Referencing Styles : Harvard 1. The government is concerned about encouraging female participation in the labour market, particularly among women with young children. Assume that if these women work, they receive the constant market wage rate w per hour; if they don’t work, they receive a benefit income equal to B. a) (5 marks) Using the individual labour supply model, illustrate the budget constraint facing these individuals. b) (15 marks) Suppose the government decides to provide a fixed subsidy, S, to all working mothers to help cover the cost of childcare. Using the individual labour supply model, illustrate and explain how this subsidy will affect the number of hours women choose to work. Could the subsidy encourage more women to participate in the labour market? Explain. 2. Suppose your income this year is £20,000 and your income next year will be £25,000. a) (5 marks) In a diagram with consumption this year (C1) on the horizontal axis and consumption next year (C2) on the vertical axis, identify your consumption bundle if you neither save nor borrow and label this point A. Draw your intertemporal budget constraint, assuming you face a constant interest rate of 5%. Make sure you clearly identify the intercepts and slope of the budget constraint. b) (10 marks) In practice, banks charge different interest rates for saving and borrowing. In a new diagram, draw your budget constraint assuming you face a 15% interest rate on borrowing and a 5% interest rate on saving. Illustrate and explain under what circumstances a consumer would save and under what circumstance they would borrow. When would it be rational for a consumer to neither save nor borrow? Section B. Decision-making under risk (30 marks) 1. (15 marks) Suppose an individual is risk averse and has to choose between £100 with certainty and a risky option with two equally likely outcomes: £100 - x and £100 + x. Use a graph to explain how the value of x (i.e. the variability of the gamble) affects the maximum price this person would pay for insurance. 2. (15 marks) How can we explain why individuals buy both insurance against losses and lottery tickets? Illustrate and explain what this behaviour implies for an individual’s utility function. 3 Section C. Markets and market structure (35 marks) 1. A monopoly drug company produces a medicine at a constant cost of 10 pence per unit. The daily demand for this medicine by the 100 patients who require it is perfectly inelastic at prices less than or equal to £100 (assume each patient requires 1 unit per day). a) (5 marks) In a graph, illustrate the equilibrium price and quantity, and consumer and producer surplus. b) (10 marks) Suppose the government imposes a price ceiling of £30 per unit. Illustrate and explain the impact this will have on the equilibrium and consumer and producer surplus. What is the deadweight loss associated with this price control? c) (5 marks) Suppose instead the government decides to impose a lump-sum tax on the monopoly. What impact will this tax have on the monopolist’s price and output? 2. Train operators in the UK offer a range of fares. Ticket prices for travel during peak times are generally more expensive than tickets for travel during off-peak times. Customers can also often get substantially reduced fares if they buy their tickets in advance rather than on the day of travel, and discounts are available to young people, students and seniors, provided they have the relevant railcard. a) (7 marks) Explain what type(s) of price discrimination train companies are employing. b) (8 marks) Explain what circumstances or factors are required for train companies to be able to practice effective price discrimination.