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Question from Past Microeconomics Qualifying ExamEdit

Fall 2000 - Section II, Question one, George Mason University Suppose that automobile size (weight) and gasoline are inputs into the household production of transport services,  T = t(S,G) , with  T increasing as  G increases but decreasing as  S increases. Suppose also that travel is a bit risky, and that the probability of an accident increases with travel,  P = p(T) , while the damage generated falls as automobile size increases,  H = Ho - d(S) , other things being equal. If no accidents occur damages equal zero e. g.  H = Ho . Assume that individuals value only health,  H , transport services,  T , and other consumption,  C .

  • a. Characterize a typical person's (Al's) expected utility maximizing automobile size (Assume that Al has  W dollars to allocate between  C,S, and  G which are purchased in competitive markets). Explain the economics behind the mathematics that characterize Al's optimum.
  • b. Characterize Al's demand function for automobile size.
  • c. Does Al's short run demand for gasoline necessarily slope downward when Al's utility function is separable and strictly concave? Briefly explain your analysis.

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