Due to shortages in supply, the Ontario government restricts access to the flu vaccine so that only children under 12 and adults over 65 are allowed to take the shot. The cost of the flu vaccine is $10 per shot. (a) Let expenditure on all other goods be x1 and expenditure on the flu vaccine be x2. Let household income be given by Y . Show graphically how we would measure the compensating variation associated with introducing the quota for a 40 year old couple with no young kids where the wife would like to take the flu shot. Explain intuitively what the compensating variation is from this household’s perspective. (b) The compensating variation from part (a) implies that the quota is costly to this particular household. However, some households will find the quota more costly and some less costly even though they all face the same price per shot. Why might some households be inclined to vote for/support the quota policy anyway? What are some characteristics of households that (from an economic standpoint) might make them more likely to support the quota than others?

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