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Unformatted text preview: 2 /4Px 2 and Y*=I/Py (Py/4Px). Now you just take the appropriate partials: a) (X/Px) M = (-2/4)Py 2 Px-3 b) (X/Py) M = (2/4)PyPx-2 c) (Y/Px) M = (1/4)PyPx-2 d) (Y/Py) M = -IPy-2 (1/4)Px-1 3. Ralph has the following utility function: u(X,Y)=XY. a) This is standard Cobb-Douglas with =1/2, so X*=I/2Px and Y*=I/2Py. b) If I=100 and Px=Py=1, then X*=50 and Y*=50. c) If I=100 and Px=2 and Py=1, then X*=25 and Y*=50. d) Revenue = $25, so now if there is a lump sum tax, Ralph has I=75 and with Px=Py=1 you get X*=37.5 and Y*=37.5 e) So, with the unit tax, Ralph has u=25*50=1250 utils. If he makes the bribe and gets the income tax passed his income is $72 and Px=Py=1 and his bundle is X*=36 and Y*=36 so that utility = 1296 utils. Since this utility is great than 1250, he should cut the deal with the politician. Econ 313.2 - Wissink Spring 2006 PS#3 XtraQ - ANSWERS...
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- Fall '06