Question

1. Suppose a person lives for two periods (working life and retirement) earning $30,000 in income in his working life, during which he consumes or saves for period 2. What is saved earns interest of 5% per year.

a. Draw this person’s intertemporal budget constraint.

b. On the same graph, draw this person’s intertemporal budget constraint if the government taxes interest at 30%.

c. Suppose the government increases the tax rate on interest earned and this person saves more. What effect dominates, the income or substitution effect? Explain.

d. Suppose the government increases the tax rate on interest earned and this person does not change his amount saved. What other motivations could be influencing his saving decision?

e. Continue the situation in part (b) above. Now suppose the government offers a tax-deferred saving program for the first $5,500 of income saved that works like a traditional IRA. Sketch the new intertemporal budget constraint on a new graph. If this person has saved $2,000 in the past, do you think this program will increase his net saving? Why or why not?

2. Estimates indicate that increasing the contribution limits for IRAs would have little effect on the overall net rates of saving.   Why do you think this might be the case?

3. Consider a recent addition to tax-deferred saving vehicles– the MyRA program targeted at small savers. See, for example, http://www.taxpolicycenter.org/briefing-book/what-myra.

a. Explain the mechanics of a MyRA – where can deposits come from? What mechanisms are put in place to make it easier to save?

b. Sketch the intertemporal budget constraint for a MyRA assuming that the saver is in the 15% tax bracket and the current interest rate is 3%. Total income is $25,000.

c. Do you think that this program will encourage net new saving or shifting of assets? Why?

4. Comment on the following statement: “A traditional IRA is tax-deferred saving but a Roth IRA is tax-free saving!”

5. Comment on the following statement, keeping the options for tax-deferred saving in mind: “I am the model citizen. I earn a high salary, I pay the highest marginal income tax rate, and I save for my retirement in my 401(k) plan at work. In the meantime, the government is subsidizing housing, health insurance, and food purchases for low-income citizens. Where are the subsidies for me?” (Donald Trump did not say this.)

6. An Individual’s demand for doctor office visits per year is Q = 10 –(1/20)P where P is the price of an office visit. The marginal cost of producing an office visit is $120.

a. If individuals pay full price for obtaining medical services, how many office visits will they make per year?

b. Suppose there is health insurance that requires only a $20 copay per visit. If individuals must pay only a $20 copayment of each office visit, how many office visits will they make per year?

c. What is the deadweight loss to society associated with not charging individuals for the full cost of their health care?

7a.   What lessons does the Massachusetts health care reform provide for national health care reform?

b. Why is the experience an imperfect guide to reform at the national level?

c. What especially contentious political issues at the national level could be addressed by evidence from the Massachusetts experience?

Answer 1

1. a. In this issue, a man is devouring in two periods. To start with period demonstrates working period when he earned. Second time frame is retirement where he devours the cash he spared in period 1 or more premiums earned. Intertemporal spending condition demonstrates every single conceivable blend of utilizations in period 1 and period2 that are achievable Assume his first period utilization is C1 and second time span utilization is C2. At that point the condition of intertemporal spending condition is C2 (3000-C1)*1.1 C2-33000-1.1 Information from the above spending condition is demonstrated as follows 33000-1.1C1 33000 1900 7500 2000 16500 11000 500 1000 10000 15000 5000 30000 Above information are plotted in the graph. It is chart of the intertemporal spending plan. b. Now government has chosen to force 30% expense on intrigue. In this way adequately 70% of 10% ie. 7% premium is earned. Consequently new spending condition is- C2(30000-C1)*1.07 C2-32100-1.07C1 On the premise of above condition taking after information is produced

32,100-1.07C1 2100 1030 6750 1400 16050 10700 350 10000 15000 5000 In light of this information taking after outline has been drawn c. Presently it is accepted that administration expands impose on intrigue. As result shopper has spared more. It is because of substitution impact. Increment in duty has decreased sum accessible for utilization in period 2. Keeping in mind the end goal to substitute this diminishment, he has chosen to devour less in period 1 and substitute the additional reserve funds in period 2 cash to repay the lack. d. Assume government has expanded duty rate, yet customer has not expanded his investment funds. It will happen if his minor utility of period 1 is more than minimal utility of period 2. MU MU2 It will initiate him to spare more in period 1 expanded his or peniod 2 Mu1 MU2, I wil miia noruoriod 1 is e. Presently government offered a duty conceded funds program for initial 5000. So shopper will gain 10% in full for initial 5,000 earned. For adjust winning is 7%. Therefore spending condition is C2 5000-o)1.1+(30000-(C1-5000+oc)0.7 C2-23000-0.4oc-0.7C1 Here if 2000 is spared then a 5000-3000, C1-28,000. Substitute these qualities in the above condition to get C2-2,200. It is spared cash 2000+ premiums 200

On the premise of above connection spending chart is drawn beneath 2250 1180 6900 1550 16200 10850 500 10000 15000 5000 6000 7000 8000 9000 300 200 100 On the off chance that the individual has spared $2000 in the cake, then this impetus will actuate him to spare soil, gave Mu of 2 is more than MU of period 1