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Unformatted text preview: b) Assume that the government imposes a $1.50 tax on Pepsi. Again, using indifference curve analysis, show that Joel will now purchase only Coke. c) How much revenue does this tax raise? In dollars, what is the excess burden associated with this tax? Demonstrate this excess burden using graphical analysis. 4) Ramsey Rule Janet has income m and receives CobbDouglas utility from consumption of two goods (X and Y): U = α log(X) + (1α ) log(Y) Pretax prices are given by P X and P Y and advalerom tax rates are given by T X and T Y . a) Show that, with CobbDouglas utility, demand functions are given as follows: X = α m / (P X (1+ T X )) Y = (1α )m / (P Y (1+ T Y )) b) Show that the Ramsey rule requires T X = T Y . Hint: Δ X = dX/dT X . c) Relate your answer in part b) to the inverse elasticity rule. Hint: First calculate the price elasticity of demand for good X [(dX / dP X ) / ( X / P X )] and good Y....
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 Spring '10
 Knight
 Economics, Marginal Tax Rate, Substitute good, Joel, perfect substitutes

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