In the Great Depression, why did Keynes think about the relative reliability and effectiveness of Fiscal and Monetary policy?

Why do negative externalities, monopoly, and asymmetric information result in bad economic outcomes? What can we do to fix these?

Question 1

Health insurance markets suffer from a large asymmetry of information that leads to adverse selection in the marketplace.

Describe the asymmetric information in the health insurance market. Who is harmed by it?

7. Your government is considering an import tax on a consumer good (imported). Your team is assisting the government in evaluating the welfare impact of the tax. You are the head of the team, and your task is to explain to your team members how the small-country or non-small-country assumptions would influence the result.

9. You are the head of a research team that is assisting your government in evaluating the impact of a global pandemic on the economy. Your task is to explain each step of how to do this job to your team members.

Adapted from “Waiting lists continue to grow at a rate that far outstrips organ supply, and many people die waiting for a kidney or liver”. All countries, including Australia, have far more people on organ waiting lists than available donors. At the beginning of 2015 in Australia over 3000 people were waiting for organ transplants, and by the end of April, only over 150 people had donated organs, allowing 350 people to receive transplants (one donor usually provides several organs). Waiting lists continue to grow at a rate that far outstrips organ supply, and many people die waiting for a kidney or liver. Commentators, health economists and policy makers around the world have made a variety of proposals about how to solve organ shortages. Some health economists argue the de-regulated market (ie allow the free market) for transplant organs is the best way to improve supply. Currently in Australia and most part of the world, organs are treated as 'gifts'. Organs must be donated without payment (ie Ps = $0 for all donations), and distributed according to clinical need rather than ability to pay. This gift system helps to protect both donors and recipients from coercion, and distributes organs fairly.

(Adapted from “Waiting lists continue to grow at a rate that far outstrips organ supply, and many people die waiting for a kidney or liver”.)

1) Currently, the donors and their relatives receive no compensation for the organ donations (ie Ps = $0 for all donations), if the government changes its policy and allow human organs to be traded, what would happen to the supply of organ.

2) Is the demand for human organs such as liver, kidney, lungs, eye price elastic or inelastic?

3) Hospital A, a private institution which is specializing in organ transplant requires to raise more funds (I e Total Revenue) to upgrade its equipment, should Hospital A :

a) raise its price; or

b) hold it price or

c) Drop its price.

Use a diagram to demonstrate and explain the case.

4) Do you think that if the government allows a free market system for organ transplant is fair?

10.

A city is experiencing over-exploitation of its grazing areas. The city council is looking for a consultancy organization that can suggest viable solutions. Your research team is bidding for this job, and you are responsible for the methodology section in the bidding document.

Carefully explain what you would include in the methodology section. Your explanation must include the details of the method (or methods) you choose, the data that need to be collected, the assumptions or restrictions you may want to make, and also the strengths and weaknesses of the method(s).

3.

You are the head of a research team. Your team is analyzing the behavior of a group of consumers toward a number of consumption goods. In particular, the team must estimate the elasticity of substitution of the consumers among these goods.

You are now instructing your team members about how to undertake this estimation job. Your task is to explain each step to your team members.

1. You are the head of a research team, and you are training your team members on the index number technique. Your task is to explain to your team members that when measuring an overall price increase (e.g., inflation), the Laspeyres index likely overestimates while the Paasche index likely underestimates it.

1. You have been hired to advise the Ministry of Primary Industries on its policy directed at deterring illegal fishing. Thieves make money Wout of illegal fishing. The existing probability of apprehending a fisheries thief is p < 0.5. If caught they are fined F and their wealth is (W-F). The Ministry is proposing to deter illegal fishing by eitherdoubling the fine (F)for illegal fishing (holding probability constant) ordoubling the probability (p)of catching the fish thieves (holding the fine constant). As an economist, you are well aware of the relevance of an individual’s attitude to risk and suggest analysing the problem in terms of a risk adverse and a risk loving thief.

1. If fish thieves are risk averse, what policy (doubling the fine or doubling the probability of catching the thief) will do better in deterring illegal fishing?
2. If fish thieves are risk loving, what policy (doubling the fine or doubling the probability of catching the thief) will do better in deterring illegal fishing?

Hint: use a graph to answer each question.(hints to the problem are given below)

First, set the problem up.

Expected wealth = E(W) = W₀– pF; if we double pthen E(W) = W₀– 2pF

If we double Fthen E(W) = W₀– p2F. Thus E(W)is the same. The best deterrent is the option that results in the lowest expected utility.

1. Doubling the fine has the biggest impacton the risk averse thief’s EU
2. Downside risk is not as significant for the risk loving thief. For this person, the best deterrent is to double the chance of being caught. These thieves like to take risks.

Velocity.   

a) The money supply is $600. The price level is 2 and Real GDP is 900. What is velocity?  

b) The money supply grows 3%, velocity is growing 1%, real output is growing 2%. What is the inflation rate? Suppose that people are worried that future inflation will be very high, so that people don’t want to hold onto money since it will lose value, which makes velocity grow at a rate of 10%. If the money supply continues to grow at 3% and RGDP continues to grow at 2%, what would be the inflation rate now?  

A. According to the Coase theorem, why would a Hobart zinc refinery that is legally allowed to emit pollution agree to reduce its pollution emissions even though it is not in its own private interests? How might transactions costs prevent this?

B. Suppose for every $1 of poppies grown in Tasmania that $0.05 of environmental damage is done from fertiliser entering river systems and other water ways. What type of externality is growing poppies causing? Explain why the social marginal cost of poppies is higher than the private marginal cost. Explain why the environmental damage from growing poppies causes a dead-weight loss. Suggest a market-based policy that will eliminate the dead-weight loss and how it will achieve the socially efficient level of poppies in Tasmania.

C. Suppose 3 kelp harvesters each send 1 boat each week to harvest bull kelp off Granville Harbour. Each boat returns with a harvest worth $1,150. It costs $1000 per boat per week to harvest the bull kelp. Every additional boat beyond 3 that is sent to harvest kelp results in the harvest falling by $50 per boat for all kelp harvesters. Why does an individual kelp harvester have an incentive to add another boat? Why is adding another boat not socially optimal?

D. Why do most economists advocate only using the tax/welfare system to address equity concerns from welfare analysis, rather than altering prices?

1. a. The fast food industry is extremely competitive and in some cases close to perfect competition. Identify 2 fast food chains which you feel have almost identical products and pricing and identify the almost identical products that they both sell.

b.Of the 2 that you identified, explain a strategy that one or the other has used in an attempt to gain more control of its respective market and a strategy that you think would work better.