QUESTION 11

1. Consider the following version of the earned income tax credit (EITC).

All persons who earn less than $20,000 are given a wage subsidy of $0.50 for each dollar worked.The maximum benefit is therefore $10,000.

All persons who earn between $20,000 and $30,000 are paid the maximum benefit of $10,000.This is the income disregard region.

The phaseout occurs in the income range from $30,000 to $50,000.In this range the maximum benefit $10,000 is cut by $0.50 for each dollar earned.For example, a person who earns $30,001 will get paid $10,000 -$0.50 = $9,999.50.At an income of $50,000 the program has been totally phased out.

Now focus on a person initially working and earning $25,000 before the plan is introduced.

Consider the net effect of this program (i.e. we are talking in this question about BOTH the income and substitution effects) for a person earning this amount. The program will:

a.

have no effect on time spent working

b.

may cause time spent working to rise, fall, or remain the same

c.

cause time spent working to rise

d.

cause time spent working to fall

QUESTION 12

1. Consider the graph which is attached to the four answers.It shows the preferences and budget constraint of Sheila, who consumes fine

meals and Ranger games.

Suppose that this person moves from M to R.It follows that:

a.

her utility will rise but her total expenditure on goods will be unchanged

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

b.

her utility and her total expenditure on goods will be unchanged

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

c.

her utility will be unchanged but her total expenditure on goods will rise

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

d.

her utility and total expenditure on goods will both rise

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

QUESTION 13

1. Consider the graph which is attached to the four answers.It shows the preferences and budget constraint of Sheila, who consumes fine

meals and Ranger games.

Suppose that this person moves from R to J.It follows that:

a.

her utility will rise but her total expenditure on goods will be unchanged

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

b.

her utility and her total expenditure on goods will be unchanged

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

c.

her utility will be unchanged but her total expenditure on goods will rise

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

d.

her utility and total expenditure on goods will both rise

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

QUESTION 14

1. Consider the graph which is attached to the four answers.It shows the preferences and budget constraint of Sheila, who consumes fine meals and Ranger games.Recall that the 'consumer optimum' is the point that maximizes utility subject to the budget constraint.

Which of the following statements is true?

a.

V cannot be the consumer optimum ;R may be the consumer optimum

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

b.

R cannot be the consumer optimum;V may be the consumer optimum

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

c.

either R or J is the consumer optimum ; but both cannot be the consumer optimum

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

d.

both R and J are the consumer optimum

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

QUESTION 15

1. Consider the following hypothetical poverty program.Any person who earns less than $15,000 is given a subsidy of $0.50 for each dollar worked.The maximum benefit is equal to $7500 and it is reached if a person earns exactly $15,000.

The phaseout begins immediately afterwards.For each dollar earned beyond $15,000, the benefit is cut by $0.50.The net benefit falls to zero when a person earns $30,000.

The program is shown in the graph that is attached to each answer. The original budget line is AB and it is presumed that there is no unearned income.The plan budget line isAGVB.The slope of AG is equal to 1.5w, where w denotes the wage.

Point G corresponds to the situation where the person is earning exactly $15,000 and is

getting the maximum benefit of $7500.It follows that the vertical distance from the budget line AB to G is equal to $7500.

Point V corresponds to the situation where the person is earning exactly $30,000.At that point the original and plan budget lines coincide because the net benefit is equal to zero.

The line GV is the phase out range between $15,000 and $30,000.In this range the net benefit is equal to 0.5w.

Consider a person not initially working.He is now offered the plan. Note that U₁and U₂are two hypothetical indifference curves that show the preferences of this person. Which of the following statements is true?

a.

he will unambiguously remain not working regardless of whether his preferences are shown by U₁

or U₂

Spring 2021 Economics 3212 first exam graph on poverty program with indifference curves.docx

b.

he will start working if his preferences are shown by U₂; he will remain not working if his

preferences are shown by U₁

Spring 2021 Economics 3212 first exam graph on poverty program with indifference curves.docx

c.

he will unambiguously start working regardless of whether his preferences are shown by U₁or U₂

Spring 2021 Economics 3212 first exam graph on poverty program with indifference curves.docx

d.

he will start working if his preferences are shown by U₁; he will remain not working if his

preferences are shown by U₂

Spring 2021 Economics 3212 first exam graph on poverty program with indifference curves.docx

QUESTION 16

1. Consider the following hypothetical poverty program.Any person who earns less than $15,000 is given a subsidy of $0.50 for each

dollar worked.The maximum benefit is equal to $7500 and it is reached if a person earns exactly $15,000.

