Section A – Answer all questions

200 words per question

Question 1

Over the last year, the UK Government has made increasing use of food vouchers to support children from disadvantaged families. Use what you know about the budget  constraints to analyse the use of vouchers from a consumer perspective.

(10 marks)

Question 2

Table 1: UK Alcohol Expenditure and Prices and UK Income

Table 1 contains information about average UK income, UK alcohol prices and spending on alcohol taken from the ONS. Use consumer theory to explain the changes to the consumption of alcohol in the UK.

(10 marks)

Question 3

Leeds Bradford airport is being expanded and this will reduce the effective price of flights for Leeds residents. Alan lives in Leeds, and consumes flights and other      commodities. What method would you use to measure the impact of airport           expansion on Alan’s well-being? Explain this method and why you prefer it.

(10 marks)

Question 4

You and a friend are having a night at the theatre. Tickets cost £200 each. The show you are watching has reached the half way break. It becomes clear that neither of     you are enjoying the show. However, your friend is unwilling to leave because of the price of the tickets. Explain to your friend what sunk costs are and whether that         means you should stay or go.

(10 marks)

Section B – Answer two questions

600 words per question

Question 5

Toni is conducting consumer behaviour research in the consumption of cigars and    whisky. She has found that there are two types of consumers: Group 1 and Group 2.

(a) People in Group 1 consume three glasses of whisky with every cigar.

i.     Give the utility function that represents these preferences. Let  denote the number of cigars consumed and  represent the number of            glasses of whisky.

(2 marks)

ii.     Derive the demand functions for cigars and whisky for people in Group 1.

(8 marks)

(b) People in Group 2 consume one glass of whisky instead of one cigar.

i.     Give the utility function that represents these preferences.

(2 marks)

ii.     Derive the demand functions for people in Group 2.

(8 marks)

(c) Toni only has time to use a single utility function in her model. Which utility function should she use? With reference to the demand functions, explain your answer.

(10 marks)

Question 6

Kurt is a behavioural scientist and is researching behaviour when people are offered a simple lottery. The lottery makes peoples income £400 with a probability of 0.5 and £200 with a probability of 0.5.

(a) What is the expected wealth of the lottery?

(3 marks)

(b) Kurt has set up an experiment. He has offered each subject a choice: take    £300 now or take part in the lottery. His lab notes for the three individuals are as follows:

Kurt has not studied Economics, but particularly enjoys diagrams. Explain and illustrate the concepts of risk aversion, risk neutrality and risk loving to Kurt     and link them to the reactions of Steve, Bob and Todd.

(12 marks)

(c) Kurt now has a better understanding of Economics and has done some self-   study. To help model the behaviour, Kurt is proposing a utility function of          = 10 , where  is income. However, this utility function will only apply when I is greater than 300. If  is greater than 300 then utility is constant at 3000.

i.     Sketch the utility function. Can Steve, Bob or Todd be represented by the utility function? Explain.

(5 marks)

ii.     Are the results of Kurt’s experiments generalisable to the population? What utility function would you suggest to model behaviour around    risk? Explain.

(10 marks)

Question 7

FarFlung make computer keyboards. They use both labour, L, and materials, M, in  their production of keyboards. The production method they use requires that at least one labour and one material is always employed. FarFlung have a Cobb-Douglas    technology which means that their production function is: (, ) =  .

(a) FarFlung can make and sell 160000 computer keyboards.

i.     How much labour and materials would they need to employ if the price of labour is £100 and the price of materials is £25?

(8 marks)

ii.     If fixed costs are £1000000. What is the short run total cost of production and the short run average cost of production?

(2 marks)

(b) FarFlung have the opportunity to move to a new factory, where they will be able to manufacture 360000 computer keyboards. They are confident they