficjamsthatcostmotoristsmoretimetotravelthehighway,whichwouldrepresentnon-zerocoststohavinganadditionalpersonusethehighway.Therefore,thecongestionoftheroadwaydetermineswhetherornotwecoulddesignateitasapublicgood.Todeterminewhetherornottheprivatizationofthehighwayisasensibleidea,itisnecessarytoconsidertheadvantagesanddisadvantagesofsuchanaction.First,ifthemarketstructureissuchthatprivatizingthehighwaywouldresultinamonopolistincontrolofthehighway,thenthiswouldbeinefficient.Also,itwouldbedifficultforthegovernmenttowriteacompletecontractformaintainingthehighway,whichwouldalsocauseinefficienciesthatwouldresultfromtheprivatizationoftheroad.However,ifthegovernmentownsthehighway,itmightnothavetheappropriateincentivestomaintainitproperly.Insuchacase,evenownershipbyaprivatemonopolistmightbeasensiblesolution.Thebenefitsofmaintainingtheincomesofthepooraccruetosocietyasawhole,sowelfareisapublicgood.Itishardtosaywhetherornotitshouldbepubliclyorprivatelyadministered.Privateadministrationmightbelesscostly.Ontheotherhand,privateadministratorsmighthaveanincentivetodeprivedeservingindividualsofbenefitsinordertocutcosts.Itwouldbedifficulttowriteacontracttopreventthiskindofbehavior,becauseonecannotspecifyinadvaneeeveryconceivablesetofcircumstancesunderwhichwelfareshouldbegranted.Alowcostisnotenough.Weareconcernedwhethertheprisonersaretreateddecently,whethersecurityisgood,andsoon.Theexperimentalresultssuggestthatthereissomefreeriding,butsomepeopledocontribute.That'swhathappenedinManchester.Also,theexperimentsuggestedthatwhenthegamewasrepeated,peopleweremorelikelytofreeride.Thisalsohappened--thesecondyear,participationwasless.Thereisnocompellingreasonformuseumstoberunbythegovernment.IntheUnitedStates,manygreatmuseumsarerunbyprivately(notforprofit),andtheyseemtodoquitewell.InFigure4.5,drawalinestartingatpointxthatrunstothesoutheastandisparalleltoAB.Aslongaseducationisanormalgood,morewillbeconsumed.However,iftheschoolingisfinancedbya(lump-sum)tax,thenthebudgetconstraintshiftsinbyanamountthatdependsonthehousehold'sshareofthetaxburden.Sumofthemarginalbenefitsequalsmarginalcostat67degrees.10.Chapter5Classicaleconomicsexplicitlyrequiresthatallcostsandbenefitsbetakenintoaccountwhenassessingthedesirabilityofagivensetofresources,soGore 'sstatementThenotionthatrescuingtheenvironmentshouldbe “thecentralorganizingprincipleforcivilization providesnopracticalbasisfordecidingwhattodoaboutautomobileemissions(oranyotherenvironmentalproblem),becauseitprovidesnoframeworkforevaluatingthetradeoffsthatinevitablymustbemade.

2.P.SeescheduleMSBP*.Grantaunitsubsidyof$bperparty.Totalsubsidy=abed.“Society”comesoutaheadbyghc,assumingthesubsidycanberaisedwithoutanyefficiencycosts.(Cassanova'friendsgaingchd;Closeschdbutgainsabcd,whichisasubsidycosttogovernment.)a. Ifyouknowwhowascooking,theexternalityiseasytoidentify,anddependingonhowmanystudentsareinvoIved,thecostsofnegotiationshouldbefairlysmall.Itseemsfeasibletoestablishpropertyrightstotheriverandmakepeoplepayforthefish.Therearetoomanyfarmersandtoomanycity-dwellersforaprivatenegotiation.ToomanypeopleareinvoIvedforprivatenegotiation.a. Thepriceofgasolinedoesnottakeintoaccounttheincreasedriskstoeveryonefrommoredependenceonforeignoil.Estimatethemarginaldamageassociatedwiththerisk.Thesupplyofvouchersisverticalat140million. Thedemandcurveisdownwardsloping.Foreverygallonofgasoline,youeitherhavetobuyavoucheroruseuponeofourown.Ineithercase,thisincreasestheopportunitycostby75cents.Thetaxesaretoolow.Byestablishingamarketforairpollutionrights,theBoardofTradehasappliedtheCoaseTheorem.Thepotentialefficiencyoftheoutcomemaybelaudable,butthedistributionalimpactmaybeunpalatabletosome.a.4.b.2.

