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(econ198)[2005](s)midterm~masze^_10230.pdf
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Department of Economics, HKUST Department of Economics, HKUST

ECON 198 ECON 198
MICROECONOMIC THEORY I MICROECONOMIC THEORY I


Semester: Spring 2005 Semester: Spring 2005
Prof. S. F. Leung Prof. S. F. Leung






Midterm Examination Midterm Examination
March 31, 2005 March 31, 2005
3:00 pm C 4:20 pm 3:00 pm C 4:20 pm



This is a closed book examination. You have 80 minutes to complete the test. Write coherently, lucidly, and legibly. Always explain your answerThis is a closed book examination. You have 80 minutes to complete the test. Write coherently, lucidly, and legibly. Always explain your answer. The maximum score for this exam is 80 points. Points are marked next to the questions and may be served as a rough guide to how much time you should allocate on each question. Points will be deducted for irrelevant materials. Use mathematics and/or diagrams wherever appropriate to support your answer.



1. (15)



In Hong Kong, Comprehensive Social Security Allowance (CSSA) is a huge welfare program that takes up a significant percentage of the government budget. Reports of CSSA recipients abusing the system appear in the news from time to time. For example, one CSSA recipient was reported to have hidden assets worth more than HK$10 million while another one used the allowance for a vacation tour with her ex-husband (faked divorce) in Phuket, Thailand.

Some commentators suggest that the cash allowance be replaced by coupons for specific uses such as rent and food. For example, CSSA recipients are issued a certain dollar value of food coupons in lieu of cash. The coupons can only be used for the purchase of food. Food sellers can redeem the coupons for cash from the government.

(a) Discuss the pros and cons of this proposal from a CSSA recipients point of view.



(b) Discuss the pros and cons of this proposal from societys point of view. In particular, discuss whether food coupons can mitigate the abuse of government money.




2. (5)



The Financial Secretary Henry Tang has just proposed in his 2005 Budget that the estate (inheritance) tax be abolished. The duty, applicable to people who die leaving assets worth HK$7.5 million or more, produces revenue of HK$1.5 billion a year for the government.

Discuss the pros and cons of the abolition of the estate tax.






3. (5)



A consumer rank different bundles (x,y) of goods x and y in the following way:

(a) Bundle (11,17) is indifferent to bundle (3,21).
(b) Bundle (10,29) is preferred to bundle (4,21).
(c) Bundle (4,21) is preferred to bundle (15,8).
(d) Bundle (15,8) is preferred to bundle (11,17).

Does this consumers ranking satisfy the fundamental axioms of preferences? Explain.






4. (5)



Henry likes eating fish, but he only eats two kinds: tuna and salmon. His preferences are such that, given a choice between two bundles c