EC325 MT Knowledge

Question 1

Why can we not compare utility across individuals?

Answer 1

Utility functions only tell us whether or not A is preferred to B, and not by how much A is preferred to B. We can only compare utilities across individuals when we assume identical agents who have the same utility functions.

Question 2

First Fundamental Theorem of Welfare

Answer 2

Under the assumptions of:

1. symmetric information
2. rationality
3. perfect competition
4. complete markets
5. no externalities

Then the market equilibrium is Pareto efficient

Question 3

Second Fundamental Theorem of Welfare

Answer 3

Any Pareto efficient allocation is attainable by a competitive equilibrium through suitable lump-sum reallocation of wealth

Question 4

The Samuelson Rule?

Answer 4

Samuelson (1954)

Sum of MRS = MRT (Marginal rate of transformation = price ratio)

Question 5

What is Lindahl Pricing?

Answer 5

Provide a public good at the efficient level through making each individual pay their maximum willingness to pay.

Question 6

Constraints of Lindahl Pricing?

Answer 6

1. Only works with excludable goods (Club goods), and not pure public goods
2. The price is not determined by market mechanism and therefore may be incorrect
3. Must know individual preferences to set individual prices. People have an incentive to under-report their WTP
4. In real life, Lindahl pricing is usually only implemented in local levels

Question 7

What are the differences between Deductibles, Co-insurance and Co-payment?

Answer 7

• Deductibles: Insurees pay the full cost up to a limit beyond which the insurer pays everything
• Copayment: insurees make a fixed payment whenever they get a medical good or service
• Coinsurance: insurees pay a share of each medical bill

Question 8

Evaluate government funded health insurance?

Answer 8

1. deadweight loss (bad)
2. Consumption smoothing (Major events such as cancer)
3. Prevents monopolies health insurance providers from charging insurance prices for monopoly profit
4. Redistribution