1. Begin with a George/Harriet (exchange) economy with 2 units of ale and 1 unit of bread (so that the Edgeworth Box is rectangular.) Assume generic preferences. [Hint: There isn’t a unique way to draw indifference curves. Every time we change the utility function, we change which points are on the same indifference curve. Our theory is general enough that it works with lots of utility functions, so that we don’t have to specify a specific one in advance. But what makes the utility function part of the environment is that if you ever change it after picking one, you are talking about an entirely different economy.] Define the Contract Curve. Argue through the definition of Pareto Optimality why the allocations which give all of the resources to one of the two agents (George or Harriet are on the curve.) Pick one point above the contract curve and one point below, show why these two points are not on the indifference curve. Find all of the points on the Contract Curve which dominate one of your two points. Explain why at least one of these points is on the Contract Curve. 2. Consider the same above economy and assume a specific endowment such that George has all of the ale and Harriet all of the bread. Assume both agents’ preferences can be represented by the same utility function. Show how to construct the supply and demand curves for ale by constructing at least three points on it via an explained graph. What items in the Edgeworth box adjust to show that? Make sure one of the points you include is the equilibrium point, a second represents a shortage and the third a surplus of ale. Label the amount of the shortage/surplus on the Edgeworth box and the supply/demand curve. 3. Again consider the previous economy. Suppose that a public official has her own preferences for this economy that considers a point on the contract curve which gives Harriet strictly higher utility than the competitive equilibrium. Explain intuitively the meaning of lump sum taxes. Show how the public official can use lump sum taxes such that the resulting equilibrium matches her preferences for the economy’s outcome. Could she use lump sum taxes to implement an outcome that was off the Contract Curve if for some very unusual reason she wanted to? 4. Let’s suppose that we believe that an Edgeworth box economy is a good description of the resource allocation problem for an actual economy where George and Harriet are stand in for two organized political factions in a democratic political system. What would the welfare theorems lead us to predict about the extent (and possible) outcomes of political conflict in the outside economy? Let’s say upon observation, we saw that the two political parties claimed that their preferred policies towards resource allocation satisfied a “national interest.” [This is not a economic term with a known meaning]. How would the models in Chapter 2 and 3 help you interpret/understand this claim? Let’s say that we hoped to interpret this clai ...

1. 1. Begin with a George/Harriet (exchange) economy with 2
units of ale and 1 unit of bread (so that the Edgeworth Box is
rectangular.) Assume generic preferences. [Hint: There isn’t a
unique way to draw indifference curves. Every time we change
the utility function, we change which points are on the same
indifference curve. Our theory is general enough that it works
with lots of utility functions, so that we don’t have to specify a
specific one in advance. But what makes the utility function
part of the environment is that if you ever change it after
picking one, you are talking about an entirely different
economy.] Define the Contract Curve. Argue through the
definition of Pareto Optimality why the allocations which give
all of the resources to one of the two agents (George or Harriet
are on the curve.) Pick one point above the contract curve and
one point below, show why these two points are not on the
indifference curve. Find all of the points on the Contract Curve
which dominate one of your two points. Explain why at least
one of these points is on the Contract Curve.
2. Consider the same above economy and assume a specific
endowment such that George has all of the ale and Harriet all of
the bread. Assume both agents’ preferences can be represented
by the same utility function. Show how to construct the supply
and demand curves for ale by constructing at least three points
on it via an explained graph. What items in the Edgeworth box
adjust to show that? Make sure one of the points you include is
the equilibrium point, a second represents a shortage and the
third a surplus of ale. Label the amount of the shortage/surplus
on the Edgeworth box and the supply/demand curve.
3. Again consider the previous economy. Suppose that a public
official has her own preferences for this economy that considers
a point on the contract curve which gives Harriet strictly higher
utility than the competitive equilibrium. Explain intuitively the
meaning of lump sum taxes. Show how the public official can
use lump sum taxes such that the resulting equilibrium matches

