MS09 - Economics 104A Solution for Midterm Exam Winter 2009...

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Economics 104A Solution for Midterm Exam Winter 2009 1. Kate’s parents have provided a trust fund for her college education. Kate can receive the entire trust fund on the condition that she spend it only on education. (a) (2pt) Draw Kate’s budget line without the trust fund by putting dollars spent on education on the horizontal axis and dollars on spent other forms of consumption on the vertical axis. Answer: See Figure 1. (b) (4pt) Draw her budget line with the trust found on the same diagram. Answer: See Figure 1. (c) (4pt) Use the budget line and the ICs to illustrate why the fund is a welcome gift but perhaps not as welcome as an unrestricted trust. Answer: If Kate’s preferences over combinations of dollars spent on education and dollars on spent other forms of consumption are represented by the ICs as in Figure 2, then her optimal bundle with the fund as an unrestricted trust would be better than her optimal bundle with the fund being a conditional trust. 2. Maria gets utility from days spent traveling on vacation domestically (D) and days
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This note was uploaded on 12/04/2010 for the course ECE 134 taught by Professor York during the Fall '08 term at UCSB.

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MS09 - Economics 104A Solution for Midterm Exam Winter 2009...

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