Many large corporations in Hong Kong provide insurance subsidies for their staffs. The staffs are restricted...

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Many large corporations in Hong Kong provide insurance subsidies for their staffs. The staffs are restricted to use the subsidies to buy insurance from any insurance company. Assume there are only two types of goods in the consumption bundle: insurance and other goods. Suppose the salary of a representative staff is I and the insurance subsidy is S in addition to the salary. a. Draw and explain the budget constraint line of the above representative staff. Let insurance be on the horizontal axis and other goods on the vertical axis. b. Suppose that the insurance policy is changed so that the insurance subsidy S is changed into an equal-amount cash allowance. Under what circumstance will the optimal consumption bundle change? Will the staff be better off? Use a diagram to explain your answers in details. Many large corporations in Hong Kong provide insurance subsidies for their staffs. The staffs are restricted to use the subsidies to buy insurance from any insurance company. Assume there are only two types of goods in the consumption bundle: insurance and other goods. Suppose the salary of a representative staff is I and the insurance subsidy is S in addition to the salary. a. Draw and explain the budget constraint line of the above representative staff. Let insurance be on the horizontal axis and other goods on the vertical axis. b. Suppose that the insurance policy is changed so that the insurance subsidy S is changed into an equal-amount cash allowance. Under what circumstance will the optimal consumption bundle change? Will the staff be better off? Use a diagram to explain your answers in details.

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a In the above figure the budget line without any insurance subsidy is represented by B1L1 Now when ... View the full answer