1.

How do the solutions by the poor and the rich illustrate the trade - off between equity and efficiency?

_{(Select each correct answer.)}

oThe optimal tax rate from the perspective of the rich yields higher efficiency

oThe optimal tax rate from the perspective of the rich yields higher equity

oThe optimal tax rate from the perspective of the poor yields higher efficiency

oThe optimal tax rate from the perspective of the poor yields higher equity

oEfficiency is lost due to the leaky bucket

oEfficiency is lost due to diminishing marginal utility

oThis redistribution is perfectly efficient

2.

Suppose poor households have preferences over consumption and leisure (T) given by u (C, T) = 1n (C) + 1n (T), and they can work at hourly wage w_p = 5. Assume consumption costs one dollar, and they have 24 hours in a day to allocate to either leisure or working.

Solve for the household's optimal bundle of consumption and leisure.

C =

T=

How much utility do they get?

u=

3.

1 point possible (graded)

Using what you found above, what is the optimal tax rate T_rich that maximizes the income of a rich individual?

T_rich =

4.

1 point possible (graded)

How do the solutions by the poor and the rich illustrate the trade-off between equity and efficiency?

_{(Select each correct answer.)}

oThe optimal tax rate from the perspective of the rich yields higher efficiency

oThe optimal tax rate from the perspective of the rich yields higher equity

oThe optimal tax rate from the perspective of the poor yields higher efficiency

oThe optimal tax rate from the perspective of the poor yields higher equity

oEfficiency is lost due to the leaky bucket

oEfficiency is lost due to diminishing marginal utility

oThis redistribution is perfectly efficient

5.

Suppose poor households have preference over consumption (C) and leisure (T) given by u (C, T) = 1n (C) + 1n (T), and they can work at hourly wage w_p =5. Assume consumption costs one dollar, and they have 24 hours in a day to allocate to either leisure or working.

Solve for the household's optimal bundle of consumption and leisure.

C =

T =

How much utility do they get?

u =

6.

To help the poor, the government offers an income transfer of $20, but because picking up the check takes time, participants can only work up to 5 hours per day if they sign up for the program. (Continue to assume any time not spent working is leisure.)

Find their optimal bundle when the program is in effect.

C =

T =

How much utility do they get?

u =

7.

If the poor have a choice to sign up for the program, will they?

oThe poor will choose to enroll

oThe poor will not choose to enroll

oThe poor are indifferent about enrolling

What if the program didn't limit their labor supply, and was a pure income transfer of $20?

oThe poor would choose to enroll

oThe poor would not choose to enroll

oThe poor would be indifferent about enrolling

It's possible that the answers above depended on the functional form of the utility function. Suppose that the utility function of the poor was u (C, T) = C, and that the program limits labor supply.

In this case, if the poor had a choice to sign up for the program, would they?

oThe poor would choose to enroll

oThe poor would not choose to enroll

oThe poor would be indifferent about enrolling