During a particularly dry summer, officials in Tucson, AZ worry that their existing water supplies are not large enough to meet residents’ basic needs and they begin to discuss measures for reducing the city’s water consumption. Residential water use consists broadly of “indoor” use (drinking, cooking, bathing, laundry, etc.) and “outdoor” use (watering grass, washing cars, filling up swimming pools, etc.). The city, being reluctant to raise water rates, wants to place a ban on outdoor water use because using water in this way seems less “essential.” As an economist, you wonder whether it might be better to increase water prices and allow residents to decide for themselves how to allocate water across different uses. To make a more formal case, you obtain data on Tucson’s water demand in each sector (indoor and outdoor) and decide to calculate the deadweight loss associated with this outdoor water ban.

You will find that demand for “indoor” water (?_??) and “outdoor” water (?_???) are given by

? = 150 − 3?_?? and ? = 20 − 0.2?_???

1. Compute the deadweight loss ($/day) associated with the ban on outdoor water use. (To find this number, you can use figure like the one shown below.)

2. What is the price ($/1,000 gal.) that Tucson should charge to bring the city’s total residential water consumption down to ?̅?

All that is needed to solve is QUESTION 5 & its sub-parts...

Asymmetric Information and Separating Equilibrium

A population has two equal-sized members of "healthy" and "unhealthy" individuals. Members of each type have the same, identical, utility function: U = 20Y0.5 (i.e. 20 x Y raised to the 0.5 power), where Y is annual income.

Assume each individual, in either group, has disposable income (after normal expenses) of $19,000 a year. If in need of major medical care (and does not have insurance), each individual will have $15,000 in medical expenses. A "healthy" individual has a 6% probability, while an "unhealthy" individual has a 18% probability, of requiring major medical care.

Use the information above to answer the questions (1 through 5) below.

NOTE: An actuarially fair insurance premium (AFIP) is always calculated as: AFIP = (Medical expenses covered) x (Probability of occurring).

1. Calculate the AFIP of the full-coverage policy for a "healthy" individual.

2. Calculate the AFIP of the full-coverage policy for an "unhealthy" individual.  

3. Calculate the AFIP of a deductible policy for a "healthy" individual, for which the deductible is equal to $12,000.

4. Calculate the AFIP of a deductible policy for an "unhealthy" individual, for which the deductible is equal to $12,000.

5. Suppose health status ("healthy" or "unhealthy") represents asymmetric information: Each individual knows her or his health status, but insurance companies do not.  

Now, suppose an insurance company offers only two types of policies: 1) a full-coverage policy with premium equal to the most expensive (regardless of insurance type) of the two full-coverage policies.

a. In the boxes below, calculate expected utility for a "healthy" individual, for each scenario:

No Insurance:

Most Expensive Full-Coverage Policy (Option 1):

Least Expensive Deductible Policy (Option 2):

b. In the boxes below, calculate expected utility for an "unhealthy" individual, for each scenario:

No Insurance:

Most Expensive Full-Coverage Policy (Option 1):

Least Expensive Deductible Policy (Option 2):

c. Based on your answers in 5a. and 5b., which option would a representative member of each group (i.e. "healthy" and "unhealthy") choose?

d. In the box below, enter the insurance company's expected economic profit from selling the desired policy (from the individual's perspective) to a member of each group.

Expected Profit from "Healthy":

Expected Profit from "Unhealthy":

Identify the vast demand for natural resources in the East Asian realm, the types of resources that are utilized, and how the high demand has impacted the economies and histories of East Asian countries.

1. What happens to the long-run equilibrium price and quantity of cashew milk if almond milk becomes more expensive AND cashews (that are used in the production of cashew milk) less expensive?

   		Price increases and the change in quantity is ambiguous.
   		Price decreases and the change in quantity is ambiguous.
   		Quantity increases and the change in price is ambiguous.
   		Quantity decreases and the change in price is ambiguous.

QUESTION 7

1. If the price elasticity of demand is 2, what is the percentage change of price that is consistent with a decrease in quantity demanded of 40%? [Type a whole number, no gaps. If the number is positive don't put any sign, if negative put a minus in the front.]

QUESTION 8

1. If the price elasticity of demand is 0.5, what is the percentage change of quantity demanded that is caused by a 10% increase in price? [Type a whole number, no gaps. If the number is positive don't put any sign, if negative put a minus in the front.]

