(24 pts.)

Please type your answers.

Each of the following cartoons (either the message or the cartoon itself- hint) describes a public choice theory (or two).  Explain what theory (that we have discussed in class) you think the cartoon relates to and why.  You will be graded on how well you back up your argument as to which theory the cartoon represents.  Work on your own - see what you can come up!  (3 pts. each)

You can just type up the answers without printing out the cartoons - just make sure your answers are numbered correctly (numbers are in red above each cartoon).

#1

 #2

 #3

 #4

#5

 #6

 #7

 #8

1.  Explain:

a.  What is the labor/leisure trade-off? (3 pts.)

b.  If income taxes are increased, what would the substitution effect say would happen with respect to the labor/leisure trade-off?  Explain. (4 pts.)

c.  If income taxes are increased, what would the income effect say would happen with respect to more or less work?  Explain. (4 pts.)

d.  Explain why the head tax creates an income effect but not a substitution effect. (6 pts.)

2.  Given Landsburg's "tentative criteria" for the "perfect tax," would he prefer a flat income tax or the progressive system we have today?  Explain your answer.  (15 pts.)  Note the point total, I expect a good analysis of his criteria - organize your answer accordingly.

Assume the following about the flat tax system:

• The flat rate would be 20%.

• The tax applies only to wages, salaries, and pension income, and leaves income from savings, such as interest, dividends, and capital gains, untaxed. 

• The mortgage interest and charitable donations would be eliminated.

• There would still be a standard deduction of $12,000 per person.  Therefore, this amount can be taken off of the income amount before the tax is determined.  A family of four could therefore reduce their income by $48,000 before determining the flat tax.  If a family made this amount or less, they would pay no income tax.

1.  Use the information in the chart below to answer a - e:

Assume each project cost $1500.  Each person pays a per capita share of the project of $500.  Also assume each project does not depend upon the other.

a.  Using standard welfare analysis (costs vs. benefits) would it be "efficient" to do both projects?  Explain.  (3 pts.)

b.  Explain why majority voting would defeat both projects - be specific in your answer (with numbers, etc.).  (3 pts.)

c.  If vote trading between voters took place - explain what would happen.  Make sure you explain who is vote trading and why and if the projects would be approved or not.  (4 pts.)

d.  Is your result in "c" efficient?  Explain?  (2 pts.)

e.  Now suppose that your result in "c" took place, but George's MWTP for each project was $400 (everything else held constant).  Is your result still efficient?  Explain.  (3 pts.)

2.  Using the median voter model, explain why Randy the Radical would (probably) never win if he ran for the Presidency of the United States. (5 pts.)

3.  Explain one difference between "profit seeking" through markets and "rent seeking" through the political process. (4 pts.)

4.  Graphically and in words, explain why the cost of rent seeking is more than simply the "welfare" loss of trade due to a government-granted monopoly position (as explained by mainstream economic analysis and Tullock).  Clearly show on your graph where the "welfare or deadweight" loss is -- but also where the other loss is and explain in words where it comes from. (8 pts.)

Extra Credit:

Find an interesting figure (number) that relates to rent seeking - provide the number and the source.  For example, someone in the class wanted to know if there are limits on the amount that someone can contribute to a politician's campaign - look that up.  This is just one example, be creative and think of something that interests you but is related to rent seeking or lobbying.

1.  Look at the Forbes' 2009 Tax Misery and Reform Index (found at this link) - most recent index they have done.  Choose at least six of the countries listed (spread out among the list).  Then choose two economic "variables" that you think might have a correlation (positive or negative) with the level of taxation in a country.  Write down your theory regarding your two variables -- what kind of correlation do you expect to find and why?  Then find some empirical data that might either back up and shoot down your theory -- that is, see if there seems to be a correlation or not, etc.  You don't have to do any fancy statistics (don't have to run a regression, etc.) but just see if there seems to be a correlation or not.  Show me your data and conclusions some how -- through plotted graphs or charts, whatever you think works best.  (20 pts.)

2.  Bob could work overtime and earn $30 per hour.  But he needs to fix the broken boards on his deck before his annual spring party the coming weekend.  He could hire Bill to fix his boards for $25 per hour.  Bob has no special like or dislike for fixing boards.  He is only thinking of money and getting his boards fixed.

a. At what level of marginal income tax (%) would Bob NOT hire Bill and fix the boards himself.  Explain. (3 pts.)

b. Explain why the tax (at the level you talked about in "a") might be "unproductive." (4 pts.)

3.  Explain why the head tax creates an income effect but not a substitution effect.  In your answer make sure you explain/define what the substitution effect and income effects are. (6 pts.)

4.  Explain why a national sales tax of 20% might not mean that prices will increase by 20% (to consumers).  Make sure you explain the theory.  (5 pts.)