ECON 5001: In semester Exam
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ECON 5001: In semester Exam
Question 1: John’s budget line and his satisfaction maximizing market basket, A, are shown in the diagram below. There is no calculation required in parts a, b and c.
a. Suppose that John is given $100 worth of vouchers that must be spent on food. How will the vouchers alter his budget line (draw the diagram to illustrate)?
b. Suppose that John is given $100 in cash instead of $100 in vouchers. How will this alter his budget line (draw the diagram to illustrate)?
c. Is John indifferent between the food voucher and cash program, or does he prefer one program over the other? Draw an indifference curve diagram to explain your answer.
Question 2: Minti always consumes 2 bottle of cokes (C) with 3 slides of pizza (S). The respective prices of coke and pizza are Pc and Ps .
a. Write a utility function that represents Minti’s preferences.
b. Find Minti’s demand functions for cokes and pizzas.
c. On a diagram, show both the Slutsky substitution and income effects for coke if the price of coke is going down (assuming that coke is on the horizontal axis and both coke pizza are normal goods).
Question 3: Two individuals, a and b, consume goods x and y. Their endowments are ωa = (4, 10) and ωb = (20, 2). Both have identical utility functions Ui(xi, yi) = xiyi where i = a, b. The price py = 1 and for simplicity, we write px = p.
a. Derive individual i’s demand for good x and good y if mi is the income of individual i. (2 marks)
b. Derive the equation of contract curve.
c. Calculate the equilibrium price p* and the quantity ((xa, ya ), (xb, yb )).
Question 4: Drug addicts often turn to a life of crime to obtain the money to sustain their habit. Let us suppose the amount of crime is directly related to the amount of money that changes hand from drug trading.
a. Using the supply and demand framework, show the equilibrium price and quantity in the market for drugs. On your graph, show the amount of total money that changes hand between drug buyers and sellers in this market. (Hint: think of this amount as the total revenue)
b. Suppose government wants to combat drug related crime and deploys a larger police force to prevent drug trafficking. Show the effect of this policy on a new graph. On your new graph,
show the new amount of total money that changes hand between drug buyers and sellers in this market.
a. Does the policy intervention reduce drug related crime? Why? Why not? ( Hint: Think in terms of elasticity)
2022-11-15