Chapter 10: Problems 
5. Using the transfer equation, solve for each of the following:
a. Suppose the basic transfer is $500 per month and the breakeven net income is $2,000 per month. What is the transfer reduction rate?
b. Suppose the basic transfer is $200 per month, the transfer reduction rate is 0.5, and net income is $100 per month. What is the amount of the transfer received
by the individual?
c. What is the breakeven net income when the transfer reduction rate is 0.3 and the
basic transfer is $360 per month?

a. In order to solve for the transfer reduction rate, recall that the breakeven net income (BENI) is equal to the basic transfer (BT) divided by the transfer reduction rate (TRR):

BENI = BT/TRR.

Rearranging this equation we find that the transfer reduction rate is equal to the basic transfer (BT) divided by the breakeven net income (BENI) or:

TRR=BT/BENI.

Using this equation we find a transfer reduction rate of .25 ($500/$2,000).

b. The transfer received by the individual is given by:

T = BT TRR(NI).

T is the transfer, BT is the basic transfer, TRR is the transfer reduction rate, and NI is net income. Using this equation we find the transfer to be equal to $250 ($200 + 0.5(100)).

c. The breakeven net income is equal to the basic transfer divided by the transfer reduction rate:

BENI = BT/TRR.

Plugging numbers into this equation we find the breakeven net income to be $1,200 ($360/0.3).

8. "Extending Medicaid to cover all of the working poor would significantly increase the opportunity cost of medical care." Is this statement true or false? Defend your answer.
It is not certain whether such a program would significantly increase the opportunity cost of medical care. Many of the working poor not currently covered by medical insurance receive treatment anyway. If they cannot pay, the cost is shifted to other patients. This means that much of the increase in Medicaid outlays would simply result in costshifting from nonpoor patients to the general taxpayer rather than increase the opportunity cost of medical care. It is also likely, however, that some of the poor currently not covered by insurance or Medicaid do without needed medical services. If Medicaid were to pay the bill, these individuals would obtain more medical services, thereby driving up the opportunity cost of medical care.
