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Sample Hourly 1B

# Sample Hourly 1B - Quantitative Intermediate Theory Micro...

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Quantitative Intermediate Theory, Micro Sample Hourly Exam #1B 1) Suppose that George was displaced by hurricane Katrina. He is now living in Massachusetts where housing (X) costs \$2 per unit and all other goods (Y) cost \$1 per unit. His only income is a government grant of \$1500 per month. While in Massachusetts, George bought 300 units of housing per month. George has been offered the choice of moving to Vermont. Housing in Vermont costs \$1 per unit but George’s government grant would be reduced to \$1000. (All other goods still cost \$1 per unit in Vermont.) Show whether he would be better off in Vermont, better off in Massachusetts or does it depend? Would he buy more housing, less housing, or does it depend? Use an appropriate diagram to illustrate your reasoning. Explain your answer thoroughly. (Assume that George would be indifferent between Massachusetts and Vermont if the prices and his income were the same in both states. Also assume that, because of his preferences, George never buys more than 500 units of housing.) 2) Suppose that the average household now spends \$100 per month on medical insurance (i.e. they buy 100 units each of which costs \$1). In order to make medical insurance more affordable, the Bush administration has proposed a subsidy program. The federal government would pay 50% of the cost of medical insurance. The program would be financed by a progressive tax on household incomes. The tax rate would be set so that the average household has to pay \$50 per month in taxes to support this subsidy program. Politicians representing the average household claim that their constituents gain nothing from the subsidy program and that it would have no effect on the amount of insurance that their constituents would purchase. Show what effect would the program have on the average household’s utility and the amount of medical insurance bought.

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