2. her preferences for the economy’s outcome. Could she use lump
sum taxes to implement an outcome that was off the Contract
Curve if for some very unusual reason she wanted to?
4. Let’s suppose that we believe that an Edgeworth box
economy is a good description of the resource allocation
problem for an actual economy where George and Harriet are
stand in for two organized political factions in a democratic
political system. What would the welfare theorems lead us to
predict about the extent (and possible) outcomes of political
conflict in the outside economy? Let’s say upon observation, we
saw that the two political parties claimed that their preferred
policies towards resource allocation satisfied a “national
interest.” [This is not a economic term with a known meaning].
How would the models in Chapter 2 and 3 help you
interpret/understand this claim? Let’s say that we hoped to
interpret this claim to mean that their proposed policy Pareto
Dominates their rival’s proposed policy (and that both parties
are only using lump sum taxes), Give at least one element of the
outside economy we are observing that our model is likely
missing which would make such an interpretation possible.
5. Suppose that our public official was restricted to only use
surprise transfers of ale after George and Harriet visited the
market and that the endowment was fixed as in question 1. Can
you graph the set of allocations that can be implemented in an
Edgeworth Box? You should keep the Contract Curve graphed
as a reference curve.
6. Take the previous example as modified in the setup of
Question 2. What would Rawls and Nozick consider the set of
fair allocations for this economy?
7. Consider an ale and bread economy such that for whatever
income level and price level George maximizes utility by
spending ¾ of his income on ale and Harriet likes to spend ¾ of
her income on bread. Suppose there are one unit each of both
ale and bread. Graph the Contract Curve for the economy.
Suppose there is twice as much ale as bread in this economy.
Graph the Contract curve for this now rectangular economy.

3. Using the first welfare theorem and the tangency condition,
explain what the equilibrium prices must be in this economy for
any possible set of endowments.
8. Assume that the initial endowment (before lump sum taxes)
gives Harriet all of the ale and George all of the bread for an
economy like in Question 7. The next part is open ended. Define
a notion of fairness for this economy that you find intuitive
(You will not be judged on the values represented in your
definition.) What are the fair allocations in the square
Edgeworth Box economy? What about in the one with uneven
aggregate endowments? Do you have a quasi-first welfare
theorem for your personalized notion of fairness?
9. Explain intuitively and with the help of a graph the role of
prices in the proof of the first welfare theorem.
10. Consider a generic production economy. Suppose the gov’t
placed a binding price ceiling on the price of ale and solved any
shortage by rationing before the fact, so that only George was
allowed to purchase as much ale as he wanted whereas Harriet
faced a limit on the amount of ale she could purchase.
Document which of the three types of efficiency will no longer
be satisfied in the resulting competitive equilibrium. In what
way will prices fail to reveal information to outside observers
that would be visible without the quota? Can you think of a
policy scenario, possibly over time where the lack of this
information may impose an additional cost beyond the
deadweight losses inherent from missing out on the types of
efficiency which does not hold here? [Hint: There are many
possible acceptable answers here.]
11. Suppose there was a tax of a fixed linear rate (1+t*) on
capital in ale production but not bread. How would that affect
production efficiency? Suppose the policy maker responded to
that with a tax on labor in ale production at the same level.
What would happen to Production Efficiency from an otherwise
efficient equilibrium. Why might the equilibrium still be
inefficient? Suppose instead of taxing labor in ale production,
the policy maker taxed capital in bread production at the same

