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, , with increasing as increases but decreasing as increases. Suppose also that travel is a bit risky, and that the probability of an accident increases with travel, , while the damage generated falls as automobile size increases, , other things being equal. If no accidents occur damages equal zero e. g. . Assume that individuals value only health, , transport services, , and other consumption, .
- a. Characterize a typical person's (Al's) expected utility maximizing automobile size (Assume that Al has dollars to allocate between and 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.