Please answer the questions below with appropriate level of detail and clarity sequentially. You need not arrange your assignment in the form of a report.

When doing diagrammatical work, make sure to label the axes and show all the relevant details (for e.g. mark intercept lengths, label all relevant points and bundles etc.).

It is OK to hand draw your diagrams neatly on paper and insert clear and properly positioned scans of your diagrams into your answer document. Instructions on how to do this are available in the document titled “inserting handwritten documents” within the Problem-based Written Assignment folder.

While composing your answers, assume the following:

1. (1) A household spends their income on two goods: “other goods” and “travel”. “Travel” stands for regional travel undertaken by a household within their own state.

2. (2) Allhouseholdshave“usuallyshaped”or“well-behaved”preferencesbetweenthesegoods.

3. (3) IncomeofanyhouseholdisdenotedasYanditexceeds$400.

4. (4) Thepriceofaunitofothergoodsis$1andthepriceofaunitoftravelis$pperunitineachstate.

5. (5) Other goods and travel are homogenous and divisible goods that can also be consumed in fractional quantities.

6. (6) All households treat other goods and travel as normal goods and both have positive income elasticities.

7. (7) Ignore the nitty gritty of each state’s regional travel voucher scheme and work with the following simple interpretations:

   Victorian Regional Travel Voucher Scheme: A voucher recipient gets $200 re- imbursement as long as they spend at least $400 on travel.

   South Australian Regional Travel Voucher Scheme: A voucher recipient gets a $50 voucher to spend on regional travel.

Question 1

Illustrate how a household’s budget line will change if they are successful in securing a travel voucher in Victoria. On a separate diagram, do the same for a household who’s successful in securing the Great State Voucher in South Australia. Explain your work.

[It is important that you answer this question thoughtfully and ensure that your diagrams have all the relevant details. This is because your diagrams for this question will provide the base for answering the rest of the questions. To answer each of the questions 2-5, you’ll often need to keep reproducing one of these diagrams and do further work on it.]

Question 2

Diagrammatically illustrate a case where a household does not stand to benefit by registering for the Victorian travel voucher. Explain your diagram.

Question 3

Will Victorian households, who in the absence of any scheme plan to spend at least $200 on travel, be interested in registering for the Victorian travel voucher scheme? Is it possible that a household that normally (i.e. without any inducements) spends less than $200 on travel might also be interested? Support your answer using a suitable diagram.

[20 points]

Question 4

Consider the case of a household who in the absence of any scheme, spends more than $400 on travel. Suppose that such a household is successful in getting the Victorian travel voucher. Is it reasonable to expect that their travel spending will surely increase by at least $200 dollars as a result of this scheme? Support your answer with a suitable diagram and explanation.

[15 points]

Question 5

What might be some of the characteristics of households who choose to not participate in the Victorian travel voucher scheme? Explain your answer. Is it possible that a household not interested in Victorian voucher scheme may nonetheless show interest in a voucher scheme like South Australia? Use a diagram to support your answer. Which of the two schemes is likely to fare better from an equity perspective and why?

[35 points]

Question 6

In reality, engaging in travel often involves procuring multiple services such as accommodation and transportation. However, these services may not be perfectly divisible (that is consumable in fractional quantities) as assumed in the assignment. For example, you generally don’t have the option of staying in a hotel for less than one night. Given this fact, is there any implicit similarity between the Victorian and South Australian schemes that may not be apparent from the simple interpretations of these schemes described earlier in Assumption (7)? Explain your answer.

[5 points]