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Unformatted text preview: x y I p x p y + } with budget constraint {x,y: I=p x x + p y y} where I is income, and x and y are two goods with respective prices p x and p y . a) Write the equation in interceptslope form with y as the dependent variable? b) What is the y intercept of the equation? x intercept? c) What is the slope of the equation? How is it interpreted? d) If now p x and p y are factory prices and transport costs are t per unit for both x and y to ship from the factory to the consumer, what is the new relative price of x ( x y p p ) for a consumer? If t were $1 using the prices in problem 1, would the relative price of x be higher or lower for the consumer compared to at the factory? 5. Interpret t in problem 4. as an ad valorem tax rate (the tax rate is applied times price, e.g., 50%) and apply it only to x, how does this change the budget constraint in 4a)? Include how the tax changes the relative price of x to the consumer?...
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This note was uploaded on 04/07/2011 for the course ECON 380 taught by Professor Showalter,m during the Winter '08 term at BYU.
 Winter '08
 Showalter,M
 Economics

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