Belo are macro quiz...its a complete question help me
1) (35 points) As you know, the high price of gasoline over the last 12 months has been a concern because it has slowed the rate of U.S. economic growth. Gasoline's ability to slow economic growth results from the combination of two factors: . In the short run, at least, the demand for gasoline is quite inelastic with respect to its own price. Much of the customer income paid for more expensive gasoline goes directly to oil producers in foreign countries. a) (15 points). Begin with a typical consumer we will call Louie. Louie spends his money on two things - gasoline and hamburgers. Set up indifference curve axes with gasoline on one axis and hamburgers on the other axis. Using these axes, illustrate the following: . Two or three increases in the price of gasoline (assume that the price of hamburger and Louie's income remain constant). . A carefully drawn set of three or four indifference curves that lead to Louie's having a very inelastic demand curve for gasoline as the price of gasoline rises.b) (10 points) Draw Louie's demand curve for hamburgers before the price of gasoline began to rise. Using words and your diagram, explain what, if anything, happens to this demand curve when the price of gasoline rises.c) (10 points) We now go back to the real world where people spend their money on many goods - not just two goods. In this real world, another issue of economic concern is the rising cost of medical care. Using common sense and any relevant information contained in this problem, explain why the rising cost of medical care should or should not exert the same negative effect on U.S. economic growth as the rising price of gasoline.3) (35 points) Suppose your utility function is defined over two goods, beer and salads. The utility function itself can be written: U = 10xLN(beer) + 20xLN(salads) PBEER = $2.00, PSALAD = $5.00, and your income is $30.00 Suppose also that the government imposes a 25 percent tax on the price of each beer sold. a) (10 points) Solve your utility maximizing problem.c) (10 points) Based on the calculations you have been making so far, explain in as much detail as you can what you can say about the elasticity of your individual demand curve for beer. If you can't say anything, explain why you can't.4) (15 points). The distribution of many economic statistics follows what is called an "80- 20" rule, or "90-10" rule etc. For example, "the top 20 percent of our customers account for 80 percent of our profits" (here, "top" means most profitable). Similarly, "the top 10 percent of the items in listed in our catalog account for 90 percent of our sales." (here "top" means the best sellers) A health insurance company can construct the distribution of expenditure per customer and come up with a similar statement: the top (i.e. most expensive) Y percent of customers account for X percent of our total costs. Consider two possible examples of this statement: - The most expensive 5 percent of customers account for 95 percent of total cost (but we don't know in advance who these customers are). - All customers have roughly equal expenditures - e.g. the top 20 percent of customers account for 23 percent of total expenditure. One of these distributions suggests a possible strategy for holding down the growth of health care expenditures while maintaining basic notions of insurance. Which distribution is it and what is the strategy? 6