The phaseout begins immediately afterwards.For each dollar earned beyond $15,000, the benefit is cut by $0.50.The net benefit falls to zero when a person earns $30,000.

The program is shown in the graph that is attached to each answer. The original budget line is AB and it is presumed that there is no unearned income.The plan budget line isAGVB.The slope of AG is equal to 1.5w, where w denotes the wage.

Point G corresponds to the situation where the person is earning exactly $15,000 and is

getting the maximum benefit of $7500.It follows that the vertical distance from the budget line AB to G is equal to $7500.

Point V corresponds to the situation where the person is earning exactly $30,000.At that point the original and plan budget lines coincide because the net benefit is equal to zero.

The line GV is the phase out range between $15,000 and $30,000.In this range the net benefit is equal to 0.5w.

Consider a person who is initially earning $20,000 before the plan is introduced.In this question the focus is on thenetimpact of the substitution and/or income effects.When the plan is introduced, his:

a.

time spent working may rise, fall, or remain the same

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

b.

time spent working will unambiguously rise

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

c.

time spent working will unambiguously fall

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

d.

time spent working will be unchanged

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

QUESTION 17

1. Consider the following version of the earned income tax credit (EITC).

All persons who earn less than $20,000 are given a wage subsidy of $0.50 for each dollar worked.The maximum benefit is therefore $10,000.

All persons who earn between $20,000 and $30,000 are paid the maximum benefit of $10,000.This is the income disregard region.

The phaseout occurs in the income range from $30,000 to $50,000.In this range the maximum benefit $10,000 is cut by $0.50 for each dollar earned.For example, a person who earns $30,001 will get paid $10,000 -$0.50 = $9,999.50.At an income of $50,000 the program has been totally phased out.

Now focus on a person initially working and earning $15,000 before the plan is introduced.

Consider the impact of the substitution effect (note that in this question we are not talking about the income effect!).Which of the following is true?

a.

the substitution effect will raise time working

b.

the substitution effect will lower time spent working

c.

there is no substitution effect in this income range

d.

the substitution effect may raise or lower time spent working

QUESTION 18

1. Jane initially is paid $17/hour for all hours worked.She chooses to work exactly 30 hours.Now her boss offers her a new pay scheme.

She will continue to be paid $17/hour for the first 30 hours. She will be paid $20/hour for each additional hour.The new system where

overtime pay is provided:

a.

will cause her to work less

b.

will have no effect on time spent working

c.

will cause her to work more

d.

may cause time spent working to rise, fall, or remain the same

QUESTION 19

1. John is currently eating both shrimp and swordfish. The price of shrimp is $10/lb and the price of swordfish is $20/lb.Let a 'util' be a

unit of utility.Assume that the marginal utility of swordfish is 30 utils.If the marginal utility of shrimp is 30 utils:

a.

John would increase his utility by eating more swordfish and less shrimp

b.

John would maximize his utility if he ate either only swordfish or ate only shrimp

c.

John would increase his utility by eating more shrimp and less swordfish

d.

John is maximizing his utility

QUESTION 20

1. Consider the following poverty program.Under this plan, each person who earns less than $30,000 is given a fixed payment of $10,000.

All persons who earn more than $30,000 receive nothing.This plan differs from the ones discussed in class in that there is no phaseout

range; instead, the benefit simply disappears at an income of $30,000.

Now consider a person initially earning $20,000 before the plan is introduced.Which of the following is true after the plan is

introduced?

a.

the substitution effect will reduce time spent working ; there is no income effect

b.

both the substitution effect and the income effect will reduce time spent working

c.

the income effect will reduce time spent working ; there is no substitution effect

d.

there is no substitution effect and there is no income effect

QUESTION 21

1. Consider the model presented in class where a person buys movies and Ranger games.Suppose that the price of Ranger games falls.

Thesubstitutioneffect (note that I am not talking about the income effect here) causes:

a.

the number of Ranger games purchased to fall and the number of movies purchased to rise

b.

the number of Ranger games and movies purchased to both rise

c.

the number of Ranger games purchased to rise and the number of movies purchased to fall

d.

the number of Ranger games purchased to fall and the number of movies purchased to fall