True/False: Determine whether each statement is true, false, or uncertain and ex

Question

True/False: Determine whether each statement is true, false, or uncertain and explain why. Answers with no explanation will receive no points.

(a) If local house prices rise by $1 after local property taxes are reduced by $1, then the pre-tax-reduction equilibrium was inconsistent with the Tiebout (1956) model.

(b) In a world with adverse selection, at least the highest-risk types will buy actuarially fair insurance if it is offered.

(c) The US social security’s delayed retirement credit program (DRC) should unambiguously increase the labor supply of workers above the full retirement age.

(d) One solution to the crowd-out problem of free public education (i.e. public education leading some families to have less education overall) is the use of educational vouchers. With this system, educational spending would increase for all the families. Thus, vouchers unambiguously improve the efficiency with which education markets function in the United States.

Explanation / Answer

(A) True

According to Tiebout model, the consumers choose their residence optimally. In this case once the Property tax is reduced the demand for the local house will increase this will raise the price of the residence. How ever the utility of the consumers will be reduced as the tax reduction is ineffective on general utility of consumers.

(B) TRUE

Adverse selection occurs when there is assymetry of the information when company does not have access to information about charactersitics of customer where this affects the risk potential. Under these condition it is a favourable condition for the High tisk types to buy the acturially fair insurance. As the risk is less known to the company hence the premium would be low.

(C) Uncertain

When the reitrement benefit get delayed to the labour. The labour would continue to work in order to meet his/her needs. However it is to say it unambiguosly increase labour supply of workers above post retirement age is false.

Individual preference do matter while considering the labour supply. Many worker donot like to work post retirement.

Governments limit of age of work is one factor that restricts the labour supply.

(D) Uncertain

The Educational vouchers will definitely help in crowd out problem of the public education system in USA. It will provide financial assistance to people to access private education. However it is not just the only solution, By increasing the number of intakes, increasing the infrastructure Government can adress the crowd out problem.

The education vouchers will bring competition in the education market and will improve the efficiency. However in case of market failure the vouchers will not be so useful. Government has to take further steps like setting high quality standards, conitnous monitoring and evaluation, Participatary approaches in education to improve educational efficiency.

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