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Unformatted text preview: 1 s ECO 204 2008‐2009 Ajaz Hussain HW 3 Question 1 In lecture 3, we analyzed the effects of a public policy program that gave free education for exactly 12 years of education. Figure 1 depicts the private budget line and public budget point from that question: Figure 1 In this question, you will analyze two variations of that question: (a) “coupons” that can only be used for education (exactly like gift certificates that can be spent only a certain store) and (b) a cash subsidy. Assume consumer has “imperfect substitutes” preferences over education and everything else, which are each good goods. ECO 204, 2008‐2009. Ajaz Hussain. Department of Economics, University of Toronto 2 Note: You may want to read BB p. 114‐118 after you attempt this question‐‐ in their version of this question‐‐ for housing instead of education‐‐ they look at the case of someone who consumes less than a “mandated” level of housing. (a) Suppose the government gives everyone a coupon (voucher) which can be used to obtain the up to 12 years of education for free. Analyze the impact of this policy on optimal choice, “happiness” and education levels. Note: in this question, the consumer will have the option of 12 years of education for free and‐‐ if she wants more than 12 years of education‐‐ to pay for additional years of schooling. In the lecture question you had to either go to free public schools for 12 years or go to private schooling for any number of years. (b) Suppose the government gives a cash payment guaranteeing 12 years of education which the consumer can spend however she wishes. Analyze the impact of this policy on optimal choice, “happiness” and education levels. In particular, compare the optimal choices in the coupon versus subsidy programs. Question 2 You are the proud owner of McCurry‐Hurry, a fast food chain specializing in South Asian fast food cooking (they give you the ingredients and tell you to go home and cook it yourself). The parent corporation McCurry‐Hurry, We‐Take‐Your‐Money‐in‐a‐Hurry has conducted market research across Canada and has found that the store‐level demand for McCurry‐Hurry’s best selling product, Chicken Brr! Yani (it’s Canada after all!) is: Q = 400 – 1,200 P + 0.8 A + 0.055 Pop + 800 Po Q = Sales of Chicken Brr! Yani per week, P = Price of Chicken Brr! Yani, A = advertising per week, Pop = Local population in thousands, Po = Price of other goods. Currently: P = $1.50, A = $1,000, Pop = 40, Po = $1. (a) Are the “other goods” substitutes for or complements to Chicken Brr! Yani!? (b) How many Chicken Brr! Yani’s will each store sell per week? (c) Estimate the price elasticity for Chicken Brr! Yani. Any recommendations? (d) Estimate the advertising elasticity for Chicken Brr! Yani. Any recommendations? (e) Derive the demand curve Q = f(P) for your store ECO 204, 2008‐2009. Ajaz Hussain. Department of Economics, University of Toronto 3 Question 3 After graduation you’re hired by the “Say No to Puffing” Foundation, a Canadian non‐profit organization which aims to prevent smoking. You collect data on the annual consumption (Q) and price (P) of cigarettes, annual expenditure on advertising (A) and per capita income (Y). You estimate a constant elasticity model and obtain: ln(Q) = ‐2.55 – 0.29 ln(P) – 0.09 ln(Y) + 0.08 ln(A) – 0.1 W Where W = 1 for years after 1953, when the American Cancer Society linked smoking to cancer. (a) Write the model in the “constant elasticity” demand function form. (b) What is the price elasticity? (c) What is the income elasticity? Are cigarettes a normal good? (d) What is the advertising elasticity? (e) Interpret the coefficient on W. Ceteris paribus what was the impact of the cancer report on cigarette sales? ECO 204, 2008‐2009. Ajaz Hussain. Department of Economics, University of Toronto ...
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This note was uploaded on 05/02/2011 for the course ECO 204 taught by Professor Hussein during the Fall '08 term at University of Toronto Toronto.
 Fall '08
 HUSSEIN
 Microeconomics

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