Chương Cost – Benefit analysis

3) A project yields an annual benefit of $25 a year, starting next year and continuing forever. What
is the present value of the benefits if the interest rate is 10 percent? [Hint: The infinite sum x + x 2
+ x3 . . . is equal to x/(1 x), where x is a number less than 1.] Generalize your answer to show that if
the perpetual annual benefit is B and the interest rate is r, then the present value is B/r.
4) Suppose that you are planning to take a year vacation to bike across the United States. Someone
is willing to sell you a new bicycle for $500. At the end of the year, you expect to resell the bicycle
for $350. The benefit to you of using the bicycle is the equivalent of $170.
a. What is the internal rate of return?
b. If the discount rate is 5 percent, should you buy the bicycle?
5. Bill rides the subway at a cost of 75 cents per trip, but would switch if the price were any higher.
His only alternative is a bus that takes five minutes longer, but costs only 50 cents. He makes 10
trips per year. The city is considering renovations of the subway system that would reduce the trip
by 10 minutes, but fares would rise by 40 cents per trip to cover the costs. The fare increase and
reduced travel time both take effect in one year and last forever. The interest rate is 25 percent.
a. As far as Bill is concerned, what are the present values of the project’s benefits and costs?
b. The city’s population consists of 55,000 middle-class people, all of whom are identical to Bill, and
5,000 poor people. Poor people are either unemployed or have jobs close to their homes, so they do not
use any form of public transportation. What are the total benefits and costs of the project for the city as a
whole? What is the net present value of the project?
c. Some members of the city council propose an alternative project that consists of an immediate tax of
$1.25 per middle-class person to provide “free” legal services for the poor in both of the following two
years. The legal services are valued by the poor at a total of $62,500 per year. (Assume this amount is
received at the end of each of the two years.) What is the present value of the project?
d. If the city must choose between the subway project and the legal services project, which should it
select?
e. What is the “distributional weight” of each dollar received by a poor person that would make the
present values of the two projects just equal? That is, how much must each dollar of income to a poor
person be weighted relative to that of a middle-class person? Interpret your answer.
6. Suppose that the government is debating whether to spend $100 billion today to address climate
change. It is estimated that $700 billion of damage will be averted, but these benefits will accrue 100
years from now. A critic of the proposal says that it would be far better to invest the $100 billion,
earning an average real return of 5 percent per year, and then use the proceeds in 100 years to
repair the damage from climate change. Is this critic correct?
9. According to Viscusi and Gayer [2005], regulations in the United States vary greatly in the cost
per each life they save. For example, the regulation to install passive restraints in vehicles has a cost
per life saved of $600,000, whereas the regulation to remove asbestos in workplaces has a cost per
life saved of $180 million. What does this information imply about whether the regulations pass a
cost-benefit test? How might resources be shifted between these regulations in order to reduce cost
or save more lives?
Chương Income Redistribution
2. Suppose there are only two people, Simon and Charity, who must split a fixed income of $100.
For Simon, the marginal utility of income is MUs = 400 - 2Is while for Charity, marginal utility is
MUc = 400 - 6Ic where Ic, Is are the amounts of income to Charity and Simon, respectively.
a. What is the optimal distribution of income if the social welfare function is additive?
b. What is the optimal distribution if society values only the utility of Charity? What if the reverse
is true? Comment on your answers.
c. Finally, comment on how your answers change if the marginal utility of income for both Simon
and Charity is constant: MUc = 400 , MUs 400
6. An economy consists of two individuals, Lynne and Jonathan, whose utility levels are given by U L
and UJ, respectively.
a. Suppose that the social welfare function is W = UL + UJ
True or false: Society is indifferent between giving a dollar to Lynne and a dollar to Jonathan.
b. Now suppose that, instead, the social welfare function is W = U L + 8UJ
True or false: Society values Jonathan’s happiness more than Lynne’s.
c. Now suppose that, instead, the social welfare function is W min[U L, UJ]
True or false: In this society, the optimal distribution of income is complete equality
8. Sherry’s utility is US and her income is YS. Marsha’s utility is UM and her income is YM. Suppose
it is the case that:
Define the Pareto efficient redistribution, and explain why the concept is relevant in this situation.
Suppose that initially Sherry and Marsha both have incomes of $100. Assuming that the social
welfare function is additive, what happens to social welfare if $36 is taken away from Marsha and
given to Sherry?
Chương Taxation and Income distribution
1. In 2009, it was proposed that the state of Nevada create an entertainment tax that “would require
the state’s 25 legal brothels to give the state some money on a per-transaction basis” [Friess, 2009].
Discuss the likely incidence of such a tax. Use an appropriate diagram as the basis for your
discussion.
2. Consider a society with only two people—one rich and one poor—who have the same utility
functions. These utility functions exhibit diminishing marginal utility. Suppose that taxes are set
such that the total amount of utility that each person loses is the same. Does it follow that the tax
will be progressive? Explain.
Cho hàm QD = 2000-200P, QS= 200P. CP áp mức thuế đơn vị $2 lên người bán. Tính sản lượng cân
bằng khi chưa có thuế, khi có thuế. Tính doanh thu thuế.
7. Suppose that the income tax in a certain nation is computed as a flat rate of 5 percent, but no tax
is levied above $50,000 in taxable income. Taxable income, in turn, is computed as the individual’s
income minus $10,000; that is, everyone gets a $10,000 deduction. What are the marginal and
average tax rates for each of the following three workers? (Evaluate the marginal tax rate at each
person’s current income level.)
a. A part-time worker with annual income of $9,000.
b. A retail salesperson with annual income of $45,000.
c. An advertising executive with annual income of $600,000.

Chương Taxation and Efficiency

1. Which of the following is likely to impose a large excess burden?
a. A tax on land.
b. A tax of 24 percent on the use of cellular phones. (This is the approximate sum of federal and
state tax rates in California, New York, and Florida.)
c. A subsidy for investment in “high-tech” companies.
d. A tax on soda bought in a cup or glass but not bought in a bottle or can. (Such a tax exists in
Chicago.)
e. A 10-cent tax on a deck of cards that contains no more than 54 cards. (Such a tax exists in
Alabama.)
f. A tax on blueberries. (Such a tax exists in Maine.)
2. Suppose that your neighbor is willing to pay you $100 to do some home repairs for her. You
would
be willing to do the job for $80, so you strike a deal. Now suppose that the government levies a tax
of $25 on all home repair transactions. You pack up your gear and leave your neighbor’s home,
because it is no longer worthwhile for you to do the job. As a result of your leaving the job, you do
not have to pay the $25 tax. Relate this scenario to the concept of excess burden.
9. In the United Kingdom, each household that owns a television pays a compulsory levy that is
equivalent to $233 per year. The total revenue collected, which is over $7 billion annually, goes to
the British Broadcasting Corporation. Do you think that such a tax is likely to have a substantial
excess burden relative to the revenues collected?