S07 Prelim 1 answers - Econ313-1 Spring 2007 Talia Bar...

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Econ313-1 Spring 2007 Talia Bar Prelim 1, suggested solution Question 1 (30 minutes) Buzzard University is considering adopting a policy that would reduce the demand for parking around the campus. Only university employees park on campus. They can be roughly divided into two groups. Members of one group have a demand function u 1 P , Y P Y 6 . for parking P and other goods Y . Members of the other group have a demand function u 2 P , Y 60 P Y . Every employee maximizes each period his/her utility from hours of parking ( P and the composite of all other consumption goods ( Y ), subject to a simple linear budget constraint. Ignore the possible time constraint on parking, just think of this as units of some good. Income per period m 3900 is allocated between P and Y . Before any policy is adopted, the price of parking is p 1 $3. The cost of the composite good is p 2 $1. The university considers adopting a policy of taxing parking, in hope that the tax would reduce the demand for parking. Tax revenues will not be given back to employees but used for other university spending. a. (7 points) Before any policy is adopted, how many hours of parking does a member of group 1 consume? How many hours of parking does a member of group 2 consume? Group 1: MRS Y 12 P 3 3 P Y 3900. Y 36 P 3 P 36 P 3900. P 100. Group 2: MRS 60 2 P 3 3 P Y 3900. 10 P P 100 300 Y 3900. Y 3600. Youwereno taskedtof ind Y , but we need to do so in order to verify that Y 0 ,so that P 100 is possible. b. (7 points) Suppose the university adopts a policy of taxing parking. They impost atax t $3 per hour of parking, with tax the price of parking is p 1 $6. After the
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How many hours of parking does a member of group 2 consume? Group 1: MRS Y 12 P 6 6 P Y 3900. Y 72 P 6 P 72 P 3900. P 3900 78 50. Group 2: MRS 60 2 P 6 6 P Y 3900. 5
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This note was uploaded on 05/24/2008 for the course ECON 3130 taught by Professor Masson during the Spring '06 term at Cornell University (Engineering School).

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S07 Prelim 1 answers - Econ313-1 Spring 2007 Talia Bar...

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