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Unformatted text preview: d Y*=.7m/Py. Therefore, utility given the tax is
0.3*ln(0.3*100/1.25)+0.7*ln(0.7*100/1) = 3.927 where X* given the tax is 24 and
0.25*24=6. Utils given the lump sum transfer is 0.3ln(0.3*94)+0.7ln(0.7*94) = 3.93243
which is higher.
c) d) The first thing you need to do is calculate the optimal demand before the price
change and after the price change. This you can do using the substitution method, but I’m
sick of typing so I’ll just use the formulas.
Before price change: X* = .3(100)/1 = 30 Y* = .7(100)/1 = 70
After price change: X* = .3(100)/1.25 = 24 Y* = .7(100)/1 = 70
For CV, we want to give the person enough money to get them back to the original
utility level before the price change. So set .3ln(.3m/p ) + .7ln(.7m/p ) = .3ln(X*) + .7ln(Y*).
x y It is important to note that X* and Y* are the optimal values before the price change, while p
and p are the new prices after the price change (so the right-hand side is utility before the
y price change, and on the left-hand side you just vary m...
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This note was uploaded on 02/09/2014 for the course ECON 1130 taught by Professor Baum-snow during the Spring '11 term at Brown.
- Spring '11