4. level, what would happen to both production and match
efficiency after this alternative policy?
12. Give at least one reason that a philosopher might consider
greater Economic Efficiency (say through reduced deadweight
losses) a worthwhile policy goal in a world where all taxes are
distortionary. In class, we talked about the efficiency/equity
tradeoff that has been posited to exist in income tax policy.
How did we say such a tradeoff typically arose in public debates
concerning such taxes? Using your rationale, can you think of a
philosophical reason that two altruistic (or at least not perfectly
self-interested) and knowledgeable social scientists might
disagree about the appropriate degree of the trade-off?
13. Consider an exchange economy where Dinah’s preferences
are: u(ad,bd)= sqrt(ad)+bd and Joe’s are: u(aj,bj)=ad+sqrt(bj)
where the second letter indexes the individual. Suppose that
Dinah has an endowment of five units of each good whereas Joe
has an endowment of 5 units of ale and 15 units of bread. Use
the consumer’s maximization decision to solve for each agent’s
demand curve, being careful to define what we mean by a
demand curve. Find the Excess Demand curve for the economy
and show how to use it solve for the Equilibrium price. Solve
for the equilibrium price and then the rest of the equilibrium.
14. Suppose we are given a PPF of: 5a+2b=25. (This would
typically happen in a world with either capital or labor but not
both so that Production efficiency would tend to hold.) Suppose
George and Harriet have equal endowments and ownership
shares of the firm as well as identical preferences given by:
u(a,b)=sqrt(a)+ b. How would you use the second welfare
theorem to solve for the equilibrium quantities? Follow through
on this. [Hint: you can and should use the symmetry of the
problem to solve it. But do think about how having two agents
affects the PPF. The PPF in this case is at the aggregate level so
that ag+ah=a] 15. Many economic commentators apply the
result in chapter 5 on taxes for substitute goods to taxes on
capital income (including both dividends and capital gains).
What is the baseline result? What does it imply for future

5. capital income taxation?
First Discussion: Tax Reform, discussion is based on
Chapter 2 of the book Showdown at Gucci Gulch
September 11, 2012
1. In what sense did tax reform allow "a rare chace for the goals
of social equity and
economic e�ciency, which were usually in con�ict,to work
hand in hand
(a) What is meant by social equity. How did tax reform serve
the interest of social
equity?
(b) What is meant by economic e�ciency. How did tax reform
serve the interest of
economic e�ciency
(c) Why do these goals typically con�ict?
(d) How does tax simplicity �t into these goals?
2. What shaped Bradley's view of the tax code?
(a) What was Bradley's view of the tax policy of 1981?
(b) What did Bradley's experience as a basketball player lead
him to believe about

6. the tax code? How could he a�ect his taxable income?
(c) How did Bradley's 1978 political experience shape his view
of the tax code?
3. What was the substance and importance of Bradley's 1981 tax
proposal?
(a) Why did academic wisdom declare the income tax
"obselete"?
(b) Why did Bradley consider reforms that lowered the top
marginal rate?
(c) What fairness argument did Bradley make for his plans?
(d) What were the three key decisions that formed the backbone
of his plan? Why
did he make them?
(e) How did Bradley reduce the top rate without providing a
windfall to the wealthy?
i. Explain the Minarik plan for lowering deductions.
(f) What are the key elements of Bradley's eventual plan?
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4. What happened to Bradley's plan in the short term?
(a) What facts interfered with its passage?

7. (b) Why was tax reform considered politically unlikely?
5. What was the state of tax policy in the 1982 era Congress
(a) What was Bob Dole's goals in tax policy? How did this lead
to legislation?
(b) What was the House of Representatives view of tax policy in
this era. How did
this a�ect outcomes?
(c) How did the banking and real estate industry a�ect tax
policy? What provisions
of the tax codes did they lobby over?
(d) What was Mondale's view of tax reform and tax policy in
general? How did this
a�ect the election of 1984?
i. What four reasons do the authors give for Mondale opposing
tax reform?
ii. Why do the authors complain that Mondale's campaign was a
campaign of
the special interests? How does this relate to tax reform?
6. Why did Bradley's reforms �nd support from some
Republicans?
(a) Who are the supply-siders? What policies do they prefer?
Why?

8. (b) Politically what was the overall condition of supply siders in
the 1982-194 period.
Why?
(c) Where did supply siders agree with Bradley? Where did they
disagree? What is
the merit of their disagreement? How did their eventual
legislation disagree with
Bradley's? What were some of the limitations of their approach?
7. What was the Reagan administrations view of tax reform?
(a) Which forces in Reagan administration supported the idea?
Why? What is the
relationship between tax reform and a �at tax? Which oppposed
it?
(b) What was Reagan's approach to tax reform in the 1984 State
of Union and
subsequent election? Was this seen as supportive of tax reform?
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