2003MidtermSolutions

2003MidtermSolutions - Solution to Midterm Exam Fall 2003...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Solution to Midterm Exam Fall 2003 Economics 2020a / API 111 / HBS 4010 QUESTION 1 1. Use e ( p, v ( p, w )) w e ( p, u )= r 16 p 1 p 2 u 3 w = r 16 p 1 p 2 v ( p, w ) 3 w 2 = 16 p 1 p 2 v ( p, w ) 3 v ( p, w )= 3 w 2 16 p 1 p 2 . And Roy’s identity . .. x 1 ( p, w )= v p i v w = 3 w 2 16 p 2 1 p 2 6 w 16 p 1 p 2 = w 2 p 1 . QUESTION 2 2a) EV = e ¡ p 0 ,u 1 ¢ e ¡ p 0 ,u 0 ¢ is more appropriate than CV = e ¡ p 1 ,u 1 ¢ e ¡ p 1 ,u 0 ¢ since it uses the same base prices to compare the impact of the two policies. If we were to compute CV for the two policies, CV for the apple tax would use di f erent reference prices than CV for the banana tax. Because of this, it is not necessarily the case that the policy with the smaller | CV | is better for the consumer (even if tax revenue is the same). 2b) For apples, there is no wealth e f ect, and so EV is the same as CS (i.e., Marshallian and Hicksian demand curves coincide). A 10% increase in the price of apples raises it from 1 to 1 . 1 . This causes demand to decrease (using a linear approximation) to 50
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/12/2009 for the course HKS API111 taught by Professor Avery during the Fall '08 term at Harvard.

Page1 / 3

2003MidtermSolutions - Solution to Midterm Exam Fall 2003...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online