1. John consumes good X and good Y. His expenditure function is E=2U(PX)^5(PY)^5. His demand for goods X and Y are given by X=I/(2 PX), Y= I/(2 PY) Suppose that initial PX=1 and PY=1. John's income is 12. a. Find John's initial level of utility. b. Suppose the government announces plans to introduce a tax of 3 per unit on good X. Find an exact expression for the amount of income John would be just willing to give up to avoid the tax on good X. c. Suppose the government implements the tax. How does John's consumption of good X change? Find the income and substitution effects (with regards to good X) associated with the tax increase.
1. John consumes good X and good Y. His expenditure function is E=2U(PX)^5(PY)^5. His demand for goods X and Y are given by X=I/(2 PX), Y= I/(2 PY) Suppose that initial PX=1 and PY=1. John's income is 12. a. Find John's initial level of utility. b. Suppose the government announces plans to introduce a tax of 3 per unit on good X. Find an exact expression for the amount of income John would be just willing to give up to avoid the tax on good X. c. Suppose the government implements the tax. How does John's consumption of good X change? Find the income and substitution effects (with regards to good X) associated with the tax increase.
Microeconomics A Contemporary Intro
10th Edition
ISBN:9781285635101
Author:MCEACHERN
Publisher:MCEACHERN
Chapter6: Consumer Choice And Demand
Section6.A: Appendix: Indifference Curves And Utility Maximization
Problem 2AQ
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1. John consumes good X and good Y.
His expenditure function is
E=2U(PX)^5(PY)^5.
His demand for goods X and Y are given by X=I/(2 PX), Y= I/(2 PY)
Suppose that initial PX=1 and PY=1. John's income is 12.
a. Find John's initial level of utility.
b. Suppose the government announces plans to introduce a tax of 3 per unit on good X. Find an exact expression for the amount of income John would be just willing to give up to avoid the tax on good X.
c. Suppose the government implements the tax. How does John's consumption of good X change? Find the income and substitution effects (with regards to good X) associated with the tax increase.
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