10HW3 - each good is $1. Her utility function is u ( x 1 ,x...

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Economics 104A Problem Set #3 (March 3) Winter 2010 1. Suppose that a household in a state consumes 600 gallons of gasoline per year. A 15% gasoline tax is introduced and the household is provided with a $90 annual tax rebate. Will the household be better off or worse off under the new program? Support your answer. 2. Suppose Joanne has a utility function u ( x 1 ,x 2 ) = x 1 x 2 and suppose her income m = $100 and prices p 1 = $5 and p 2 = $5. (a) Which bundle would Joanne choose? (b) If the government levys a quantity tax of $2 on good 1, which bundle would Joanne choose? (c) Find the SE and IE caused by the quantity tax. (d) if the government asks Joanne how much of her income, at most, she would be willing to give up to prevent this quantity tax, what would her answer be, assuming she does not lie? 3. Anne earns $1,000 per week in City A and buys two goods x and y. The price of
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Unformatted text preview: each good is $1. Her utility function is u ( x 1 ,x 2 ) = x 1 + 2 x 2 . Anne is oered to a transfer to City B where the price of good 1 is $2 and the price of good 2 is $1. She is oered a 50% increase in pay. Anne understands compensating variation and equivalent variation perfectly. (a) If Anne considers all other features of the two cities to be the same, will she accept the move? Support your answer. (b) How much would Anne require to be paid in City B to accept the move? Support your answer. (c) How does the change in price and salary compare to Annes current salary in City A? The oer is the same as a pay cut (or increase) of what magnitude? Support your answer. (d) In part (b) are you calculating the equivalent variation or the compensating variation? Support your answer. 1...
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