QUESTION 9

1. The income elasticity of demand for good X is -0.5. What can you infer about good X?

   		The demand for good X is inelastic.
   		The demand for good X is elastic.
   		Good X is a normal good.
   		Good X is an inferior good.

QUESTION 10

1. The cross price elasticity of demand for good X and good Y is -1.2 and the income elasticity of demand for good X is 0.5. What can you infer about good X?

   	a.	Good X and good Y are complements.
   	b.	Good X is a normal good.
   	c.	The demand of good X is inelastic.
   	d.	All of the above.
   	e.	(a) and (b) are correct
   	f.	(a) and (c) are correct.
   	g.	(b) and (c) are correct.

Determine if each statement is True/False

6. An increase in the money supply shifts the LM curve to the right.   

7. Expansionary monetary policy is not effective in increasing domestic output under floating exchange rate regimes.

8. An increase in G shifts the IS curve to the left.

9. An increase in domestic interest rates increases the capital account.   

10. An increase in e ($/£), a dollar depreciation, should result in an increase in export revenues.   

11. A currency depreciation shifts the BP curve to the left.

12. A decrease in consumption C shifts the IS curve to the right.

13. An increase in interest rates shift the Aggregate Expenditure curve to the right.   

14. Expansionary fiscal policy is relatively more effective in increasing output in a floating exchange rate regime compared to a fixed exchange rate regime.   

15. Expansionary monetary policy is relatively more effective in increasing output in a floating

exchange rate regime compared to a fixed exchange rate regime.

16. According to the GG-LL model optimum currency areas are most appropriate for areas closely integrated through international trade and factor movements.

17. According to the GG-LL model, an increase in the size and frequency of shocks in the domestic economy will shift the LL curve to the right.                                                             

A firm has the following long run production function x = a(K^1/2)(L^1/2)(P^1/4), where a > 0 is a constant and K, L , P are inputs of the three factors. The prices of K, L , P are Rs. 1 , Rs. 9 and Rs. 8 respectively.

a) Derive the firm’s long run total cost function , long run average cost function and long run marginal cost function. Show the workings in detail

b) In the short run P is fixed and K and L are variable. Derive the firms short run a) Total Cost Function b) Variable Cost Function c) Average Variable Cost Function d) Marginal Cost Function.

c) Obtain an equation of the form P = f(x) showing the optimum quantity of the fixed factor P for the firm to acquire as a function of the intended output x.

How would you contrast the efficiencies of oligopoly with those of monopoly?

2.   A small community currently taxes residents to provide monthly community concerts. Voter A currently pays a tax per concert equal to $50 per month. This voter receives a marginal benefit of $75 at the current political equilibrium number of concerts per month. Voter A:

a.    is the median voter.

b.   would be made better off if the number of monthly concerts were increased.

c.    would be made worse off if the number of monthly concerts were increased.

d.   has achieved his most-preferred political outcome for monthly concerts.

3.   If all voters have single-peaked preferences, then under majority rule:

a.    cycling of political outcomes can occur.

b.   a political equilibrium exists.

c.    the political equilibrium is the median most-preferred outcome.

d.   both (b) and (c)

4.   Voter A will normally vote in favor of one security guard per week because his marginal benefit is $125 and his tax share is $100 per week. Voter A receives zero marginal benefit from one concert a week and would vote against it. Voter B receives $125 marginal benefit from one concert per week but no marginal benefit from one security guard. One concert per week also will fail to gain a majority when put to the vote. Assuming that both Voter A and Voter B will pay $100 per week in tax for each concert and each security guard,

a.    they can both gain by engaging in logrolling on the two issues.

b.   pairing the issues on one ballot will result in both Voter A and Voter B voting in favor of the combined issue.

c.    pairing the issues on one ballot will result in both Voter A and Voter B voting against the com­bined issue.

d.   implicit logrolling will result in Voter A voting in favor of the combined issue, but in Voter B voting against it.

5.   If bureaucrats seek to maximize the size of their budgets, they will:

a.    seek to fund levels of services up to the point at which MSC = MSB.

b.   seek to fund levels of services for which TSB > TSC.

c.    seek to fund levels of services for which MSC > MSB.

d.   both (b) and (c)

6.   The demand curve for a pure public good is:

a.    obtained by adding the quantity demanded at each possible price for all consumers.

b.   obtained by summing the marginal benefits of each consumer for each possible quantity.

c.    always upward sloping.

d.   always a flat line.

