Exam 5: Using Consumer Choice Theory

Consider Figure 5-6.The family shown faces the budget line A₁BFZ.Health insurance is measured in $100 units and other goods in $1 units.A health insurance plan is introduced which would provide this family $15,000 worth of insurance for $4,000.The new budget constraint the family will face is:

Suppose the government provides $1,400 worth of educational services for all children.Assume that public schooling cannot be supplemented with private tutoring.What would be the cost of schooling for a family that desires educational services worth $1,700?

In the model of inter-temporal choice,will a person who initially consumes exactly their income in each period have more or less current consumption after a decrease in the interest rate?

An excise subsidy given on each unit of X consumed will:

In a two-year period,if a higher interest rate causes consumption in year 1 to rise:

Answer the following: a)Sarah drives 6 miles to work every day.Liam takes the same route but has to drive for a total of 11 miles.With the objective of reducing traffic jams,the government decides to impose a tax on drivers.How would an annual fixed payment of $500 as congestion charges affect Sarah and Liam? Explain your answer using indifference curves and a common budget line for Liam and Sarah. b)What if the government decided to impose a fee of $1 per mile driven?

Fred is considering consumption between two periods and is earning an income of $1,000 in both periods.If the interest rate is 8 percent,Fred borrows $500,but if the interest rate rises to 18 percent,Fred saves $500.Is this behavior economically reasonable?

The effect of substituting an equal-cost lump-sum grant for an excise subsidy is to:

An individual who is considering consumption between two time periods (year 1 and year 2)has an endowment of $20,000 in year 1 and $15,000 in year 2.If the interest rate is 5 percent,what is the maximum approximate amount that can be spent on consumption in year 1?

Walter works for a large firm that produces software and has a capitalized value of $10 billion.This firm pays its employees,in part,with the company's stock,compensating Walter an additional thirty percent of his $50,000 annual salary worth of the company's stock.Which of the following is true?

The expected utility from an investment is defined as _____.

If an equal-cost lump-sum transfer were substituted for a per unit excise subsidy on good X:

Figure 5-1 shows the preferences of a consumer for food and other goods.He is initially in equilibrium at point A where the budget line MN is tangent to the indifference curve. In Figure 5-1,the total outlay on other goods before the excise subsidy is given by _____.

Use the following figure to answer the question: Figure 5-2 :shows the quantity demanded of a good at various prices. -Based on Figure 5-2,the welfare cost of an excise tax (that raises price from P₂ to P₁)is the area _____.

In a two-year period,suppose Gloria has $10,000 in income in year 1 and $4,300 in income in year 2.In order to maintain her optimal consumption of $8,000 in year 1 and $6,500 in year 2,she can borrow or lend at a rate of 10 percent.If Gloria's income stream changes such that she earns $3,000 in Year 1 and $12,000 in Year 2,the budget line will:

Suppose Microsoft stock will provide either a return of 10 or 20 percent over the next year and that the probability of the former outcome is 0.25 while the probability of the latter is 0.75.If the utility an investor derives from a 10 percent return on Microsoft stock is 200 and the utility the investor derives from a 20 percent return is 400,the investor's expected utility from holding Microsoft stock is _____.

Figure 5-1 shows the preferences of a consumer for food and other goods.He is initially in equilibrium at point A where the budget line MN is tangent to the indifference curve. In Figure 5-1,the total cost incurred by the government on the lump-sum transfer is given by _____.

Use the following figure to answer the questions : Figure : 5-5 shows a family's preferences toward schooling,before and after a fixed-quantity subsidy. -Prior to the subsidy,the family is in equilibrium at point J.Assume that public schooling cannot be supplemented with private tutoring.Refer to Figure 5-5.Public schooling provided in the amount of B0 causes the family to increase consumption of other goods by _____.

Comparing the original budget line with the budget line for an excise subsidy and a cash grant:

Which of the following is true of an excise subsidy?