Econ_102A_PS3 - (X Y b Now suppose that the price of good X...

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Econ 102A Problem Set 3 1.) Show graphically why a lump sum (income) tax is superior to a per unit (sales) tax. 2.) Using the same logic as in 1.) show graphically why a lump sum subsidy is superior to a per unit subsidy. 3.) a.) If the demand curve for a commodity is given by Q=1/P, calculate the price elasticity of demand b.) If the demand curve is given by Q=100-P, calculate the price elasticity of demand when the price in the market is $20. c.) Suppose the price elasticity of demand at a point on the demand curve is 1 and the demand curve is given by Q=100-2P. What is the price and quantity at this point? 4.) The utility function for a consumer is given by U=X 1/2 Y 1/2 . The price of goods X and Y are $5. The consumer has $100 of income. a) Derive the demand bundle
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Unformatted text preview: (X*, Y*) . b) Now suppose that the price of good X increases to $10. Solve for the new demand bundle (X**, Y**) . c) Draw a diagram in X-Y space clearly labeling all optimal bundles, indifference curves, budget lines, slopes, and intercepts. d) On your graph, show the income and substitution effects of the price change. e) Under the new pricing scheme, the amount of income needed to make the consumer just as well off as he was before prices changed is called the compensating variation. Calculate the compensating variation for this consumer and label it on your graph. f) How much income would the consumer need to be compensated so that she could afford her original bundle? Is this more or less than the compensating variation?...
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