Profitsgoupby17.[needanswer]PrivateMarginalBenefit=10-XPrivateMarginalCost=$5ExternalCost=$2Withoutgovernmentintervention,PMB=PMC;X=5unitsSocialefficiencyimpliesPMB=SocialMarginalCosts=$5+$2=$7;X=3units.Gaintosocietyistheareaofthetrianglewhosebaseisthedistaneebetweentheefficientandactualoutputlevels,andwhoseheightisthediffereneebetweenprivateandsocialmarginalcost.Hence,theefficiencygainis?(5-3)(7-5)=2.APigouviantaxaddstotheprivatemarginalcosttheamountoftheexternalcostatthesociallyoptimallevelofproduction.Hereasimpletaxof$2perunitwillleadtoefficientproduction.Thistaxwouldraise($2)(3units)=$6inrevenue.Intheabseneeofpersuasiveevideneeonpositiveexternalitiesforhighereducation,thereisnoreasonforthegovernmenttoprovidefreetuition.True,taxesonwagesmaydistorteducationdecisions(seeChapter16),butvirtuallyalltaxesdistortsomedecisionmaking,anditisunlikelythatitisoptimaltosubsidizetuitionat100percent.a.P=5.Chapter61.a.Chapter61.a.Below,thepreferencesfor1and2aredrawn.Sameprocedureisusedfor3,4andCwinsineverypairwisevote.Thus,thereisastablemajorityoutcome,despitethefactthatpersons1,2,and3havedouble-peakedpreferences.Thisdemonstratesthatalthoughmulti-peakedpreferencesmayleadtovotinginconsistencies,thisisnotnecessarilythecase.Thisepisodeisconsistentwiththelogrollingmodel.Thesenatorsfromtheaffectedstatesmakeadealtoadvantagetheirconstituentsattheexpenseofotherregions.a.Threepercentayear.Assumingthatthepublicsectorusesonlylaborasaninput,thepriceofthepublicgoodincreasesby3percentayear.Thesizeofgovernmentincreases.ForfurtherdiscussionofthisphenomenonseethepaperbyW.J.Baumol,“MacroeconomicsofUnbalaneedGrowth:TheAnatomyofUrbanCrises,AmericanEconomicReview,1967.Yes,itisconsistent,becausethetheorysaysthatwhenunanimityisrequired,nodecisionsarelikelytobemade.Amajoritysystemmightbemoresuitable,althoughitissubjecttocyclingandotherproblems.Ifthesefiguresaretrue,thenthepredictionsofthemedianvotertheoryarenotaccurat-thatis,majorityvotingwillnotreflectthepreferencesofthemedianvoter.Thereasonforthisisbecauseofthedifferentturnoutratesforindividualsindifferentincomecategories.Considerthissimpleexample:supposethatvotershavesingle-peakedpreferences,andtheyaretryingtodeterminehowmuchshouldbespentonnationaldefense.Theirpreferencesarelistedasfollows:Andrew:$500Allison:$600Anne:$650Andrew:$500Allison:$600Anne:$650Bob:$700Bill:$750Beth:$800Charlie:$850Cathy:$900Cheryl:$1,000Themedianvotertheorempredictsthatamajorityvotewillresultin$750beingspentondefense(whichisreflectiveofBill 'spreferences,sinceheisthemedianvoter).Howeveiftherearedifferentparticipationratesbydifferentgroups(inthiscase,thegroupsaredeterminedbythefirstletterintheperson thenth£n(amfer；encesofthemedianvoter(Bill)arenoIongerreflectedinthemajorityvote.SupposethatAndrewandAnnedon'tvotethe-amajorityvotewillresultin$800ofdefensespending.Whenthereisavoteoverthreeoptions,thereisthechaneethatapotentialmajorityvoteissplitbetweentworelativelypreferredoptions,andthethirdoptionwins.Thewinningoptionmayhavebeenvoteddownifithadbeenatwo-wayvotewitheitheroftheotheroptions.Further,ifpreferencesarenotsingle-peaked,cyclingandinconsistentpublicdecisionsmayemerge.

