Nanyang Technological University

HE9091 Principles of Economics

July Semester 2016
Tutorial 6 (Student Version)

Question 1

The demand for Botox injections (a procedure that removes wrinkles and
smoothes the skin) is as shown in the diagram. The marginal cost of a Botox
injection is $1000 and the procedure is not currently covered by health
insurance.

Price of Botox injection ($/procedure)

1000

1000 of procedures
40 80

(a) By how much will total economic surplus change if the city council
passes a law requiring employers to include full reimbursement for Botox
injections in their employees health coverage?

(b) How would the change in total economic surplus be affected if the law
instead required health insurance to pay only $500 per procedure?

Question 2

John Tan and Mary Lee live in the same flat and next to each other in the same
level Mary Lee loves to play music CD so loudly that John Tan can hear them.
John Tan prefers a quiet environment when he is resting at home. Assume that
Mary Lee receives $100 of benefits from her music and John Tan suffers $60
of damages.

(a) Suppose the flat does not have any rules about noise. John Tan and
Mary Lee can bargain at zero cost. What will be the outcome? Is the outcome
socially efficient?

(b) Now suppose flat passes a rule that says residents are not allowed to
play music their neighbors can hear if any of the neighbors object. As before,
John Tan and Mary Lee can bargain at zero cost. What will be the outcome?
Is it socially efficient?

1
(c) Singapore has strict policy to prohibit activities that generate loud
sound after 10 pm in residential area. Since negotiation among private parties
can result in social optimal outcome, why is there still a need for government
policies to regulate and control noise pollution?

Question 3

Mr Lim and Mr Tan are staying side by side in a hill top. There is a piece of
vacant land infront of their houses and both wish to build a Koi pond. Each of
them value the Koi pond at $220 and the cost of constructing the Kio pond is
$400. Mr Lims income is $1000 while Mr Tans income is $3000. The
official from the Town Council suggest two schemes to them. Scheme A
requires them to split the cost equally while Scheme B requires them to pay
10% of their income to finance the construction.

(a) From the society point of view, should the Koi pond be built?

(b) If the Koi pond should be built, which scheme is the preferred one?

Question 4

Two consumers, Smith and Jones, have the following demand curves for
Podunk Public Radio broadcasts of recorded opera on Saturdays:

Smith: PS = 12 - Q
Jones: PJ = 12 2Q

Where PS and PJ represent marginal willingness-to-pay values for Smith and

Jones, respectively, and Q represents the number of hours of opera broadcast
each Saturday.

(a) If Smith and Jones are the only public radio listeners in Podunk,
construct the demand curve for opera broadcasts.

(b) If the marginal cost of opera broadcasts is a constant amount of $15,

what is the socially optimal number of hours of broadcast opera?