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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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