This preview shows pages 1–3. Sign up to view the full content.
1
Economics 3131
Cornell University
Talia Bar
Spring 2006
Final Examination
This exam consists of three sections.
Answer each section in a separate blue book
and label each
blue book clearly.
The exam is worth 145 points.
You will have 150 minutes (2.5 hours) to
complete it. Allocate your time wisely between the sections.
The exam is closedbook, but you may
use a calculator.
Good luck.
Section I (50 points)
Question 1
(30 points) (Consumer theory)
Every school in some state has $5000 to spend on computers (C) and other goods (Y).
Prices of
these two commodities are P
C
=20,
P
Y
= $1.
Each school has preferences for computers and other
goods that can be represented by
U(C,Y) = AlnC+Y
.
where A>0 is some constant value. The State Education Commission has decided that it is desired
for each school to consumer at least C=100 units of computers. The schools interests are not
necessarily aligned with those of the State Education Commission. The Commission has no funds to
spend on this program and the money for any policy would need to come from taxing the schools.
The Commission is considering the following ways to induce schools to consume exactly C=100
units of computers.
Plan 1:
The state will provide C=100 units of computers to each school and tax them a lump
sum of $T (i.e. deduct T from each high school’s budget) to cover the cost of the
C=100 units of computers provided to that school. Assume the school cannot sell the
units of computer provided by the state.
Plan 2:
The state will give each school $S as a lump sum subsidy (i.e. increase each high
school’s budget by S) and will levy a tax of $t per dollar spent on other goods (i.e.
the price of Y becomes $(1+t)). The state will choose S and t such that the tax
revenues from each school exactly cover the subsidy given to that school, and such
that with its new budget the school will choose to consume C=100 units of
computers.
(a)
Write the utility maximization problem of a school if the state
does not
intervene in the
school’s budget spending.
(b)
How many units of computers will the school purchase without any intervention? (Your
answer should depend on the parameter A).
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document2
(c)
For what values of the parameter A will no intervention result in consumption of at least 100
units of computers? If A=1000 how many units of computers will be demanded?
From now on (for parts di) assume A=1000.
(d)
If
plan 1
were adopted, what tax T is needed to finance the C=100 units of computer given
to a school?
How many units of other goods will the school purchase?
(e)
Show on the same graph the schools budgets, indifference curves and optimal choices with
no intervention and with plan 1.
This is the end of the preview. Sign up
to
access the rest of the document.
 Spring '06
 MASSON
 Economics

Click to edit the document details