Microeconomics Answers

Highlight of the advantages and disadvantage of such pricing practices, for the supply side and society consumers

Consider a consumer with utility function u(x1, x2) = α_1x_1^( 2) + α_2x_2^( 2) where α1 > 0 and α2 > 0. Assume that p1, p2 > 0. (a) Show that the utility function represents strongly monotone preferences (b) Draw indifference curves passing through points (1, 2), (3, 3) and (0, 3). What properties of the preference relation can you derive from these indifference curves? (c) State the expenditure minimization problem and derive the Hicksian demand. Does the EMP problem have a unique solution at every price vector p >> 0? (d) Derive expenditure function e(p, u). Verify that it is homogeneous of degree 1 in p and increasing in u. (e) Using expenditure function and Hicksian demand, calculate Walrasian demand and indirect utility 

Consider a consumer with utility function u(x1, x2) = min{4 min{x1, x2}, x1 + x2} (a) Draw indifference curves passing through points (2, 2), (1, 2) and (4, 2). Make sure you correctly determine kink points. What properties of the preferences can you deduce from the shape of indifference curves? (b) When X = R 2 +, does UMP have a solution when p1 = p2 = 0? What property of the preference relation did you use to get your answer? (c) Assume that prices are such that p1, p2 ≥ 0 and that p` > 0 for some ` ∈ {1, 2} (i.e. the price of at least one good is positive). Derive Walrasian demand. What are the prices for which Walrasian demand is single-valued?

At the Melbourne Cricket Ground, home of the AFL Grand Final, seating is limited to 95 000. Seeing a golden opportunity to raise revenue, the state government levies a tax of $5 on each Grand Final ticket, to be paid by the buyer. AFL fans, a famously civic-minded lot, dutifully send in the $5 per ticket. Draw a well-labelled graph showing the impact of the tax. On whom does the tax burden fall – the AFL (who sells the tickets), the fans or both? Explain your answer.

The Pharmaceutical Benefits Scheme subsidises the price of prescription medications. Demand for prescription drugs is inelastic due to the lack of close substitutes, while supply is relatively elastic.

a Use a supply and demand graph to illustrate the equilibrium in the market for prescription medications without a subsidy.

b On the same graph show the effects of a $10 per prescription subsidy paid to drug companies. What happens to the equilibrium quantity?

c Do buyers or sellers benefit the most from the subsidy? Explain your answer.

d The government, noticing that drug companies are unpopular, decides to pay the $10 subsidy to consumers instead. What effect does this change in policy have on the price paid by consumers, the price received by drug companies, and the size of the prescription drug market? Explain your answer

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