reviewprelim1spring05bSp06 - f ect of this tax on his...

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Talia Bar Econ313-1 Prelim 1- review Solve questions 1 and 2 in a blue book. Solve questions 3 and 4 on the exam form. Question 1. (30) An individual has $270. The price of good x 1 is $10 per unit. The price of a composite consumption good x 2 is $1 per unit. The individual’s utility is: u ( x 1 ,x 2 )= x 1 x 2 2 (a) Draw the budget constraint for this individual. (b) Find the individual’s optimal choice. (c) Suppose the government levies a $20 lump-sum tax on the individual. Portray the e f ect of this tax on the individuals budget constraint? What would be the e
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Unformatted text preview: f ect of this tax on his optimal consumption? Argue that this is consistent with both goods being normal goods. (d) Suppose that, instead of a lump-tax, the government levies a tax t perunit of good x 1 . What does this do to the individual’s budget constraint? Find his new optimal choice as a function of t. Show graphically the income and substitution e f ects of this tax. The graph does not need to be precise but it does need to be consistant with the predictions and our theory. 1...
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