Public Finance (The McGraw-Hill Series in Economics)
10th Edition
ISBN: 9780078021688
Author: Harvey S Rosen, Ted Gayer
Publisher: McGraw-Hill Education
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The Jeffersons have asked you what would be needed to fund the children’s future college costs. Assume each child will begin college at age 18 and graduate in four years. Assume current costs are $24,000 per year and are expected to increase by 5% per year and investments earn 7%.
A. Assuming no existing assets are dedicated to college, what is the annual savings amount required to fund the children’s education? The Jeffersons’ goal is to have an amount at the beginning of the freshman year for each child that is sufficient to fund a serial payment covering the $24,000 of current costs of college adjusted for inflation for each of the four years of college. Please include your calculator keystroke inputs [PV, I/YR, N, FV, and PMT (if needed)] for each step of this calculation. Also include whether any PMTs are in the end mode or the begin mode.
B. What would you say to the Jeffersons about their education funding situation? Write a script of a single paragraph as if you…
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.
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 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?
Draw the benefit schedule with labels.
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.
C)…
3. Suppose a high schools graduate earns $40,000 per year while a college graduate makes $80,000.
Assume these wages will not change over time, and there are no other benefits to going to college.
Explicit costs of going to college (tuition, books, supplies, etc.) are $30,000 per year. Ignore the psychic
costs. The college education lasts four years. The retirement age is 65.
a. Say an 18 year-old decides to obtain college education. What can her annual discount rate be?
b. Say a 40 year-old has a discount rate of 5%. Will this person go to college?
Chapter 7 Solutions
Public Finance (The McGraw-Hill Series in Economics)
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