1.The unit price of market goods is $1. Each person has 8 hours to work each day.
Another couple, Sylvan and
van and Alex, have the same productivities: Sylvan is identical to Rajan, while Alex
and Esther are identical.
Esther and Rajan both engage in market work. Sylvan works full time at home, so only Alex works in the
a) Given this information, which couple has the higher opportunity cost of home produced goods?
Explain how you determined this. You can add a diagram if that helps, but you are not required
to include one.
b) Can you determine which couple has the higher utility? Explain why or why not.
Suppose now that value of market production for both Alex and Esther increased to $12/per hour.
c) Explain the change in the household joint production possibility frontier generated by this
d) Explain what would happen to each couple’s choice of both household and market produced
goods, using an analysis by means of income and substitution effects.
e) What changes in time allocation for each couple that would be necessary to produce and
consume this new bundle? Briefly explain your reasoning.
3.Suppose that Wegboys has a supermarket with a downward sloping demand curve in Pilgrim City. It purchases frozen turkeys
chases frozen turkeys at a constant wholesale price of $1/turkey, which is its full marginal cost for supplying turkeys. During July, only a small number of wealthy people are interested in buying turkeys in Pilgrim. Their demand curve is P = 10 – .02 Q, where P is Wegboys’ retail price for turkeys during the month and Q is the quantity of turkeys purchased. The demand curve for these wealthy people is constant – it is the same curve in both November and July. During November, a large number of less wealthy people enter the market to purchase turkeys for Thanksgiving. Their demand curve for Wegboys’ turkeys is
P = 4 – .0005Q. In other months of the year, they do not purchase turkeys at any price.
a. (5 points) What price should Wegboys charge in July to maximize its profits? Calculate its profits from turkey sales.
b. (5 points) Demonstrate that Wegboys can earn a higher profit if it lowers its retail price for turkeys during November (you can do this without finding the optimal price). Explain the basic economic intuition.
4.Suppose that the economy is at full employment (our economy has reached its potential GDP or the maximum that we
imum that we can normally produce). Now suppose that the Federal Government decides to decrease taxes. If we compare the long run price and GDP levels to the price and GDP levels that existed before the Federal Government’s action, we would find that_______?
Production or the GDP would not increase in the long run.
Prices would decrease in the long run.
A decrease in unemployment would result in the long run.
Producers would increase production in the long run as a result of the Federal Government’s actions
5.Spending on health care now constitutes a significant fraction of total expenditure. Understanding the efficacy of this spending is therefore
he efficacy of this spending is therefore relatively important. When it comes to contagious diseases, there are generally two strategies that can be adopted. The first involves prevention, which includes vaccinations to lower or eliminate the risk of contracting a disease. The second involves treatment of those unfortunate enough to get sick, treatment typically requires some form of a drug. Since pharmaceutical companies can produce both vaccines and drugs, we would like to understand the incentives they have to develop each type of medicine. To explore this question, consider a population of 100 consumers, 90 of whom have a low disease risk, say 10%. The remaining ten have a high risk – to make things simple, assume they are certain to contract the disease. In addition, suppose the disease generates personal harm equal to the loss of $100 for each individual when they are infected. Suppose also that pharmaceuticals of either form (vaccines or drugs) are costless to produce (once R & D has occurred) and are perfectly effective
Question 2. What price would a profit maximising monopolist charge for a vaccine? What are the monopoly profits on the vaccine? What is the efficient outcome (i.e. SMB = SMC)? What is the welfare under the monopoly and at the efficient allocation?
Question 3.Now consider the demand for the drug (assume that the vaccine is not available). Construct the demand function for the drug and plot it on a diagram. What price would a profit maximising monopolist charge for the drug? What are the monopoly profits from the drug? What is the efficient outcome? What is the welfare under the monopoly and at the efficient allocation?
Question 4. If the R&D costs of the vaccine and drug are the same, what will the pharmaceutical company do? Explain your answer in terms of the variation in the willingness to pay and the size of the R& D costs. What would a social planner do?
Question 5. What are the R&D cost for the vaccine and the R&D cost for the vaccine drug that would make a pharmaceutical company indifferent between developing the vaccine and the drug? Is the social planner indifferent in this case? Explain any difference.