Wewouldexpectaccountingtrickstomaskthesizeofthedeficits,andifthatdidn'twork,wewouldexpectthedeficitrulestobeignored.Thisisapparentlywhatishappening.WhenGermanyexceededthedeficittarget,nomovesweretakentolevytherequiredfines.Sincerents,bydefinition,arethereturnsaboveanormalreturn,thenwhenthelicensesareputonthemarket,theirpricewillbethevalueoftherents.Hence,theowner,whoeverheorsheisonlymakinganormalreturn.Putanotherway,thelicenseisanassetthatearnsanormalrateofreturn.Ifthelicensesystemwereeliminated,efficiencywouldbeenhanced.Butitwould,ineffect,confiscatethevalueofthisasset.Itisnoteclearthatthisisfair.Onecouldalsoarguethatwhensomeonebuysthisasset,itiswiththeunderstandingthatthereissomeprobabilitythatitsvaluewillbereducedbyeliminationoftheprogram;hence,itisnotunfairtodoso.a.P=2,Q=80.P=6,Q=40.Rents=(6-2)x40=160.Maximumcontributionisthesizeoftherents,160.Deadweightlossis.5x40x4=80.Deadweightlosscouldgoashighasthesumoftheconventionaldeadweightlossandtherents:160+80=240.InFigure6.4,theVcurveshiftsup.Thisincreasestheactualnumberofinspectorshired.ItislikelythattheshiftingalsoincreasestheslopeofVateverylevelofbureaucraticoutput,whichwillleadtotheefficientoutputincreasingaswell.Medianvoterrule.Chapter7Utilitarianismsuggeststhatsocialwelfareisafunctionofindividuals 'utilitiesornotthericharevulgarisirrelevant,sothispartofthestatementisinconsistentwithutilitarianism.Ontheotherhand,Stein 'sassertionthatinequalityperseisunimportantinconsistentwithutilitarianism.a.TomaximizeW,setmarginalutilitiesequal;theconstraintiss+Ic=100.So,400-2Is=400-6Ic.substitutingIc=100-Isgivesus2s=6(100-Is).Therefore,Is=75,Ic=25.b.IfonlyCharitymatters,thengivemoneytoCharitytillMUc=0(uniessallthemoneyintheeconomyisexhaustedfirst).So,400-6Ic=0；hence,c=66.67

GivinganymoremoneytoCharitycauseshermarginalutilitytobecomenegative,whichisnotoptimal.Notethatwedon 'tcareiftheremainingmoney($33.33)isgiventoSimonornot.IfonlySimonmatters,then,proceedingasabove,MU.0ifIs=100;hence,givingallthemoneytoSimonisoptimal.(Infact,wewouldliketogivehimupto$200.)c.MUs=MUcforalllevelsofincome.Hence,societyisindifferentamongalldistributionsofincome.Themainconceptualproblemwiththepovertygapisthatitdoesn'dccountfortheincomeeffectonlaborforceparticipationrates.Thepovertygapiscalculatedassumingthatlaborincomewouldremainunchangedevenaftertheincomewastransferredtothepoorpopulation,buteconomictheorypredictsthatthiswillnotbeso.Infact,ifthepoorhouseholdweregivenenoughincometobringitoutofpoverty,wewouldbelievethatthehouseholdwouldworklessasaresultofreceivingthistransfer.Thiscomplicatestheanalysis,ofcourse,becauseoncethehouseholdworksless,thenitwillgeneratelesslaborincome,thusloweringitsoverallincome.ThismeansthatthepovertygapactuallyunderstatestheamountofmoneynecessarytoalleviatethepovertyintheUnitedStates.Adaycarecenterisanexampleofanin-kindcompensation.Thefigurebelowissimilartofigure8.2inthetext.TheoriginalbudgetlineisG1H1Iftheemployeereceived$5,000cash,thebudgetlinemovestoGH2.Anemployeewhousesthedaycarecentermaynotbe$5,000betteroff.TheemployeeconsumesatpointA,butwouldbebetteroffatpointB,whichrepresentsconsumptionafteracashtransferof$5,000.a.Thiswouldincreasetheincomesoftheprovidersofcomputerequipment,andtheindividualswhomaintaintheequipment.Inthelongrun,thismightalsoincreasetheincomesofthestudentswhousetheequipment.

