11. A consumer’s utility only depends on the consumption of goods A and B according to the following Cobb-Douglass utility function: U(A, B) = A1/4 B3/4. The price of goods A and B are $10 and $15, respectively. The consumer has a budget of $1120 that he can use to consume the two goods. Write down the budget constraint and plot it. Calculate the optimal bundle and maximized utility for the consumer. A new tax of $5 is imposed on the price of good B. Compute the new optimal bundle of good A and B for the same consumer. What is the utility loss due to the tax?
11. A consumer’s utility only depends on the consumption of goods A and B according to the following Cobb-Douglass utility function: U(A, B) = A1/4 B3/4. The price of goods A and B are $10 and $15, respectively. The consumer has a budget of $1120 that he can use to consume the two goods.
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Write down the budget constraint and plot it.
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Calculate the optimal bundle and maximized utility for the consumer.
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A new tax of $5 is imposed on the price of good B. Compute the new optimal
bundle of good A and B for the same consumer. What is the utility loss due to the
tax?
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Show that the consumer would prefer a lump sum income tax that raises the same
revenue as the tax on good B.
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A consumer’s utility only depends on the consumption of goods A and B according to the following Cobb-Douglass utility function: U(A, B) = A1/4 B3/4. The price of goods A and B are $10 and $15, respectively. The consumer has a budget of $1120 that he can use to consume the two goods.
A tax of $5 Is imposed on the price of good B. Show that the consumer would prefer a lump sum income tax that raises the same revenue as the tax on good B.
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