ps4 - Middle East Technical University Department of...

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Middle East Technical University Spring 2011 Department of Economics ECON 201 Erol Çakmak TA: Osman Değer PROBLEM SET 4 1)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
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ps4 - Middle East Technical University Department of...

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