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Fall '07 Hourly 1

# Fall '07 Hourly 1 - TUFTS UNIVERSITY Department of...

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TUFTS UNIVERSITY Department of Economics Hourly Exam #1 Economics 16 Quantitative Intermediate Micro Professor Linda Datcher Loury Fall 2007 1) Georgia spends all of her income on medical care and vacations because her adult children buy all of the other goods that she needs. Her utility function, U(X,Y)=X 1/4 Y 1/2 shows that she values each unit of medical care (Y) more than each unit of vacation (X). Based on her utility function, Georgia’s doctor concludes that she should buy more units of medical care than vacations. Calculate the optimal choices of vacation and medical care for Georgia as a function of the prices of the goods and her income. (That is, calculate the Marshallian demands for vacation and medical care.) Given her optimal choices, explain why Georgia’s doctor is either correct or incorrect. 2) Suppose that Helen’s income is \$10,000 per year and she spends it in two ways – (a) health insurance and (b) all other goods. (Both are normal goods.) The health plan of Presidential candidate A is a cash grant of \$1,000 per year (regardless of how much health insurance is bought). The health plan of presidential candidate B is a cash grant of \$200 per year (regardless of how much health insurance is bought). The health plan of presidential candidate C is a matching grant program where the Federal government would give Helen \$.10 to add to her budget for each dollar spent on medical insurance.

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Fall '07 Hourly 1 - TUFTS UNIVERSITY Department of...

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