There are four types of people: 1. Type 1 (100): Can earn $5 per hour 2. Type 2 (400): Can earn $10 per hour 3. Type 3 (400): Can earn $25 per hour 4. Type 4 (100): Can earn $100 per hour Washington B.C. is a city with 1,000 people. People who work work 40 hours per week. People choose how many weeks they work and can work up to 50 weeks per year. Washington B.C. initially has no tax and transfer programs. Continue to assume no Washington income tax, and Washington has a $4M grant to spend. Zoe Wu tells the mayor that a means-tested program would allow the poor to get more money. She suggests that benefits should be redunced by $10 for each $100 in workers’ pre-tax income. 1. Suppose the guarantee rate is G. How much benefit would each group get at their original income (working 40 weeks) in terms of G? 2. With the $4M grant, how large can G be? How much benefit does each group get? What is the maximum income in the phase-out region? 3. Draw the benefit schedule with labels. 4. Suppose the government could identify workers’ type and sent them money equal to your answer in part (b), regardless of their labor supply choice. (a) What is the percentage change in workers’ wealth, the dollar value of their time plus unearned income? (b) How many weeks per year would each type work using the elasticity of η = −0.1? Compare your answer to 4(d). Explain why they are similar or different. 5. Using your answer from part (d) as a starting point, estimate the additional effect of benefit phase-out (the tax) for those who recieve benefits using the elasticity of ε u = 0.3. What is the total number of weeks worked by each type?
There are four types of people:
1. Type 1 (100): Can earn $5 per hour
2. Type 2 (400): Can earn $10 per hour
3. Type 3 (400): Can earn $25 per hour
4. Type 4 (100): Can earn $100 per hour
Washington B.C. is a city with 1,000 people. People who work work 40 hours per week. People choose how many weeks they work and can work up to 50 weeks per year. Washington B.C. initially has no tax and transfer programs.
Continue to assume no Washington income tax, and Washington has a $4M grant to spend. Zoe Wu tells the mayor that a means-tested program would allow the poor to get more money. She suggests that benefits should be redunced by $10 for each $100 in workers’ pre-tax income.
1. Suppose the guarantee rate is G. How much benefit would each group get at their original income (working 40 weeks) in terms of G?
2. With the $4M grant, how large can G be? How much benefit does each group get? What is the maximum income in the phase-out region?
3. Draw the benefit schedule with labels.
4. Suppose the government could identify workers’ type and sent them money equal to your answer in part (b), regardless of their labor supply choice.
(a) What is the percentage change in workers’ wealth, the dollar value of their time plus unearned income?
(b) How many weeks per year would each type work using the elasticity of η = −0.1? Compare your answer to 4(d). Explain why they are similar or different.
5. Using your answer from part (d) as a starting point, estimate the additional effect of benefit phase-out (the tax) for those who recieve benefits using the elasticity of ε u = 0.3. What is the total number of weeks worked by each type?
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