A consumers utility only depends on the consumption of goods A and B according to the following Cobb-Douglas Utility function: U(A, B) = A3/5 B 2/5. The price of goods A and B are $10 and $10, respectively. The consumer has a budget of $1500 that he can use to consume the two goods. a) Calculate the optimal bundle and maximized utility for the consumer. b) 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? c) Show that the consumer would prefer a lump sum income tax that raises the same revenue of $200 as the tax on good B.
A consumers utility only depends on the consumption of goods A and B according to the following Cobb-Douglas Utility function: U(A, B) = A3/5 B 2/5. The price of goods A and B are $10 and $10, respectively. The consumer has a budget of $1500 that he can use to consume the two goods. a) Calculate the optimal bundle and maximized utility for the consumer. b) 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? c) Show that the consumer would prefer a lump sum income tax that raises the same revenue of $200 as the tax on good B.
Micro Economics For Today
10th Edition
ISBN:9781337613064
Author:Tucker, Irvin B.
Publisher:Tucker, Irvin B.
Chapter6: Consumer Choice Theory
Section: Chapter Questions
Problem 11SQ
Related questions
Question
![A consumer's utility only depends on the consumption of goods A and B according to the following Cobb - Douglas utility
function: U(A, B) = A3/5 B 2/5. The price of goods A and B are $10 and $10, respectively. The consumer has a budget
of $1500 that he can use to consume the two goods. a) Calculate the optimal bundle and maximized utility for the
consumer. b) 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? c) Show that the consumer would prefer a lump sum income
tax that raises the same revenue of $200 as the tax on good B.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb7402925-6d8a-4dfd-b192-454534d30471%2F11a60898-7ccc-4af0-8ba5-5561e9f2ec18%2Fd4mizt_processed.jpeg&w=3840&q=75)
Transcribed Image Text:A consumer's utility only depends on the consumption of goods A and B according to the following Cobb - Douglas utility
function: U(A, B) = A3/5 B 2/5. The price of goods A and B are $10 and $10, respectively. The consumer has a budget
of $1500 that he can use to consume the two goods. a) Calculate the optimal bundle and maximized utility for the
consumer. b) 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? c) Show that the consumer would prefer a lump sum income
tax that raises the same revenue of $200 as the tax on good B.
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 5 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
![Micro Economics For Today](https://www.bartleby.com/isbn_cover_images/9781337613064/9781337613064_smallCoverImage.gif)
![Microeconomics: Private and Public Choice (MindTa…](https://www.bartleby.com/isbn_cover_images/9781305506893/9781305506893_smallCoverImage.gif)
Microeconomics: Private and Public Choice (MindTa…
Economics
ISBN:
9781305506893
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
![Micro Economics For Today](https://www.bartleby.com/isbn_cover_images/9781337613064/9781337613064_smallCoverImage.gif)
![Microeconomics: Private and Public Choice (MindTa…](https://www.bartleby.com/isbn_cover_images/9781305506893/9781305506893_smallCoverImage.gif)
Microeconomics: Private and Public Choice (MindTa…
Economics
ISBN:
9781305506893
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
![Economics: Private and Public Choice (MindTap Cou…](https://www.bartleby.com/isbn_cover_images/9781305506725/9781305506725_smallCoverImage.gif)
Economics: Private and Public Choice (MindTap Cou…
Economics
ISBN:
9781305506725
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
![Economics For Today](https://www.bartleby.com/isbn_cover_images/9781337613040/9781337613040_smallCoverImage.gif)