All Exams E201 Spring10 - WARNING: The topics included in...

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1 WARNING: The topics included in the exams may vary from year to year. METU Last, first name: ____________________________ Department of Economics ID #:________________ ECON 201 E. Cakmak March 26, 2010 FIRST MIDTERM EXAMINATION (Time allowed: 80 minutes) Please, read the questions carefully and show your work. 1. (3*15=45) Assume that lower income elderly receive government subsidies to manage their drug costs according to the following scheme (which you can call Program 1): each qualifying person has a government-issued discount card that allows them to get drugs at discounted price. The government then compensates the pharmacies for the price difference. From the point of view of a consumer, this is equal to a price subsidy. The administration is not happy with the program and considers an alternative program that would introduce drug vouchers (Program 2). In this program, the qualifying elderly will get a certain amount of drug vouchers for free, and once those vouchers have been used no other subsidy is offered. The amount of vouchers is determined so that the recipients will be as well off as under the original subsidy program. You should assume that the elderly have preferences that lead to smooth, well behaving indifference curves, and that they use positive amounts of both goods. In a clearly labeled graph, with drugs on the horizontal and the composite good on the vertical axis, compare the policies, and answer the following questions: a. What can you say about the relative costs of the two programs to the government? b. Is the amount of drugs consumed equal under both programs? Explain why or why not. c. Which program would you recommend to the government? Briefly explain your answer comparing the efficiency (acquired welfare per subsidy TL) of Program 1 to Program 2. 2. (4*15=60) Ali’s utility from vacations (V) and meals (M) is given by the function U(V,M) = V 2 M. Denote the price of vacation, price of meals and income by p V , p M and I, respectively. a. Find the uncompensated and compensated demand functions for vacations. b. Find the own price demand elasticity, cross-price elasticity and income elasticity for
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This note was uploaded on 03/22/2012 for the course ECON 201 taught by Professor Çakmak during the Fall '10 term at Middle East Technical University.

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All Exams E201 Spring10 - WARNING: The topics included in...

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