y/ she has 100 h ow to use between labor and R~J" ,", I! A C rco - r~-a a. If she works 10 hours, how much are

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1 1. (From Rosen, Chapter 8, revised a bit.) In California, a welfare recipient can earn $60 per week without having her benefits reduced. Beyond $60, benefits are reduced by 50 cents for every dollar earned. Consider Elizabeth, a resident of California, who can earn $1 0 per hour. If she does not work at all, she is eligible ff" 'Y for welfare benefits of $60. a. If she works 10 hours, how much are I v d l b. If she works 10 hours how much is her welfare benefit? Aen,C zem edr-,'nr,j i ( d (/JJ -- 6a) k. P - r~-a CA.~ R~J" c. If she works 10 hours, how much is her income?,.-. d. If Elizabeth works a certain number of hours, she does not receive any benefit at all. What is the number of hours? /3h4/r# I.J ZPN C~lrn,h~/ rdo I! A C rco /?<'/"(A<., [lf~-6.11u.~- e. In light of your answers in a-d, plot her budget constraint. Place income on the horizontal,", (ed axis and hours of leisure on the vertical. s6j id^ Label and number the axes. You may assume y/ she has 100 h ow to use between labor and leisure in a week. 0 f. Please sketch an indifference curve consistent with Elizabeth participating in the labor JJ 2 JW lwj

2 2. Suppose we examine the share of aggregate income received by income quintiles in the United States and Germany. Quintile Lowest Second Middle Fourth Highest United States 3.5 % 8.8 % 14.8 % 23.3 % 49.7 % G lb % 23.4 % 44.7 % 't a. In the space below draw the number and label the axes. Lorenz curve for the United States. Carefilly b. Show how the Gini coefficient is calculated A.p4* A jlre, A t 4 c. Is the Gini coefficient going to be higher or lower in Germany? L d -pr. )i& d. What does the number tell us about the degree of income equality in the United States and Germany? f l el,gi, fl 6 ~'rn"" '/ / L-cr P? --',., 0.1 e. What has - happened to income inequality in the United States in your lifetime? d % ~ ul,,, 2' on f=y ',a/ f. The data in the table was for households. Would the Gini coefficient for individuals be higher or lower in the United States? Explain why.

3 3. Let us suppose that an econometrician finds that the annual demand for physician office visits by an elderly person is:,d (fl*'<' \/ Q, = P, Q, = Quantity of visits and P, = Price of visits a. If a visit to a physician costs $120, how many would this person purchase? Q,,0-,*5(Od) =to -6. = b. Let us suppose that the person is covered by Medicare. Medicare currently has a deductible of $124 for physician services. Please explain what this means. TAr flej,cr,~ re<,/, P,C A'., /L fi~y +L- A/J/ f117 0.F, v 10 a yepc c. Let us suppose that we will assume that I will pay the person's deductible so it no longer enters into the picture. Under Medicare, what share of the visit does our elderly person pay?!lo P,~, M ed,r,* Fkr MI,deJvr&6k / ~ Q C. ~ ~. P. - ~ pny( 202 d. How many physician visits would our person now must pay the share you gave in part c. and that ~,rlo-o1- (3~) I - e. We have discussed several reasons for the government to intervene in the economy, i.e., the six market failure and two other reasons. What is the primary reason the government intervenes in the market for physician visits? ),-UP f. What is adverse selection? Please discuss bow it can be related to the government paying for insurance for health care. a bud+ 4 4~,n h+?"'" 5 I?)<.-, LcuI~~) bm$ly 6r<X9mrnrl cinj Aalll-r. T/ldrr L-r, 44 4flCnlPI 7'4P /n J h /,el 'UJ' h u n ~ on,+ ~ v/*--/<,a (u~un/ C 7,, j f. ' /C:PP 4 J 4) 0,',y, 4 / I i?nrx fi/./~~, MP It, quj!-, ~L.%.P, /" 1x1 ~/L/JJ~ 6,/Afl ~4Am J-&///, /I i, /A o/ /PC&(/ prove d.9 Axc/. /I/; / /I)-

