Part - 1:

1. People in your neighborhood pay annual dues to a neighborhood association. This association refunds neighborhood dues to selected home owners who do a particularly nice job in beautifying their yard

a. Why might the neighborhood association provide this refund?

b. At the most recent home owners' association meeting, home owners voted to end this practice because they felt that it was unfair that some people would not have to pay their share of the costs of maintaining the neighborhood. What is likely to happen to the overall level of neighborhood beautification? Explain.

2. Suppose 10 people each have the demand Q = 20 - 4P for streetlights and 5 people have the demand Q = 18 - 2P for streetlights. The cost of building each streetlight is 3. If it is impossible to purchase a fractional number of streetlights, how many streetlights are socially optimal?

3.Suppose you prefer working 40 hours per week to 20 hours, and prefer working 32 hours per week to either 20 or 40 hours. However, you are forced to work either 20 hours or 40 hours per week. Is your hourly wage rate an accurate reflection of the value of your time? Explain.

4. The city of Wellington is considering whether to build a new public swimming pool. This pool would have a capacity of 800 swimmers per day, and the proposed admission fee is $6 per swimmer per day. The estimated cost of the swimming pool, averaged over the life of the pool, is $4 per swimmer per day.

Wellington has hired you to assess this project. Fortunately, the neighboring identical town of Kiwiville already has a pool, and the town has randomly varied the price of that pool to find how price affects usage. The results from their study follow:

a.  If the swimming pool is built as planned, what would be the net benefit per day from the swimming pool? What is the consumer surplus for swimmers?

b.  Given this information, is an 800-swimmer pool the optimally sized pool for Wellington to build? Explain.

Part -2:

1.The city Animaltown plans to build a new bridge across the river separating the two halves of the city for use by its residents. It is considering two plans for financing this bridge. Plan A calls for the bridge to be paid for out of tax revenues, allowing anyone to use the bridge freely. Plan B calls for imposing a toll of $6 for crossing the bridge, with the remainder of the cost to be paid out of tax revenues. City planners estimate a local demand curve for hourly use of the bridge to be Q = 1,800 - 100P. The bridge will be able to accommodate 2000 cars per hour without congestion. Which of the plans is more efficient, and why? How would your answer change if congestion was predicted
on the bridge?

2. You are trying to decide where to go on vacation. In country A, your risk of death is 1 in 10,000, and you'd pay $6,000 to go on that vacation. In country B, your risk of death is 1 in 20,000, and you'd pay $9,000 to go on that vacation. Supposing that you're indifferent between these two destinations, save for the differential risk of death, what does your willingness to pay for these vacations tell you about how much you value your life?

3. Jellystone National Park is located 10 minutes away from city A and 20 minutes away from city

B. Cities A and B have 200,000 inhabitants each, and residents in both cities have the same income and preferences for national parks. Assume that the cost for an individual to go to a national park is represented by the cost of the time it takes her to get into the park. Also assume that the cost of time for individuals in cities A and B is $.50 per minute.

You observe that each inhabitant of city A goes to Jellystone ten times a year while each inhabitant of city B goes only five times a year. Assume the following: the only people who go to the park are the residents of cities A and B; the cost of running Jellystone is $1,500,000 a
year; and the social discount rate is 10%. Also assume that the park lasts forever.

a. Compute the cost per visit to Jellystone for an inhabitant of each city.

b. Assuming that those two observations (cost per visit and number of visits per in-habitant of city A, and cost per visit and number of visits per inhabitant of city B) correspond to two points of the same linear individual demand curve for visits to Jellystone, derive that demand curve. What is the consumer surplus for inhabitants of each city? What is the total consumer surplus?

c. There is a timber developer who wants to buy Jellystone to run his business. He is offering $100 million for the park. Should the park be sold?

4. Jackie spends her money on food and all other goods. Right now, she has an income of $600 per month. Compare two alternative welfare programs in which she could participate: program A would provide her with a monthly check of $300 and program B would provide her with $400 a month in credits that can be spent only on food.

a.  Draw Jackie's budget constraints in each of these two cases.

b.  Draw representative indifference curves that would reflect each of these three scenarios.

(i)  Jackie prefers program A to program B.

(ii)  Jackie prefers program B to program A.

(iii) Jackie is indifferent between the two programs.

Part -3:

1.  The New Zealand government definition of poverty is the same in all communities around the country. Is this appropriate? Why or why not?

2.  An individual can earn $12 per hour if he or she works. Draw the budget constraints that show the monthly consumption-leisure trade-off under the following three welfare programs.

a.  The government guarantees $600 per month in income and reduces the benefit by$1 for each $1 of labor income.

b.  The government guarantees $300 per month in income and reduces that benefit by$1 for every $3 of labor income.

c.  The government guarantees $900 per month in income and reduces that benefit by$1 for every $2 in labor income, until the benefit reaches $300 per month. After that point, the government does not reduce the benefit at all.

3. An issue that arises when designing a welfare system is whether to make the benefits available to all low-income families with children or only to families headed by a single mother.

Explain the trade-offs involved in this decision.

4. Suppose that you have a job paying $50,000 per year. With a 5% probability, next year your wage will be reduced to $20,000 for the year.

a. What is your expected income next year?

b. Suppose that you could insure yourself against the risk of reduced consumption next year. What would the actuarially fair insurance premium be?