<br>
Answer the following Questions:<br>
<br>
1. In California, a welfare recipient can earn $225 per month without having benefits reduced. Beyond $225, benefits are reduced by 50 cents for every dollar of earnings. Consider a single mother in this state who is capable of earning $10 per hour. If she does not work at all, she is eligible for monthly welfare benefits of $645<br>
<br>
a. Sketch her budget constraint with and without the program in effect. <br>
<br>
b. Suppose our single mother enrolls in this plan. What would happen to her hours worked and total income?<br>
<br>
c. If she works 10 hours, how much are her earnings, how much is her welfare benefit, and how much is her income?<br>
<br>
d. How many hours does she have to work until she receives no benefit at all?<br>
<br>
e. Suppose California now decides to lower the implicit marginal tax rate on earnings to 40 percent. How will the introduction of the lower rate affect this person�s hours of work and total income? Explain.<br>
<br>
<br>
2. You are the head of the revenue department in a state that needs to raise revenue. Since you work in a politically correct state, you are limited to levying per unit taxes of any amount on cigarettes, alcohol, and Hummers. You decide to levy a $1 tax per gallon of alcohol sold. The demand for alcohol is <br>
<br>
Q = 500,000 � 20,000P.<br>
<br>
The supply of alcohol is<br>
<br>
Q = 30,000P, <br>
<br>
where Q is in gallons and P is in dollars.<br>
<br>
a. What is the price of alcohol before the tax?<br>
<br>
b. What is the price of alcohol after the tax?<br>
<br>
c. Calculate the tax revenue.<br>
<br>
d. Calculate the excess burden (deadweight loss) of the tax.<br>
<br>
<br>
3. Suppose that the government proposes eliminating any tax on earnings from work which are less than $20,000 for Americans at least 62 years old. Seniors earning more than this threshold would still be subject to the normal income tax rates on higher earnings<br>
<br>
a. Sketch a budget constraint in the leisure-income diagram consistent with this proposal. <br>
<br>
b. If the proposal were adopted, what would happen to the labor supply for seniors? Explain.<br>
<br>
<br>
4. In an economy, the supply curve of labor S is given by<br>
<br>
S = -100 + 200wt<br>
<br>
where wt is the after-tax wage rate. Assume that the before-tax wage rate is fixed at 10. Thus wt = (1 � t)*10.<br>
<br>
a. Write a formula for tax revenues as a function of the tax rate, and sketch the function in a diagram with the tax rate on the horizontal axis and tax revenues on the vertical axis (<a href=”https://i.e” target=”_blank”>i.e</a>., a Laffer curve).Suppose that the government currently imposes a tax rate of 70 percent. What advice would you give it?<br>
<br>
b. At what tax rate are tax revenues maximized in this economy?