Short Assignment 2

1. Suppose you are designing a study to help try to determine the likely costs of including 100% prescription drug coverage under Medicare.

a)      Make a simple demand and supply sketch that shows the likely costs to government at a given point in time.

b)      Now think about what could affect the key elements and make a list of some of the things you would want to look at if you needed to make projections of the costs in the future.  In your list make note of why you think these things could matter.

2. Tom and Jerry form a small isolated economy with fixed endowments. Tom has 30 fish.  Jerry has 15 bottles of milk.

a)      Draw an Edgeworth box for this small economy.

b)      Without trade where in the Edgeworth box is the current allocation of fish and milk?

c)      Assume Tom and Jerry both like fish and milk.  Tom would be willing to trade at a rate as high as 3 fish for 1 bottle of milk (up to a maximum of 15 fish for 5 bottles of milk).  Jerry is willing to trade at a rate as high as 1 bottle of milk for 1 fish (up to a maximum of 5 bottles of milk for 5 fish).  Is the current allocation of fish and milk Pareto efficient? Explain.

3. Outdoor concerts would aesthetically enhance the lives of people who visit the local park.
Suppose there are 200 community members who each receive a marginal benefit of monetary value, “P” such that P=9-3q, where q is the number of outdoor concerts.  After 3 concerts they are satiated and P=0.  Suppose there are another 3 community members who enjoy these gatherings more and receive a marginal benefit of P=300-50q.  After 6 concerts they are satiated and P=0.  So, there are a total of 203 demand curves. Each concert costs \$1200 to produce.

a)      Assuming outdoor concerts are local public goods, what is the efficient number of outdoor concerts for this community? Show your answer algebraically and graphically.

b)      In what ways is an outdoor concert a public good?

c)      Do you think that the private markets will provide enough concerts?  Why or why not?

4.  a)  Briefly summarize the Coase Theorem (include the 3 key conditions).

b)      Give an example in which the Coase Theorem would suggest government intervention is not necessary and explain why.

c)      Give an example in which the Coase Theorem would suggest government intervention may be desirable and explain why.