PS 1 Solution

# PS 1 Solution - Quantitative Microeconomics Answers to...

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Quantitative Microeconomics Answers to Problem Set #1 1) a) (See diagram 25M) GK is budget line for the average consumer before the subsidy program. After plan A, the budget line (GN) has a less steep slope than GK since the price of medical insurance is lower. If the consumer chooses 100 units of medical insurance with plan A, the total value of the subsidy is 5 (100*.05). F’J shows the size of the subsidy in the diagram. If the consumer chooses 100 units of medical insurance, she can buy 5 more units of all other goods after plan A than before plan A. b) Since plan B does not affect prices of the goods, the associated budget line (SR) has the same slope as GK. SR passes through F’ since the total plan B subsidy equals \$5. The average consumer is better off with the plan B \$5 subsidy program than with the plan A subsidy since she can obtain a higher level of satisfaction. Intuitively with plan A, the MB of health insurance (MRS) equaled the MC(P X /P Y ) at F’. With plan B, preferences have not changed so MB(MRS) is

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## This note was uploaded on 03/26/2008 for the course EC 16 taught by Professor Loury during the Fall '07 term at Tufts.

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PS 1 Solution - Quantitative Microeconomics Answers to...

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