HW8S_302 - Econ 302- Solution to 8th Problem Set Spring...

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Spring 2010-Ali Toossi Due: Wednesday, March 31 Chapter 5: Answer to question 1. Because gasoline is relatively more expensive than other goods after the tax, consumers substitute away from it and will spend only part of the tax rebate on gasoline. Consequently the consumption of gasoline does fall, but not as much as it would if the rebate were not given. Answer to question 2. A two-part pricing scheme exists when a seller charges a initiation fee or cover charge and then a per unit charge as well. This is an attempt on the part of the seller to capture as much consumer surplus as possible. Answer to question 4. Heavy drinkers are generally lower income and consume a sizable portion of their budget in alcohol. Therefore the income effect is stronger than is often thought. Answer to question6. other goods ($/year) gas (gal/year) a b q1 q0 The most important reason is the increase in income. Assume that, 30 years ago, the budget constraint was b and the optimal consumption was q0. Although the price of gas has increased, so has income. The budget constraint (a) has become steeper, but it has also shifted outward. Optimal consumption increases to q1, despite the increase in price. 1
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HW8S_302 - Econ 302- Solution to 8th Problem Set Spring...

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