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Intermediate Microeconomics: A Modern Approach, Seventh Edition

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Economics 301 – Fall 2006 – PRELIM 2 MAKEUP - J. Wissink – Friday November 3, 2006 Directions: Answer all questions. Write legibly, concisely, and coherently. Be sure to label all axes, functions, and variables you use. READ QUESTIONS CAREFULLY. Draw pictures whenever possible. Show all your work! Total time for the test is 90 minutes. Total points on test = 100 ANSWER ALL THE QUESTIONS – Each question is worth 20 points. 1. The Bush administration has decided to follow the lead suggested by our very own Robert Frank and get people to conserve gasoline. Bush also wants to shore-up the federal budget. Suppose Bush decides to place a per unit tax on gas. This tax raises the price consumers pay from P 0 to P 1 . Assume the supply curve for gas is horizontal. Suppose Zac is a representative consumer with well-behaved preferences who gets utility from Gas (G) and $aog. Much to Bush’s dismay, his tax on gas raises very little revenue in terms of $aog. However, the tax does reduce gas consumption a great deal.
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