5. Warren has $144 to spend on hamburgers (h) and gelato (g). His utility function is u(h, g) = 2/hg + 10. Hamburgers cost pH = $4 and gelato costs pg = $4. %3D (i) Find Warren's optimal bundle. (ii) Now suppose the government imposes a $5 unit tax on hamburgers, which raises the price to $9. What is Warren's optimal bundle now? (iii) Finally, suppose that the government gives Warren a lump-sum subsidy of $72 while still imposing the tax. What is Warren's optimal bundle in this case? (iv) Suppose that the government had simply imposed the tax (without a subsidy). Use the answers from (i) – (iii) to find the substitution and income effects from the increase in the price of hamburger.
5. Warren has $144 to spend on hamburgers (h) and gelato (g). His utility function is u(h, g) = 2/hg + 10. Hamburgers cost pH = $4 and gelato costs pg = $4. %3D (i) Find Warren's optimal bundle. (ii) Now suppose the government imposes a $5 unit tax on hamburgers, which raises the price to $9. What is Warren's optimal bundle now? (iii) Finally, suppose that the government gives Warren a lump-sum subsidy of $72 while still imposing the tax. What is Warren's optimal bundle in this case? (iv) Suppose that the government had simply imposed the tax (without a subsidy). Use the answers from (i) – (iii) to find the substitution and income effects from the increase in the price of hamburger.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Number 5 : IV part only. Thank you.
Transcribed Image Text:5. Warren has $144 to spend on hamburgers (h) and gelato (g). His utility function is
u(h, g) = 2/hg + 10. Hamburgers cost pH = $4 and gelato costs pG = $4.
(i) Find Warren's optimal bundle.
(ii) Now suppose the government imposes a $5 unit tax on hamburgers, which raises the
price to $9. What is Warren's optimal bundle now?
(iii) Finally, suppose that the government gives Warren a lump-sum subsidy of $72 while
still imposing the tax. What is Warren's optimal bundle in this case?
(iv) Suppose that the government had simply imposed the tax (without a subsidy). Use the
answers from (i) – (iii) to find the substitution and income effects from the increase in the
price of hamburger.
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