A married couple with children is considering divorce
1) (15 points) A married couple with children is considering divorce. They are negotiating about two elements of the divorce: the level of child support that will be paid to the partner who keeps the children, and the amount of time that the children will spend with each partner. Whoever has the children would prefer more child support from the other partner and more time with the children. Suppose that the partner who keeps the children has this utility function: u = c0.5v0.5, where c = the weekly level of child support and v = the number of hours per week that the children spend with this partner. Suppose that initially the weekly support level is $100, and the number of hours per week spent with this partner is 36.
a. What is the level of utility to this partner from that arrangement?
b. If the other partner wishes to reduce the weekly support to $80, how many more hours with the children must the child-keeping partner have in order to maintain utility at the previous level?
2) (15 points) The Truth-in-Lending Act (15 U.S.C. $4 1601-1604 (1982)) requires the uniform disclosure of the interest rate to borrowers in a readily intelligible form. Assume that before the Act, there was uncertainty among borrowers about the true level of the interest rate, but that after the Act, that uncertainty is reduced.
a. Does the Act increase the marginal cost of lenders making loans? Why?
b. Assuming that the poor and the rich are both equally capable of making informed borrowing decisions, would there be disproportionate harm on the poor or the rich? Why?
c. Does it reduce the profits of lenders? Why?
3) (15 points) Ford and GM both spend significant sums on advertising? Most of this advertising is used to counteract the other’s advertising, but on net there are not many additional customers brought into the car market. If they both reduced their advertising expenditures, they would each make higher profits. Draw a Prisoner’s Dilemma to illustrate this problem. Why don’t they each reduce their advertising expenditures?
4) (15 points) Assume that the federal government partially pays for damage recovery effort for homeowners after floods. Is the flood damage that occurred due to Hurricane Harvey in Houston partly due to a moral hazard problem? Explain.
5) (15 points) State A has very strict laws that make it expensive to get a divorce. State B has no-fault divorce laws (which means that neither partner needs to prove wrongdoing, such as unfaithfulness and thus divorces are inexpensive). Which state would have a higher quality of marriages? Which state would have more divorces? Explain.
6) (15 points). Which of the following are private goods and might, therefore, be provided in socially optimal amounts by private profit-maximizers? Which are public goods and should, therefore, be provided by the public sector or by the private sector with public subsidies? If there are both public and private characteristics, please explain. Explain briefly each of your answers.
An Elton John concert in the American Airlines Center in Dallas.
A national park.
Specialized education such as Bachelor’s of Science in Accounting.
Subsidized school lunch programs for poor children.
A very tall statue such as the Sam Houston statue on I-45 near Huntsville.