=========================preview======================
(ECON150)MT answer.pdf
Back to ECON150 Login to download
======================================================
Econ 150
Midterm Answers
1)
At (Ct ,Ct+1) = (2,2) (6,6), C(t+1) = C(t) = C*

C* = 1.5 + C*2 / 8
C*2 C 8C* + 12 = 0
(C* - 2) (C* - 6) = 0
C* = 2 or 6



If Co= 6.1, it will keep on increasing.

After imposing the high-handed policy, the equation becomes
C* = 7/8 + C*2 / 8
C*2 C 8C* + 7 = 0
(C* - 1) (C* - 7) = 0
C* = 1 or 7



Since the new C* (Ct ,Ct+1) = (7,7) is larger than 6.1, C will converge to the low-level equilibrium at B = (1,1). Later on, even if the curve moves back from ** to *, the C is still on the left-hand side of (6,6) (i.e. smaller than 6). C will keep on moving towards (2, 2). So, a high-handed policy, even temporary, may bring C(t) to a low level permanently.

(Note: points would be deducted for using the repeatedly substituting instead of finding out the stable and unstable equilibrium)


2)
Those whose income is just a bit above the poverty line will find working unattractive. These people, together with those whose incomes are even lower, will quit their jobs and receive welfare. The median income for those who still work must go up because the low-wage people have left. The poverty line will increase, causing more people to leave the labor force. Total number of welfare recipients will go up. In the extreme case, employment will go down to a level close to zero.




If a poverty line is to be established and if it is based on an absolute value of income, say, $5000, rather than the relative level discussed above, then adverse selection will not take place. When people leave the labor force, the poverty line defined in this way does not change and so there is no adverse selection.

3)
a. False or Uncertain.

There are not that many cases of death penalty that are actually carried out and so the deterrence effect is small [Textbook]. The explanation for crime reduction, proposed by Levitt, is the abortion law amendment in 1973.

b. False.
It mixes up cause and effect. More people committing crime will result in more crowded prisons, but not vice versa. Reducing the lengths of sentences will lower the cost of committing crime. More people will commit crime.

c. False or Uncertain.
Some argue that in this way total income of workers will go up [increase in wage rate > decrease in number of workers]. But those who have lost their jobs are not compensated by those who have got wage increases. The former will feel that they are unfairly treated. More importantly, what may be true in other countries may not be applicable to HK. Low-skill workers in HK have to face intense competition from people in China. An increase in the wage rate due to the minimum wage law can cause large decline in employment. Workers in HK and those in China are close substitutes.


4)
The lecture note [p9] explains why the market mechanism can induce technological changes that are generated most profits for the economy.



(1)
Induce techn