Public Economics: Advanced Topics

Tutorial 8 SOLUTIONS
Prepared by S. Grassi

Question 1
Figure 2 below is produced using USA data. Look at the Gini coefficient. Has income
inequality decreased or increased from 1970 onwards? Explain. Provide one factor that
explains the pattern in the figure.
FIGURE 2

Question 2
True or False? Explain.
“In the US, top income shares increased dramatically from 1929 to 1950
and dropped dramatically since 1980”

Question3
Americans correctly believe that the United States is a very mobile society relative to
Europe because actual evidence on intergenerational mobility shows that the USA are a
more mobile country than Europe. TRUE/FALSE? Explain in the light of the paper on
beliefs in a just world.

Question 4
Figure 1 shows that it is easier for a child born from poor parents to become richer than
his parents in the USA rather than in Denmark. True/False? To justify your answer, refer
to Figure 1 and describe the measure of intergenerational income mobility used by Chetty
et al (2014)
 Figure 1

Question 5
You graduate from UC Davis and take a job as a research assistant with a wage of $25 per
hour. Your job is extremely flexible: you can choose any number of hours from 0 to 2000
per year.
Suppose there is an income tax of the following form:
Income up to $10,000: no tax
Income from $10,000 - $30,000: 20% tax rate
Income from $30,000 up: 30% tax rate

(a) Draw a graph in [hours, consumption] space showing your opportunity set with and
without the tax system.
(b) Say you choose to work 1500 hours per year. What is your marginal tax rate? What is
your average tax rate? Do these rates differ? Why or why not?
(c) Suppose that the tax rates in the second and third brackets are increased to 25% and
50%. What is the likely effect on the labor supply of men? What is the likely effect on the
labor supply of married women? Explain how the responses might differ between these
groups, both in terms of underlying economic effects, and in terms of the empirical
evidence on labor supply responses.