# ch4_example1 - Donald derives utility from only two goods...

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

Donald derives utility from only two goods, carrots (Qc) and donuts (Qd). His utility function is as follows: U(Qc,Qd) = (Qc)(Qd) The marginal utility that Donald receives from carrots (MUc) and donuts (MUd) are given as follows: MUc = Qd MUd = Qc Donald has an income (I) of \$120 and the price of carrots (Pc) and donuts (Pd) are both \$1. a. What is Donald's budget line? b. What is Donald's income-consumption curve? c. What quantities of Qc and Qd will maximize Donald's utility? d. Holding Donald's income and Pd constant at \$120 and \$1 respectively, what is Donald's demand curve for carrots? e. Suppose that a tax of \$1 per unit is levied on donuts. How will this alter Donald's utility maximizing market basket of goods? f. Suppose that, instead of the per unit tax in (e), a lump sum tax of the same dollar amount is levied on Donald. What is Donald's utility maximizing market basket? g. The taxes in (e) and (f) both collect exactly the same amount of revenue for the government, which of the two taxes would

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 04/29/2008 for the course ECON 302 taught by Professor Toossi during the Spring '08 term at University of Illinois at Urbana–Champaign.

### Page1 / 2

ch4_example1 - Donald derives utility from only two goods...

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

View Full Document
Ask a homework question - tutors are online