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1)Suppose Mona and Tom are the only citizens in Winterland and their utility functions are presented by the following equations: Um = 0
1)Suppose Mona and Tom are the only citizens in Winterland and their utility functions are presented by the following equations: Um = 0.5 In Xm - 0.5 In Pm Ut = 0.5 In Xt -0.5 In Pt where X represents consumer goods and services and P pollution and in the natural logarithm. Assume Xm = X+ =50 and Pm = P = 25. 1. What are the marginal utilities of X and P for Mona and Tom? 2. Assume the Social Welfare Function (SWF) is an unweighted sum of individual utilities. Write the SWF and calculate its value. 3. Assume Mona is rich, but Tom is impoverished. We take 5 units of X from Mona and give it to Tom and as a result of that Pm goes down to 20 and Pt increases to 30. How will SWF change? Show your calculations. 4. Now assume that the Tom's utility function changes as follows: Ut = 0.8ln Xt - 0.2 In Pt Calculate SWF given the allocation of X and P in (3). 5. Assume Mona lives now, but Tom is not yet born. Use the original utility functions, but assume Mona's consumption increases to 80 generating 25 units of pollution today and 30 units in future for Tom. Also, as a result of Mona's excessive consumption, Tom's consumption will decrease to 20. Calculate the value of the SWF 6. Now assign a weight of 2 to Tom's utility function in the SWF. Recalculate the SWF with the allocations in (5) and compare the results. What type of environmental standard does this SWF represent?
2)The government is going to impose a policy in the market for cigarettes and ask you for advice. We have few observations for a typical day of this market as follow: P 10 A B ? D 20 30 40 QP 90 60 30 0 QS 0 10 20 30
Government consider four policies: 1. A minimum legal price at $35. 2. A maximum quantity sold at 25 cigarettes per day. 3. A $4 tax on selling 4. A $2 tax on consumption e. Which policy causes the smallest quantity sold? f. Which policy causes the smallest deadweight loss? 8. Which policy is better for consumers in term of consumer surplus? h. Which policy is better for producers in term of producer surplus? i. Which policy causes the highest revenue for the government? j. Which policy do you suggest?
3)Use the following information to answer the questions that follows:
Renumeration 10 000
Net Trade surplus 8 000
Provision for depreciation 500
Indirect Taxation 700
Subsidies 1 000
Net factor payments 500
Calculate:
i) GDP at factor cost. (2 marks)
ii) GDP at market price. (2 marks)
iii) GNP at market price. (2 marks)
iv) National income. (2 marks)
d) Complete the table that follows: (8 marks)
| Year | Total production | Price index | Nominal GDP | Real GDP (BASE YEAR 2010) |
| 2010 | 5000 | 2 | ||
| 2011 | 5600 | 4 | ||
| 2012 | 6000 | 3 | ||
| 2013 | 6000 | 7 |
Expert Solution
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2)
e.) Policy B causes the smallest quantity sold.
f.) Policy C causes the smallest deadweight loss.
g.) Policy C is better for consumers in terms of consumer surplus.
h.) Policy A is better for producer in terms of producer surplus.
i.) Policy D causes the highest revenue for the government
j.) I would suggest Policy C
3)We are provided with the following information:
Renumeration 10 000
Net Trade surplus 8 000
Provision for depreciation 500
Indirect Taxation 700
Subsidies 1 000
Net factor payments 500
i) GDP at factor cost is the total compensation paid to the factors of production for providing with their factor services. Thus, GDP at factor cost is the renumerations given which is equal to= 10,000
ii) GDP at market price is given by: GDP at factor cost + Indirect taxes - Subsidies.
Thus, GDP at market price is equal to: 10000 + 700 - 1000 = 9700
iii) GNP at market price can be determined as : GDP at market price + Net factor income from abroad
= 9700+ 500 = 10200
iv) National income in an economy is the Net National Product at Factor cost.
The Gross Domestic product at factor cost : 10000
GNP at Factor cost = GDP at factor cost + net factor income from abroad = 10000 + 500 = 10500
NNP at facor cost = GNP at factor cost - depreciation: 10500 - 500 = 10000
Thus, the national income = 10,000
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