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Econ201_2007_final

# Econ201_2007_final - EXAMINATIONS 2007 MID YEAR ECON 201...

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EXAMINATIONS 2007 MID YEAR ECON 201 MICROECONOMICS Time allowed: THREE HOURS Instructions: Answer ANY FIVE of the eight questions below. You may use non-programmable calculators. Total marks : 100 ECON 201 CONTINUED

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QUESTION 1 [20 marks] A consumer has the utility function x y U = . The price of good x is \$20 and the price of good y is \$50. (a) Suppose the consumer has a budget of \$6,000 to spend. Using the Lagrangian technique, find the optimal consumption bundle of x and y . [5 marks] (b) Are these goods both normal goods, or is one of them an inferior good? Explain your answer. [5 marks] (c) Demonstrate that the marginal rate of substitution between the two goods is diminishing. [5 marks] (d) Suppose the price of x falls to \$2.50. Calculate the Compensating Variation. [5 marks] QUESTION 2 [20 marks] Suppose that Government wishes to raise the skills of the workforce by paying for people to attend training programmes. Two options are suggested by officials. One is for each individual to be paid a cash grant and invited to use this money to enrol in a suitable programme. The other is to give a voucher to each individual, with each voucher valid as payment for enrolment in a course. Asked by their Minister to recommend which of the two options should be adopted, officials explain that under some circumstances the two policies give the same outcome, but that there are situations where the voucher scheme is a more cost- effective way of achieving any given target amount of additional training consumed. The voucher approach should therefore be preferred. (a) Use a model from this year’s ECON 201 course to explain the reasoning underlying the general recommendation in favour of vouchers. [5 marks] (b) Explain under what conditions the two policy options would give the same outcome in terms of the amount of training consumed. [5 marks] (c)
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Econ201_2007_final - EXAMINATIONS 2007 MID YEAR ECON 201...

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