EC201 Microeconomic Principles I
Instructions to candidates EC201微观经济学原理代写
This paper contains 4 questions. Each question carries 25 marks. Your answers to all 4 questions will count towards the final mark. All questions carry an equal number of marks.
Answers should be justified by showing work.
Please write your answers in dark ink (black or blue) only.
Reading Time: 15 minutes
Writing Time: 1 hour
You are supplied with: No additional materials
You may also use: This is an open book exam
Calculators: Calculators are not expected to be used in this exam
[Answer ALL FOUR questions. If during this examination you feel you need to make additional assumptions in order to proceed, then please do so stating your assumptions clearly].
Question 1 EC201微观经济学原理代写
School children purchase snacks from a vending machine using an allowance of £m. The vending machine dispenses unhealthy snacks (x1) and healthy snacks (x2), both priced at £1.
The local authority is considering two different policies in order to reduce the consumption of unhealthy snacks:
Policy 1: A tax that raises the price of unhealthy snacks to £1.25
Policy 2: A subsidy that lowers the price of healthy snacks to £0.80.
(a) Suppose children’s preferences satisfy all assumptions of consumer theory and both types of snack are normal goods. Analyse the effect of each policy with the aid of a diagram, examining income and substitution effects. Which policy is more effective in meeting the local authority’s objective? . [10 marks]
(b) A survey finds that the preferences of school children are in fact best described by u(x1, x2) = v(x1) + x2, where v’(·) > 0 and v’’(·) < 0. Assume £m is sufficiently high so uncompensated demand is an interior solution. Does this change your answer to (a)? [5 marks]
(c) In the same city, students in a hall of residence have access to two vending machines: the ‘local machine’ just outside their flat with 12 snack options and the ‘distant machine’ on the ground floor with 24 snack options. All snack options are common knowledge and equally priced. Some students opt for the local machine while others opt for the distant machine. Yet those who go to the distant machine complain it was not worth it!
What can explain this phenomenon? Is it consistent with the assumptions of consumer theory? [Refer to the course reading when answering this question.] [10 marks]
Question 2 EC201微观经济学原理代写
Taxmania is a country where the marginal rate of income tax is 40% on all incomes. Suppose a personal allowance is introduced such that the marginal tax rate is 0% for incomes below £a, and 40% thereafter.
The nominal hourly wage is W = 1, while the price per unit of a composite consumption good is p = 1. Taxmanians have T hours available that can be allocated between work and leisure. Assume their preferences over consumption and leisure satisfy all the assumptions of consumer theory.
(a) Illustrate the effect of the introduction of the personal allowance on the budget constraint of a Taxmanian worker. [5 marks]
(b) Use the same diagram to analyse the effect of the introduction of the personal allowance on an individual earning above £a. [10 marks]
(c) Figure 1 illustrates reported taxable income relative to the personal allowance threshold of £a after the introduction of the personal allowance for two sectors: retail and hospitality and the public sector.
How can the phenomenon observed in panel A of Figure 1 be explained? Why might the phenomenon be different for public sector workers? [10 marks]
Question 3 EC201微观经济学原理代写
In the town of Confidencia the probability that an individual must pay a large health expenditure L during their lifetime is 0.25. Two types of people live in Confidencia. Type A individuals correctly perceive the probability of needing to pay L, whereas Type B individuals believe the probability is lower at 0.2.
All individuals have wealth w and a utility function u(w) where u ‘(w) > 0 and u’’(w) < 0.
The government has recently introduced Affordacare, which allows the people of Confidencia to access health insurance at a fair premium p per unit of insurance.
(a) What behavioural bias do Type B individuals experience? What attitude to risk do the individuals of Confidencia have? [5 marks]
(b) Sketch a state-contingent income space diagram to illustrate (i) the outcomes of the lottery and (ii) the indifference curve for each type that reflects their perceived expected utility of the lottery, briefly explaining their shape. [7 marks]
(c) Analyse the health insurance decision of the two types of individuals. Will they fully insure? [8 marks]
(d) The government is considering amending Affordacare to require a minimum amount of health insurance coverage for all. Does your analysis in (c) provide a rationale for setting the minimum at L units of insurance? How would the people of Confidencia feel about such a policy? [5 marks]
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