Economics assignments

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Econ 421

Subsidies: Problem Set

Spring 2015


  1. Suppose low-income people are given vouchers worth 200 dollars per month that they can use only to pay rent on housing.
    1. Use indifference curve analysis to show how the person could be made as well off with a 200 dollar case transfer.
    2. Would the consumer’s choice of the amount of housing to rent be any different if he receives cash instead of housing vouchers?
    3. Use indifference curve analysis to show under what circumstance the 200 dollar per month housing voucher would cause the recipient to increase the amount of housing rented compared to what would be rented if the recipient received 200 dollars in cash each month in lieu of the housing vouchers.
    4. Would this recipient be as well off under the housing voucher scheme as he would be with a cash transfer of equal value?


  1. A needy family consisting of a mother and three children currently receives cash benefits that average 12 dollars per day. The mother of this family is allowed to earn an average of 4 dollars per day before her benefits begin to decline. After that, for each dollar earned cash benefits decline by 67 cents.
    1. Plot the recipients money income-leisure tradeoff (budget) line under these circumstances.
    2. Assume that she can find work at 4 dollars per hour. How many hours will she have to work per day before her benefits are eliminated?
    3. Assuming that her indifference curves for work and leisure are convex, show her equilibrium allocation of time between work and leisure per day. Show that it is possible to have more than one most preferred outcome.


  1. Go to to obtain the tables for the earned income tax credit (EITC) for the current year.
    1. Explain how the program increases earnings for low-income workers and affects their incentives.
    2. Draw a curve for single workers filing jointly, and single parents show how the EITC will vary with earnings.
    3. Why does the EITC encourage low-income workers to work? Use indifference curve analysis to show the income and substitution effects results from the EITC up to the point at which the maximum credit level of earnings is reached.


  1. Explain why the negative income tax plan is likely to be more expensive than the currnet system of assistance to the poor. What are the advantages of wage rate subsidies?