You are on page 1of 3

# SOLUTIONS: ASSIGNMENTS 5-8 (Questions from coursepack)

## Chapter 7 Education (Assignment 5: coursepack Q4)

a.
If income is \$50,000 per year, the budget constraint is a straight line, as shown

below.

Other Goods
\$50,000

\$50,000

Education

b.
With \$8,000 worth of free public education, the family can consumer up to \$8,000
of education without reducing the consumption of other goods.
Other Goods
\$50,000

\$8,000

\$50,000

Education

worth

c.
The family maximized utility at point A before the introduction of free public
education, and
maximizes utility at point B after free public education is introduced, so the optimal consumption of
education fell.

\$50,000

Other Goods

\$50,000

\$8,000

## Chapter 12 Income Redistribution: Conceptual Issues (Assignment 6: coursepack Q2)

a. To maximize W, set marginal utilities equal; the constraint is Is + Ic = 100. So, 400 - 2Is = 400 - 6Ic,
substituting Ic = 100 - Is gives us 2Is = 6 (100 Is). Therefore, Is = 75, Ic = 25.
b. If only Charity matters, then give money to Charity until MUc = 0 (unless all the money in the economy is
exhausted first). So,400-6 Ic = 0; hence, Ic = 66.67. Giving any more money to Charity causes her marginal
utility to become negative, which is not optimal. Note that we dont care if the remaining money (\$33.33) is
given to Simon or not.
If only Simon matters, then, proceeding as above, MUs. 0 if Is = 100; hence, giving all the money to Simon is
optimal. (In fact, we would like to give him up to \$200.)
c. MUs = MUc for all levels of income. Hence, society is indifferent among all distributions of income.

## Chapter 12 Income Redistribution: Conceptual Issues (Assignment 7: coursepack Q6)

a. False. Society is indifferent between a util to each individual, not a dollar to each individual. Imagine that
UL=I and UJ=2I. Then each dollar given to Jonathan raises welfare more than the same dollar given to
Lynne.

Educat

b. True. The social welfare function assumes a cardinal interpretation of utility so that comparisons across
people are valid.
c. False. Departures from complete equality raise social welfare to the extent that they raise the welfare of the
person with the minimum level of utility. For example, with the utility functions U L=I and UJ=2I, the social
welfare function W=min[UL,UJ] would allocate twice as much income to Lynne than Jonathan.

## Chapter 13 Expenditure Programs for the Poor (Assignment 8: coursepack Q1)

a. With a wage rate of \$10 per hour, Elizabeth earns \$100. Because the deduction in California is \$225, none
of her earnings are counted against the \$645 welfare benefit. Thus, her total income is \$745 (=\$100+\$645).
b. The actual welfare benefits collected by a person equals B=G-t(Earnings-D), where B=actual benefits,
G=welfare grant, t=tax rate on earned income, and D=standard deduction. Thus, (Earnings-D) is the net
earnings that are taxed away in the form of reduced benefits. When benefits equal zero (B=0), the
expression becomes 0=G-t(Earnings-D), which collapses to: Earnings=G/t+D. This is known as the
breakeven formula. In the California context here, the expression becomes Earnings=\$645/0.5 + 225, or
Earnings=\$1,515. With a wage rate of \$10 per hour, this corresponds to 151.5 hours of work per month.
c.

64
5
22.5