1. Consider an income guarantee program with an income guarantee of $6,000 and a benefit reduction rate of 50%.  A person works up to 2000 hours per year at $8 per hour.

(a) Comment on the equity consideration of the scheme.

(b) Suppose that the income guarantee rises to $9,000 but with a 75% reduction rate. Show the change using the budget constraints

(c) Which of these two income guarantee programs is efficiency enhancing? Explain.

2. (a) Suppose your friend works in fundraising at the public radio station in your

town. One day she tells you excitedly that the station has just been selected to receive a large grant from the federal government. The marketing department at the station plans to feature details about the grant in an upcoming promotional email,     hoping that the news will drive a wave of new donations.  Discuss what would have  to be true for your friend’s idea for a promotional email featuring the new grant to be effective in increasing donations.

(b) Senator Ostrich suggests that “in order to end poverty, all we need to do is pay everyone making less than the poverty line the difference between what they are earning and the poverty line.” Ostrich argues that, based on the set of people currently below the poverty line, this would cost $98 billion per year. Why is Ostrich understating the costs of this program?

3. Assume that there are several chemical firms in an industry, each one producing different levels of an effluent, whose damage to the environment depends on the     location of the firm.  Compare the relative merits of using green taxes (which is a     Pigou tax on the output of a product that imposes an adverse effect on the environment), tradable permits and controls (regulations) as means of achieving the socially optimum levels of effluent from these firms.

4. (a) The city of Hamiltown decides to build a new stadium to attract a basketball team from the city of Jacksondale. One economic advisor suggests that the stadium  should be financed by a 2-year sales tax of 10%, while another advisor suggests that the stadium should be financed with a 20-year sales tax of 1%. Assume the interest   rate is zero. Which approach will yield a more efficient outcome? Why?