Q5. Assume an individual has a utility function of this form U(C, L) = 16 + 8(CxL) This utility function implies that the individual's marginal utility of leisure is 8C and her marginal utility of consumption is 8L. The individual has an endowment of V=$320 in non- 1labour income and T = 16 hours to either work (h) or use for leisure (L). Assume that the price of each unit of consumption good p=$1 and the wage rate for each hour of work w=$24. (a) Find the reservation wage of this individual. (4 points) (b) Calculate the minimum dollar amount required to convince this individual to give up an additional leisure hour in return for additional consumption good when she is already working 5 hours. Determine the change in consumption when the person now works 6 hours instead of 5 hours. (6 points) (c) What is this individual's optimal amount of consumption and leisure? (12 points) (d) Suppose that there is a shock to this labour market and the competitive market wage rate jumps to $32. Determine whether the substitution or income effect dominates for this individual. (8 points) Q6. Suppose a company has invented and patented a new effective drug to treat hay fever. For simplicity, assume there is no fixed cost and the marginal cost of producing the drug is: MC=$ 4. Without being covered in any insurance plan, the market demand is as follows: Qd =1000?40 P (a) What are the equilibrium price and quantity, assuming the drug is not covered by any health insurance? (10 points) (b) Suppose the drug is covered by a public health insurance plan and everyone is eligible. Under this plan, the co-insurance rate is 20% and the payment from the insurer is capped at $20. That is, the insurer will pay 0.8P if P ?$24 and the insurer will pay $20 if P $24. What is the market demand under this insurance policy? What price should the company charge and what is the equilibrium quantity? (10 points) (c) Suppose the public health insurer changes the policy. Now, the co-payment from the customers is capped at $5 and the rest will be paid by the insurer. For example, if P=$10 the customer will pay $5 and the insurer will pay $5. If P=$11 the customer will pay $5 and insurer will pay $6. Additionally, the insurer demands that the maximum price (P) the company can charge is $12, or the drug will not be covered by the insurance. Under this situation, what is the market demand? What price the firm should charge and how much should the firm produce? (10 points)

Q5. Assume an individual has a utility function of this form U(C_. L) = 16 + 8(CrL) This utility function implies that the individual's marginal utility of leisure is St: and her marginal utility of consumption is 8L. The individual has an endowment of V=S320 in non- lahour income and T = 16 hours to either work (11) or use for leisure (L). Assume that the price of each unit of consumption good p=31 and the wage rate for each hour of work w= 24. (a) Find the reservation wage of this individual. (4 points) (b) Calculate the minimum dollar amount required to convince this individual to give up an additional leisure hour in return for additional consumption good when she is already working 5 hours. Determine the change in consumption when the person now works 6 hours instead of 5 hours. {6 points) (6 points) (c) What is this individual-'s optimal amount of consumption and leisure? (12 points) (d) Suppose that there is a shock to this labour market and the competitive market wage rate jumps to $32. Determine whether the substitution or income effect dominates for this individual. {8 points) Q6. Suppose a company has invented and patented a new effective drug to treat hay fever. For simplicity. assume there is no xed cost and the marginal cost of producing the drug is: MC = 54. Without being covered in any insurance plan. the market demand is as follows: Q5. : 1000 40 P (a) What are the equilibrium price and quantity. assuming the drug is not covered by any health insurance? (10 points) (b) Suppose the drug is covered by a public health insurance plan and everyone is eligible. Under this plan. the co-insurance rate is 20% and the payment from the insurer is capped at $20. That is_. the insurer 1will pay 0.3P if P524 and the insurer will pay $20 if PL $224. What is the market demand under this insurance policy? What price should the company charge and what is the equilibrium quantity? (10 points) (c) Suppose the public health insurer changes the policy. Now, the co-payment from the customers is capped at $5 and the rest will be paid by the insurer. For example. if P=Sl0 the customer will pay $5 and the insurer will pay $5. If P=Sll the customer will pay 35 and insurer will pay 86. Additionally. the insurer demands that the maximum price (P) the company can charge is 312. or the drug will not be covered by the insurance. Under this situation. what is the market demand? What price the rm should charge and how much should the rm produce? (10 points)