b.Thiswouldincreasetheincomesofthemanufacturersofthevaccinesandthehealthcareprofessionalswhoadministerthevaccines.Totheextentthatitresultedinbetterhealthandmoreproductivityfortheindividualswhoreceivethevaccines,theirincomeswouldincrease.a.False.Societyisindifferentbetweenautiltoeachindividual,notbetweenadollartoeachindividual.True.False.Departuresfromcompleteequalityraisesocialwelfaretotheextentthattheyraisethewelfareofthepersonwiththeminimumlevelofutility.InFigure7.2,asyoumovenorthwestfrompointF,thesegmenthasaslope(inabsolutevalue)of1ratherthan2.TheblackmarketmakestheindividualbetteroffifherbestpointonconstraintAFDisatpointF.Whenbothhaveincomesof100,Us=100andUm=180.WhenSherryhas136andMarshahas64,Us=117andUm=173.6.Socialwelfaregoesupfrom280to290.6.ThisoccursbecauseMarsha'utilitydoesnotfallasmuchasSherry'iscreases.However,thetransferisnotPareto-efficientbecauseMarshaisworseoffafterthetransfer.Chapter8a. Earningsare$100.Benefitsarereducedby$5.80(=10x.58).Income=$577+$100-$5.80=$671.20.①EOCLI①EOCLIb.Add9tothevalueofHthatsolvestheequation577—10H(.58)=0,whichimpliesH=99.5,sothenumberofhoursis108.5.b.Seediagram.Seediagram.Onecouldgatherdataontheearningsofthoseintheprogram,aswellasearningsdatafromnon-participants.Regresstheearningsvariableondemographicvariablesandotherfactorsthatdetermineearnings(suchaseducationandexperienee),andavariablethatindicateswhethertheindividualparticipatedinthetrainingprogram.Factorsthataffectlocalemploymentconditions,suchasunemploymentlevels,mayhelpexplainearnings,buttheymayalsoexplainparticipationintheprogram.Theeconometricstrategyshouldbechosencarefullytoaccountforthis.IfthequantityofleisureconsumedbyXappearsasanargumentintheutilityfunctionofY,thenX'sconsumptionofleisurecreatesanexternality.Iftheexternalityisnegative(i.e.,YlikesXtowork),thenawagesubsidyofXmightinducehimtoworktheefficientnumberofhours.Alternatively,aworkfareprogrammightachievethesamegoalbysimplyforcingXtowork.However,totheextentthatthefeasiblequantityoflaborsupplyisdeterminedlessthroughmarketincentivesnow,workfarewouldbelessefficient.HeparticipatesintheprogramaslongasPF2cacef.DDBudgetconstrainthasanotch,asinFigure8.9.Highestindiffereneecurvetouchesbudgetconstraintontherightverticalaxis.a. Demandslopesdown;supplyisvertical.b. Demandslopesdown;supplyishorizontal.

Demandslopesdown,supplyslopesup.AccordingtoSinaiandWaldfogel,thereispartialcrowdingout,socasecismostrealistic.UseFigure8.8tocomputenetEITCat$8,000,$12,000,and$16,000,andaddtothepre-EITCearnings.Chapter9Withadverseselection,insuraneecontractswithmorecomprehensivecoveragearechosenbypeoplewithhigheraccidentprobabilities.Tomakeupforthefactthatabenefitismorelikelytobepaidtosuchindividuals,theinsurerchargesahigherpremiumperunitofinsuraneecoverage.Therearemanypossibleimplications.Onepossibilityisthatpeoplewouldsavelessf