4. After the pandemic is over, the loss of government revenue due to the economic lockdown and the cost of the worker compensation scheme, made government debt soar and the treasury asks you for advice on how to reduce government debt. a) Currently, the citizens of Korona pay a flat tax on labour income of 20% and a proposal by the minister is to increase the tax rate to 30% if income exceeds the threshold of $20,000. Give your assessment of the likely effect of the proposal on labour supply, paying particular attention to the underlying forces at work. Briefly comment on how these forces may affect government revenue. [You can include a graph if it helps to illustrate your reasoning; word limit 250 words; 8 marks]. b) An alternative policy proposes to introduce a tax on inheritances to raise the same amount. Assess the effect on welfare of this inheritance tax allowing for different behavioural responses. [word limit 200 words; 6 marks]. c) Contrast the proposals in a) and b) regarding the potential for off-shore tax evasion. [word limit 200 words; 6 marks].2. (2 points) Rey buys only hamburgers and bottles of root beer out of a weekly income of 5100. He currently consumes 20 bottles of root beer per week, and his marginal utility of root beer is 6. The price of root beer is $2 per bottle. Currently, he also consumes 15 hamburgers per week, and his marginal utility of a hamburger is 8. Is Ray maximizing utility at his current consumption basket? If not, should he buy more hamburgers each week, or fewer? 3. (2 points) Helen's preferences over CDs (C) and sandwiches (S) are given by UIS, C) = SC+10(S+ C), withMUc=S+10 andMUs= (3+ 10. Ifthe price ofaCD is $9 and the price of a sandwich is $3, and Helen can spend a combined total of $30 each day on these goods, nd Helen's optimal consmrtption basket. 4. (8 points) Lou's preferences over pizza (x) and other goods 0;) are given by U(x, y) = xy, with associated marginal utilities MU: = y and m = x. a) Calculate his optimal basket as a function of Pi, Py and income. (2 points) b) When Py = 1, his income is $120, calculate his income and substitution effects of a decrease in the price offood l";r from $4 to $3. (2 points) c) When P, = 1, his incotne is $120, calculate the compensating variation of a decrease in the price of food P; from $4 to $3. (2 points) (1) WhenPy = 1, his income is $120, calculate the equivalent variation ofa decrease in the price of food P: from $4 to $3. (2 points) Please show work, thank you. 2. Suppose that the quantity theory of money holds. So, the equation of exchange holds for this economy and money demand (MD) is proportional to nominal income Further, assume that we are in a classical economy in which real output (Y) is fixed by supply- side factors at 10,000 units and the money supply (M,) is fixed at 8000 units. a) Suppose that individuals initially wish to hold a quantity of money balances equal to one-fifth of their nominal income i.e., k = 1/5. Use the money market equilibrium condition to determine the initial equilibrium price level for this economy. b) Now suppose that individuals in this economy increase their money demand and wish to hold money balances equal to one-fourth of their nominal income, i.e., k is now 1/4. With output fixed by supply-side factors at 10,000 units and money supply unchanged at 8000 units how does this increase in money demand affect the equilibrium price level? How would you explain this change in the equilibrium price level? c) Graphically illustrate your answers to parts (a) and (b) in an aggregate demand-aggregate supply graph. For the aggregate demand curve(s), explicitly indicate some of the (P,Y) combinations used to graph the curve(s) on your graph. Also indicate the initial and new equilibria.Setup: Imagine, you were hired as economic advisor to the treasury of the fictional country, Krona. The country faces an epidemic of a new viral disease, which is deadly for about 6% of the population. The airborne disease spreads rapidly across the citizens of Krona, because there is no vaccine available yet. As economic advisor your input is crucial to lead the policy response to the outbreak of the illness. 1. The Health Ministry provides some evidence that wearing simple facemasks reduces passing on the disease from an infected to a healthy individual by about 70 percent, but reduces chances for own infection only by 10 percent (when exposed to an infected individual not wearing a mask). a) The government of Krona wants you to explore whether private agents can create markets to price the corresponding externality. Discuss briefly how this might work in theory and in practice. [word limit 200 words; 8 marks]. b) Propose one alternative policy option to address the externality that leads to the optimal level of wearing of face covering. Explain briefly issues around the practical implementation [world limit 200 words; 6 marks]. c) Suppose that some preliminary research finds that wearing of face masks leads to an increase in infections of the individual wearing the face mask. Explain how this result may affect the policy proposed in b). [word limit 200 words; 6 marks].Setup: Imagine, you were hired as economic advisor to the treasury of the fictional country, Krona. The country faces an epidemic of a new viral disease, which is deadly for about 6% of the population. The airborne disease spreads rapidly across the citizens of Krona, because there is no vaccine available yet. As economic advisor your input is crucial to lead the policy response to the outbreak of the illness. 1. The Health Ministry provides some evidence that wearing simple facemasks reduces passing on the disease from an infected to a healthy individual by about 70 percent, but reduces chances for own infection only by 10 percent (when exposed to an infected individual not wearing a mask). a) The government of Krona wants you to explore whether private agents can create markets to price the corresponding externality. Discuss briefly how this might work in theory and in practice. [word limit 200 words; 8 marks]. b) Propose one alternative policy option to address the externality that leads to the optimal level of wearing of face covering. Explain briefly issues around the practical implementation [world limit 200 words; 6 marks]. c) Suppose that some preliminary research finds that wearing of face masks leads to an increase in infections of the individual wearing the face mask. Explain how this result may affect the policy proposed in b). [word limit 200 words; 6 marks].3. To slow down transmissions of the viral disea 'lockdown" hence ordering business to shut and the citizens to adhere to limiting physical distancing, but leaving the timing of the lockdown to be decided by the two regional governments of Krona. Assume that both regions have roughly the same population size of 10 million citizens. Region 1 entered lockdown at the beginning of month 3, region 2 entered lockdown at the beginning of month 2. See Next Page The following table shows the cumulative infections and fatalities due to the viral disease over time and the time of the lockdown in each region at the end of each month. Month 1 Month 2 Month 3 Month 4 cases fatalities cases fatalities cases fatalities cases fatalities Region 1 100 3 5000 300 9000 540 15000 900 Region 2 100 5 2200 130 4500 270 5500 330 a) The minister for the economy argues that after both regions entered lockdown, in month 3 the number of cases in region 2 more than doubled, whereas the growth rate is lower in region 1 arguing that the lockdown was not effective in preventing the spread of the disease. Do you agree? Can you provide a better estimate using your knowledge of empirical methods introduced in the module? [word limit 250 words; 8 marks]. b) What kind of data would you prefer to have to estimate the full impact of the lockdowns on infections and fatalities? Explain how this would help to improve your estimate from the previous question. [word limit 200 words; 4 marks]. c) In response to the lockdown the economy in region 1 contracted by $1.1bn, and $1.114bn in region 2. What can we learn from these figures about the statistical value of life? [word limit 100 words; 3 marks]. d) Suppose a vaccine against the disease was available at the beginning of month 1 (and assume it works immediately by protecting the citizens from the disease). 60% of population require the vaccine to stop the disease from spreading. The vaccine is available for $20. Should the government introduce the vaccine? State any assumptions you implicitly make underlying your advice and briefly discuss the limitation of your advice. [word limit 250 words; 5 marks]