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# Exam204 - Lyon Econ 7140 Second Exam 1 We analyze the...

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Lyon Econ 7140 February 27, 2004 Second Exam 1. We analyze the welfare loss of placing sales taxes on the commodities x 1 , and x 2 . The representative consumer has utility function and transformation function: u(x 1 , x 2 )u , C 2 , u strictly quasi-concave G(x 1 , x 2 ) = 0 with G C 2 , G strictly concave, ! G 1 (x 1 , x 2 ) G 2 (x 1 , x 2 ) ÉÉÉÉÉÉÉÉÉÉÉÉÉÉÉÉÉ < 0 G is identified from the problem: Max: p 1 x 1 + p 2 x 2 Subj to: f 1 (a 11 , a 21 ) ! x 1 = 0 f i C 2 and strictly concave f 2 (a 12 , a 22 ) x 2 = 0 f i have positive marginal products a 11 + a 12 a 1 = 0 a 1 given a 21 + a 22 - a 2 = 0 a 2 given a. We place a excise tax of J on both commodities, and redistribute the tax revenues in a neutral way. That is, a consumer pays (1+ )p 1 x 1 + (1+ )p 2 x 2 but the seller receives only p 1 x 1 + p 2 x 2 . The government then redistributes the tax revenue with random lump sum payments to the consumers. Using the information that we developed in class identify the welfare loss of this taxing scheme.

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Exam204 - Lyon Econ 7140 Second Exam 1 We analyze the...

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