7.   A voter’s most-preferred political outcome will be that for which the:

a.    marginal benefit of a pure public good is equal to the voter’s tax share per unit.

b.   total benefit per unit of a pure public good is equal to the voter’s tax share per unit.

c.    difference between the marginal benefit of a pure public good and the voter’s tax share per unit is maximized.

d.   marginal benefit of a pure public good is equal to zero, no matter what the voter’s tax share per unit.

13. If the quantity of good A is on the vertical axis and the quantity of good B is on the horizontal axis, the slope of the corresponding isocost line is:

a.    the price of good B divided by the price of good A.

b.   the negative of the price of good B divided by the price of good A.

c.    the price of good A divided by the price of good B.

d.   the negative of the price of good A divided by the price of good B.

14.   If the quantity of good A is on the vertical axis and the quantity of good B is on the horizontal axis, the marginal rate of technical substitution of the corresponding isoquant line is:

a.    the marginal product of good B divided by the marginal product of good A.

b.   the negative of the marginal product of good B divided by the marginal product of good A.

c.    the marginal product of good A divided by the marginal product of good B.

d.   the negative of the marginal product of good A divided by the marginal product of good B.

15.   If the quantity of good A is on the vertical axis and the quantity of good B is on the horizontal axis, then the cost-effective mix between the two goods occurs when:

a.    the slope of the associated isoquant line equals the price of A divided by the price of B.

b.   the marginal rate of technical substitution equals the price of A divided by the price of B.

c.    the marginal rate of technical substitution equals the price of B divided by the price of A.

d.   either (a) or (c).

. Two friends are playing a matching card game where friend 1, Max, chooses an Ace, Two, or Three and friend 2, Lucy, plays King, Queen, or Jack. They both put $ 5 each into the pot. Depending on what cards they play, they split the pot differently. The payoffs are summarized in the following table:

   Lucy

King Queen Jack

Max Ace (1,3)   (3,5) (2,4)

Two (6,5)   (3,3) (3,2)

Three (4,2) (5,4) (3,1)

(a) Use iterated elimination of strictly dominated actions (IESDA) to eliminate actions for Max and Lucy. Write out which action is dominated and HOW it is dominated (if you use a mixed strategy to eliminate another action, you need to specify the set of possible mixes or a particular mix).(4 points)

(b) Solve for all Nash Equilibrium/Equilibria of the game. Circle your answer. Explain why the set of actions you identify is a Nash Equilibrium. Write out the definition of Nash Equilibrium as part of your explanation. (8 points)

List the factors change demand and shift the demand curve. Tell what happens to demand and the demand curve when there is an increase in the factor

Discuss the problems of measuring productivity in actual work situations.

How might productivity be measured for each of the following industries?

a. Education(e.g.,elementaryandsecondaryeducation,highereducation—undergraduate and graduate)

b. Government (e.g., the Social Security Office, the Internal Revenue Service)

c. Manufacturing (e.g., soap and toothpaste, computers, heavy machinery)

d. Finance and insurance (e.g., banks, insurance companies, brokerage houses)

The government of Ontario is the largest sub-national borrower in the world, owing a whopping $359 billion as of March 31, 2019. Ontario debt to GDP ratio current stands at 41%. Please review the fiscal policy chapter and try to assess the fiscal policy of the government of Ontario. Include analysis on Ontario's economic situation by listing GDP growth rate, inflation rate, unemployment rate, etc. Try to base your analysis by answering the following questions:

1.The government of Ontario has issued a sizable portion of its debts in foreign currencies. What are advantages and disadvantages of issuing foreign currency debts?

Suppose you are the governor of the Bank of Canada. The economy is experiencing a sharp rise in the inflation rate. What changes would you consider in:

a) Open-market operations

b) The bank rate

c) Explain in each case how the change you advocate would affect chartered bank cash reserves and influence the money supply? Elaborate your ideas with hypothetical examples related to any Canadian charted bank?   

d) Distinguish between the overnight lending rate and the prime interest rate. Why is one higher than the other? Why do changes in the two rates closely track each other? Can we categorize the current monetary policy as an Expansionary Monetary Policy? Why or why not?              

Can Economic Growth Survive Population Decline?

The demographic transition is causing greying populations, shrinking labour forces, and overall population decreases in many nations. Can economic growth survive?

