Suppose that in the midst of a financial crisis, Mr Burns is forced to sell the SNPP to wealthy chocolate tycoons. The first thing the tycoons do is reverse Mr. Burns’ discriminatory policy against the obese. They eliminate the wage penalty associated with obesity but leave intact the pooled health insurance program, so Homer and Smithers still pay the same premium. a. Now do Homer’s jelly-eating, slothlike habits impose a negative externality on Smithers? Explain the nature of the negative externality. Is there any loss in net social welfare from this externality? Explain why or why not, and describe carefully any assumptions you need to answer this question. b. How might an adverse selection death spiral arise at the new SNPP?

Adverse selection arises in the market for health insurance because Moral hazard arises in the market for health insurance because OA. for many people, the price of health insurance is beyond their ability to pay for it; the marginal social benefit of healthcare exceeds the marginal benefit perceived by its consumers OB. people optimistically underestimate the health risks that they face; people take too short a view of the benefits of healthcare OC. O D. some of the healthiest people choose to not buy insurance; once insured, a person has less incentive to adopt a healthy lifestyle once insured, a person has less incentive to adopt a healthy lifestyle; some of the healthiest people choose to not buy insurance;

13 Secondhand smoke L Assume that the daily demand for packs of cigarettes in the tobacco-addicted nation of Pcoria is Q=100 – P Further assume that the marginal cost of producing a pack of cigarettes is $6, and that the market for cigarettes is perfectly competitive. Assume that each pack of cigarettes smoked does §6 worth of health damage to the smoker in the form of increased cancer risk and a total of $5 worth of health damage to the smoker's neighbors via secondhand smoke. Finally, assume that all Pcorian cigarette consumers are aware of these costs. a Assume that a Pcorian smoker named Jay states that he is willing to buy a pack of cigarettes for $8, but not a penny more. In this market, where the price is $6 per pack, what are the private benefits and private costs incurred whenever he buys a pack of cigarettes? Is it privately efficient for him to buy a pack of cigarettes at this price? b What about the public benefits and public costs? Is it socially efficient for him to buy a…

2. Suppose there are only two people, Simon and Charity, who must split a fixed income of $100. For Simon, the marginal utility of income is MU, = 400 - 21, whereas for Charity, marginal utility is MU= 400 - 61 where I, I, are the amounts of income to Charity and Simon, respectively. a. What is the optimal distribution of income if the social welfare function is additive? b. What is the optimal distribution if society val- ues only the utility of Charity? What if the reverse is true? Comment on your answers. c. Finally, comment on how your answers change if the marginal utility of income for both Simon and Charity is constant: MU₂ = 400 MU, = 400

Question 4 1 pts Consider the market for used cars. Suppose that there are "good" used cars and "lemons" (or cars that are likely to fall apart quickly). Suppose that owners of "good" used cars would be willing to sell for $10,000 and owners of "lemons" will sell their car for $2,00O. Furthermore, assume buyers are willing to pay $12,000 for a "good" car and $3,000 for a lemon. Assume that sellers know if their car is good or a lemon, but buyers cannot differentiate between good cars and lemons. This situation is an example of bulk markups that occur with adverse selection an adverse selection death spiral ex-post moral hazard ex-ante moral hazard

In the diagram below, if legislation allows Angela to be at point F, if Angela and Bruno can bargain costlessly: Angela's reservation indifference curve, IC, Angela's best feasible 12 indifference curve when an independent farmer, CO 8 CA D F FF: Angela and Bruno combined 16 24 Angela's hours of free time Select TWO correct answers. Select one or more: а. Point F is on Angela's indifference curve so it is also Pareto efficient from her point of view. b. The final outcome could be at point H, which is a Pareto improvement. С. Movements along the contract curve between C and D can still bring Pareto improvements for either Angela or Bruno. Bushels of grain

Please no written by hand Suppose all workers have the same preferences represented by U = (sqroot)w - 2x , where w is the wage and x is the proportion of the firm’s air that is composed of toxic pollutants. There are only two types of jobs in the economy, a clean job (x = 0) and a dirty job (x = 1). Let w0 be the wage paid by the clean job and w1 be the wage paid for doing the dirty job. If the clean job pays $16 per hour, what is the wage in dirty jobs? What is the compensating wage differential?

5. Consider a monocentric model with fixed housing unit h and the utility of residents u=c, where c is the consumption of the composite goods. The budget constraint of each resident living at distance d from the CBD is c + ph = w-dt, where w is wage, p is housing rental rate, t is the unit commuting cost in distance. The city is open and free migration in and out. The external utility they obtain out of the city is ū= 10. The rental rate on agricultural land is pA. (a) Illustrate why the consumption of residents living in all parts of the city will be equalized. (b) Derive the housing rental rate (p) as a function of d, distance from the CBD, What is the slope? Draw a figure with p at the y-axis and d at the x axis. (c) Discuss how the boundary of the city is determined in this model, how would the boundary of the city respond to wage w and commuting cost t?

John is a 55-year-old male smoker, about 50 pounds overweight, who has high blood sugar and drinks to excess. Because of adverse selection in health insurance, Select one: O a. when John gets health insurance, he will be less likely to take care of himself. O b. if John doesn't have health insurance already, he will not be able to get it. O c. when John gets health insurance, he will be more likely to take care of himself. O d. John is more likely to buy health insurance than the average person since premiums are based on the average risk. O e. John is less likely to buy health insurance than the average personsince premiums are based on the average risk.

Draw a market where consumers demand health insurance and insurance companies supply insurance at a price of insurance called the premium. Explain why, in this model of the insurance market, the individual mandate (the mandate is everyone has to have insurance) will cause health insurance premiums to increase.