02 Jun Question 1. You have $600 to spend on beans and rice. The price of beans is $40 and the price of rice is $30.
Question
1. You have $600 to spend on beans and rice. The price of beans is $40 and the price of rice is $30.
a. Graph your budget constraint with books on the vertical axis
b) Suppose that the government subsidizes beans such that each unit of beans are half-price, up to the first 2 units (any additional units are full price). Graph your budget constraint in this circumstance.
2. Consider a free market with demand equal to Q = 100????20P and supply equal to Q = 20P.
a) Graph the inverse demand and supply curves with price on the vertical axis and indicate equilibrium.
b) What is the value of consumer surplus? What is the value of producer surplus?
c) Now the government imposes a $1 per unit subsidy on the production of the good. What is the
consumer surplus now? The producer surplus? The government subsidy? Why is there a deadweight loss associated with the subsidy?
3. You have $1,000 to spend on flowers this year. The price of tulips (T) is $50 and the price of marigolds
(M) is $20. Suppose that your utility function is U(T,M) = T1/5M4/5.
a) What combination of T and M will you choose?
b) Suppose that the price of marigolds rises to $40. How will this change your decision?
4. The City of Davis installed a traffic light at 3rdand F streets in 1979 in order to reduce traffic accidents
at the intersection. Here are traffic accidents per year at that intersection:
One interpretation of these data is that installing the traffic light reduced accidents by 4 since traffic
accidents fell from 18 to 14 from 1978 to 1979.
Year Accidents at 3rdand F streets
1976 24
1977 21
1978 18
1979 14
2
a) What was happening to the number of traffic accidents in the years before the traffic light was
installed? What is the estimate of the impact of the new traffic light in 1979 after removing the trend
in accidents?
b) Now ignore trend and consider instead information from another intersection. Suppose that you find
information below on the number of accidents across town at the intersection of Lake and Arlington,
where there was no traffic light. What is the difference in difference estimate of the effect of the
traffic light on accidents at 3rdand F streets?
Year Accidents at Lake and Arlington
1976 12
1977 10
1978 8
1979 7
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