Question
Consider the utility function U = ln( M )+ ln( S ) where M is the level of medical care, and S is spending on
Consider the utility function U= ln(M)+ ln(S) where Mis the level of medical care, and Sis spending on all other goods. Suppose medical care is priced at $200-per-unit of medical care, income is $20,000, and let PS= $1.
- Write the budget constraint.
- Sketch the budget constraint where M is on the horizontal axis.
- Let MUM= 1/Mand MUS= 1/S. Use the rational spending rule to find the optimal level of medical care and generalized spending.
- Suppose price of medical care decreases by $100-per-unit of medical care, sketch the new budget constraint on the same graph as Exercise 2.2.
- Suppose the government established a new policy for all individuals making less than $30,000. The new policy will pay for the first $2,000 of medical care for these individuals each year.
How does this affect the person's budget constraint and optimal market basket?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
a The budget constraint can be written as 200M S 20000 b Sketching the budget constraint S 20000 200...
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Microeconomics
Authors: David Besanko, Ronald Braeutigam
5th edition
1118572270, 978-1118799062, 1118799062, 978-1118572276