4 $9 4. a. The United States currently funds the old age portion of social security on a pay-as-you-go system. PIease explain how this works? el of social security benefits determined? d / t / i P h income people or lower income people? Explain why. 4 d. In general, who gets a better return on their social security taxes paid in; mamed couples or single people? Explain why. - f. Suppose Henry is eligible for social security benefits of $1,000 per month. Please discuss the impact on an increase in his income fiom non-employment sources on h~s income. w

5 5. Let us assume that we can represent the year by the letter i and the discount rate b the letter r. a. What is the formula for the Present Value of Benefits from a project under Cost Benefit Analysis? yr~' /h )'tor/ b. What is the formula for the Present Value of Cost? from a project under Cost Benefit Analysis? M- ' &) v r A' c. Sometimes the benefits in a Cost Benefit Analysis don't have a market value. Please give an example of this and discuss how we might come up with a dollar value for the benefit. - P Adearn - + /z,&.- I A - Lye (d//'4 P f, 4.b /Pa k,v/d /((Iv@ earflfj b/;* kc C ~ A r~/dy /?PJ//P S J A h&a,m+ y /??,.i, i..rw, d. What exactly does the (socla ) d~scount rate tell us? 7XP 4vho~nC 4Aa.C L Q d~~,m+ 4 Abw 6qM+ CIA L v4lf /U,J~/J 4%- I, /3 e. The formula requires that we come up with a value for the discount rate. Rosen discusses several possible measures. Please explain one such alternative. -/LA.j AJ.iz-%, /,,ah ie J -,f,jls 90, 1.k Se+=s, P I L - i-lne /dc - 71 e f. In general, higher (social) discount rates reduce the probability a project would be built. Why is this the case? fl PC~V,-P ltn?a J, (O-F l47lpp G ~ ' 4 6 JL],~~T~JJ/P-*--*J 1

6 2, Numbers 6-13 are worth five points each. Answer all of them. 6. How is the poverty level defined in the United States? T$ 1s 3~ am$& &/ uolefmh dret A,- & 7. a. Approximately what percentage of Americans arepo the official definition? P60Y+ 12% b. In class, we cited several flaws with the current poverty level. Please give one and briefly explain it. - in-l~rnd n,c Ldwn44 - n~ edjv 1b~7nt / (u /j A hu,? -,~"J.-P I AY P < pfi/xpd l\"~ (r?b~,~ 8. In class we discussed several reasons for the increase in health care costs in the United _ States. Please cite and briefly explain two. 7 A / I /)l<ysr/ -,- sdyis (I 11 fvv/ahan L/J ' d k-51~~ -,o r </7/m,4,-5. L, 6~4shr,--r~ 4 P, (*ryr - Jfl<"*<~ PdI C - A?--, /I< ("3. - V L 4, pu/, - /'?-,?/I. $p6-2 3', r dl /A hi-%<' h~~il*. 1 h - 6, /J.,,L kn a. What is the difference in fukiing sources between Medicare and Medicaid? A. -N,[ LY. cjfi.4 b. Which population group does Medicare serve and which does Medicaid serve?

7 10. Cite and briefly explain two differences between TANF and the program it replaced. k it y~lpl.~,~ bv a&) hpnc ThrvP- n/-,h 5-4 Use the following diagram for numbers Clothing 11. a. Suppose that Charley has $200 in income. Draw his budget line. Label it AB. b. Draw an indifference curve showing Charley spending $100 on eacb. Label it 1). c. Let us give Charley $50 in Food Stamps. Draw his new budget line and label it CD. d. Draw anew indifference curve that is consistent with the first one and label it Was there an income effect in number 1 l? If so, show it Was there a substitution effect in number 1 l? If so, show it.