MICROECONOMICS

Microeconomics

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Microeconomics

Answer no. 2a

Here, O represents the other goods the consumers can purchase and G represents the gym visits that they can purchase. Initially, they will be able to get 7.5 quantity of other goods and 100 visits to the gym.

Answer no. 2b

The substitution and the income effects of the price change combine to form the price effect. The reduction of the gym price to £10 increases the quantity of gym visits available. This corresponds to a price effect. The relative price of the product of gym has changed which results in the substitution effect. Then, the relative income of the consumers has also changed with the provision of subsidy which results in the income effect. The total price effect is a change in quantity of gym that is utilized.

Answer no. 2c

All of the employees will increase their consumption of gym. This is due to the fact that the indifference curves will remain the same. Although, there might be some difference in the shape of the indifference curves of different individuals, these will remain convex to the origin and asymptotic at the ends. Hence, a provision of subsidy is likely to increase the relative marginal utility of gym for all of the employees who will then increase their consumption of gym visits. Of course, gym visits are not Giffen goods in which case the number of visits paid will go down by all employees as a result of a price reduction that is witnessed (Lipsey and Harbury, 1992).

Answer no. 2d

If the employer was to provide an income subsidy instead which was equal to the price subsidy, then the employee's consumption of gym will again increase. This will happen as employees will now get additional income in the form of gym allowance. Then, the total income of the employees will ...