Intermediate Microeconomics: A Modern Approach, Seventh Edition

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Economics 301 – Fall 2006 – PRELIM 2 - J. Wissink – Thursday November 2, 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. See point scores by each question. 1. (20 points) 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 very well-behaved preferences who gets utility from Gas (G) and $aog. Much to Bush’s dismay, even though the tax on gas raises revenue in terms of $aog, the tax leads to absolutely NO CHANGE in the observed market amount of gas Zac consumes. a. Draw a market demand curve for gas that would illustrate such a situation/outcome. b. In an “indifference curve-budget line” diagram illustrate that this could, indeed, happen. Please put gallons of gas on the horizontal axis. c. Given that Zac consumes the same amount of gas as before the tax, is it fair to say that Zac is not hurt by this tax? Explain your position.
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