Reference no: EM13784054

1. Suppose central planners have decided to financially support all children with food vouchers, free day care, and public school.

a. What problems might this create?

b. How might this lead to further interference by central planners into family choices?

2. Give an example of a merit good, a demerit good, a public good, and a good that involves an externality.

3. In the United States, say gasoline costs consumers about $2.50 per gallon. In Italy, say it costs consumers about $6 per gallon. What effect does this price differential likely have on:

a. The size of cars in the United States and in Italy?

b. The use of public transportation in the United States and in Italy?

c. The fuel efficiency of cars in the United States and in Italy?

4. What would be the effect of raising the price of gasoline in the United States to $5 per gallon?

5. In the early 2000s, Whole Foods Market Inc. switched from a medical care plan with a low deductible to a medical care plan that had a high deductible, which meant that employees were responsible for the first $1,500 of care, whereas after that they received 80 percent coverage. The firm also put about $800 in an account for each employee to use for medical care. If they did not use this money, they could carry it over to the next year.

a. What do you expect happened to medical claim costs, relative to the plan that was replaced?

b. What do you believe happened to hospital admissions, relative to the plan that was replaced?

6. Suppose you find that the price elasticity of demand for a good that your company sells is estimated to be 0.80. What recommendations would you make for pricing? That is, should the price be increased or decreased?

7. Explain the importance of substitution in determining elasticity of supply and demand.

8. Explain how the concept of elasticity makes supply and demand analysis more useful.