As you know from this chapter, Real GDP = hours of work × labour productivity. The number of hours of work depends heavily, however, on the size of the working-age population. If it begins to shrink, the number of hours of work almost always falls. In such cases, the only way real GDP can rise is if labour productivity increases faster than hours of work decreases. The world is about to see if that can happen in countries that have populations that are greying and shrinking.

The historical background has to do with the fact that as nations industrialize their economies shift from agriculture to industry. As that happens, fertility levels plummet because the shift to modern technology transforms children from being economically essential farm hands who can contribute to their families' incomes from a young age to expensive investment goods that require many years of costly schooling before they can support themselves.

As people react to this change, birthrates tend to fall quite dramatically. The key statistic is the total fertility rate that keeps track of the average number of births that women have during their lifetimes. To keep the population stable in modern societies, the total fertility rate must be about 2.1 births per woman per lifetime (= 1 child to replace mom, 1 child to replace dad, and 0.1 child to compensate for those people who never end up reproducing as adults).

Every rich industrial nation has now seen its total fertility rate drop below the replacement level of 2.1 births per woman per lifetime. In Japan and many Eastern European countries, the number has been so low for so long that there are no longer enough children being born each year to replace the old folks who are dying. As a result, their overall populations are shrinking.

Economists only expect that pattern to become more common and more rapid, so that by the year 2050 the majority of nations will have decreasing populations. But decades before a nation's overall population begins to decrease, it faces a situation in which the labour force shrinks while the elderly population swells.

That pattern is the result of each generation being smaller than the one before. As an example, the Baby Boom generation, born between 1946 and 1964, is much larger than the Baby Bust generation that followed it. So as the Boomers retire over the next two decades, there will be a lot of retirees as compared to working-age adults.

This trend can be quantified by the inverse dependency ratio, which is defined as the number of people of working age (ages 20 to 64) divided by the number of dependents (seniors over age 65 plus youths under age 20). In Canada, the inverse dependency ratio is set to fall from about 1.5 people of working age per dependent in 2010 to just 1.16 people of working age per dependent in 2050. That is extremely problematic because it implies that worker productivity will have to rise dramatically just to make up for the relative decline in the number of workers as compared to dependents. If productivity doesn't keep up with the fall in the inverse dependency ratio, living standards will have to decline because there will simply be too many nonworking consumers relative to working-age producers.

The place where this problem is likely to show up first is Social Security. In 2013, for the first time in Canadian history, the number of retirees outnumbered young people in the 15–24 age group. Statistics Canada projects that the working population will continue to drop while the number of seniors collecting pension is expected to rise. Clearly, worker productivity would have to increase to keep up with the decline in the number of workers relative to retirees.

Economists are uncertain about whether such large productivity increases will be forthcoming. The problem is that consumption competes with investment. A society with a larger fraction of dependents is a society that is likely to devote an increasingly high fraction of total output toward consumption rather than investment. If so, productivity growth may slow considerably.

Another possible problem is that, historically, most transformative new technologies and businesses have been created by energetic young people under the age of 40. With each generation getting smaller, there will be fewer people in that age range and thus, possibly, less innovation and slower productivity growth.

Other economists are more hopeful, however. They view old people as consumers and demanders. As their numbers swell, inventors may simply switch from inventing products for young people to inventing products for old people. If so, productivity growth and living standards could keep on rising at the rates we have come to expect. Moreover, Canada brings in about 250,000 new immigrants each year, which at least partially offsets the lower birth rate.

Question:

Would you expect a country with a total fertility rate of 2.7 to have a growing or a shrinking population over the long run?   

What about a country with a total fertility rate of 1.2?

In 20 years, will Canada have more or fewer workers per retiree than it does today? What are the factors that will determine the size and structure of Canadian population? What is meant by a falling inverse dependency ratio? Why does a falling inverse dependency ratio make it harder for real GDP to continue growing? Suggest some solutions to overcome this problem?                                                                                                                 

Q1a Since Canada has an employment insurance program that provides income for those out of work, why should we worry about unemployment? Do you agree? Explain your ideas with logical examples.

b: Some intellectuals and politicians are of the opinion that the existing employment insurance program can’t protect the economy from the severe effects of natural calamities like COVID- 19. What is your opinion as a student of economics? Justify your opinion with appropriate examples as you have observed all the world in recent days.