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econ313spring2006prelim1sol - Econ313-1 Fall 2006 Talia Bar...

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Econ313-1 Fall 2006 Talia Bar Prelim 1 This exam consists of four questions. Label your blue books clearly with your name. The exam is worth 66 points. To help you allocate time you can plan on spending about one minute per credit point. The exam is closed-book. You may use a calculator. Good luck. 1
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Question 1 (35 minutes) ABC University is considering adopting a policy that would help cover the cost of day-care. The rational for this policy is two-fold: (1) increase the utility of faculty who are parents (2) since faculty members spend more time doing research the more units of day-care they purchas, the university would benefit from increased hours of research. A parent faculty member maximizes each pay period his/her utility for day-care ( D and and a composite of all other consumption goods ( C ) subject to a simple linear budget constraint, and has a weekly income of m $1000 to allocate between C and D . The cost of hourly day-care in town is p D 12. The cost of the composite good is p C 1. The parent support committee proposes to give a lump sum subsidy of G 200 dollars per pay period to any parent who wants the support. That is, if a faculty parent chooses to receive the support his/her income would be m 1000 G . However, due to state tax rules, a family that receives the day-care support G may not ask for tax deduction on day-care expenses and pays the full price p D 12 per hour of day-care, while a family that does not receive the university support may receive a tax deduction so that in effect they face a price p D 10 per hour of day-care. Faculty members choose whether or not to ask for day care support. Then they choose levels of consumption that maximize their utility subject to the appropriate budget line.
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econ313spring2006prelim1sol - Econ313-1 Fall 2006 Talia Bar...

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