Intermed Micro PS1

# Intermed Micro PS1 - Econ 320 Summer 2011 Problem Set...

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Econ 320 Summer 2011 Problem Set 1 ( Note: The problems and related chapters: problem 1- Chapter 3; problems 2-3: Chapter 4; and problems 4-7: Chapter 5.) 1. From Besanko and Breautigam problems 3.4, 3.6, 3.15, 3.17, 3.18, 3.19, 3.23, 3.24. 2. Let income be I = 100 ; P x = 1 ; P y = 1 and utility U ( x; y ) = xy . Write the budget constraint and °nd the optimal consumption bundle for the consumer. Find the marginal utility of x and y: a. Suppose that a tax of 0.5 is applied per unit consumed of good x . Write the new budget constraint and solve for the optimal bundle. Compute the revenue the government earns from the tax. (Revenue = tax multiplied by units consumed). Label this revenue R: b. Consider an alternative tax scheme of a (lump sum) income tax. The amount of the tax is R: What is the new budget constraint of the con- sumer? Find the new optimal consumption bundle. c. Which scheme, (a) or (b) do the consumers prefer? 3. From Besanko and Breautigam problems 4.3, 4.7, 4.11. 4. Let a consumer±s utility function be U ( x; y ) = min( x; y ) : a. Derive algebraically the consumer±s demand for x: Draw it on a diagram.

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