a. Write down the budget constraint and plot it. b. Calculate the optimal bundle and maximized utility for the consumer. c. A new tax of $10 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?
a. Write down the budget constraint and plot it. b. Calculate the optimal bundle and maximized utility for the consumer. c. A new tax of $10 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?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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 B 3/4. The
a. Write down the budget constraint and plot it.
b. Calculate the optimal bundle and maximized utility for the consumer.
c. A new tax of $10 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?
d. Show that the consumer would prefer a lump sum income tax that raises the same revenue as the tax on good B.
Note:-
- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism.
- Answer completely.
- You will get up vote for sure.
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