Problem Set 3 Solutions

If he consumes more fish than he catches he is better

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Unformatted text preview: is selling some of his catch to the market. If he consumes more fish than he catches, he is better off with a price decline (as drawn). If he sells some of his fish, a price decline leaves him on a lower indifference curve (to the left of E). 4. Note that when the problem said "the fixed amount $0.25*X", it was meant to refer to the X John would have chosen given the quantity tax (i.e. the tax in which he paid an amount that varied with the quantity of burgers he consumed). a) b) The Lump Sum Principle tells us that John is better off giving up $0.25X of his income than paying this tax. The following graph shows this. On the graph, the budget line with the tax is steeper than the budget line without the tax, but they both pass through the consumption bundle John would have chosen if the tax were in place. To calculate the number of utils associated with points B and C, use the demand functions X*=.3m/Px an...
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