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Category > Economics Posted 23 Jun 2017 My Price 5.00

Andy is a pensioner who spends exactly $27 on groceries each week.

  1. Andy is a pensioner who spends exactly $27 on groceries each week. It’s not much, so it is fortunate that Andy is a man of humble tastes: he consumes only ale and bread. His utility function is

U = a 1 / 3 b 2 / 3

where a is his weekly consumption of ale in pints and b is his weekly consumption of bread in loaves. The baker sells a loaf of bread for a $1, and the brewer sells a pint of ale for $1.

    1. What is Andy’s budget constraint, and what is his best attainable commodity bundle?

    2. Assume that the government imposes a tax of $3 per week on Andy. What is his budget constraint, and what is his best attainable commodity bundle?

    3. Assume that the government abandons the non-contingent tax, and instead imposes a tax of $(1/8) on each pint of ale and each loaf of bread purchased. The baker and the brewer are selling their goods at marginal cost, so they do not change the amount that they are willing to accept for their goods. What is Andy’s best attainable commodity bundle? How much does he pay in taxes? Explain why Andy is exactly as well off under the tax in c) as he was under the tax in b).

    4. Now imagine that the only tax is $(1/5) on each loaf of bread purchased. What is Andy’s best attainable commodity bundle? How much does he pay in taxes?

    5. Finally, imagine that the only tax is $(1/2) on each pint of ale purchased. What is Andy’s best attainable commodity bundle? How much does he pay in taxes?

    6. Show numerically that Andy is worse off under the tax in d) than under the tax in c), and that he worse off under the tax in e) than under the tax in d).

 

 

Answers

Alpha Geek
(8)
Status NEW Posted 23 Jun 2017 08:06 AM My Price 5.00

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Attachments

file 1498206067-Answer.docx preview (167 words )
A-----------nsw-----------er ----------- (a-----------) G-----------ive-----------n, -----------U(a-----------,b)----------- = -----------a^(-----------1/3-----------).b-----------(2/-----------3) -----------The----------- In-----------com-----------e o-----------f A-----------ndy----------- = -----------$27-----------, a----------- = -----------wee-----------kly----------- co-----------nsu-----------mpt-----------ion----------- of----------- al-----------es,----------- b -----------= w-----------eek-----------ly -----------con-----------sum-----------pti-----------on -----------of -----------bee-----------rs,----------- So----------- he----------- ca-----------n s-----------pen-----------d a----------- ma-----------xim-----------um -----------of -----------$27----------- bu-----------yin-----------g B-----------rea-----------d a-----------nd -----------ale----------- in----------- a -----------wee-----------k. -----------The-----------ref-----------ore-----------, P-----------a*a----------- + -----------Pb*-----------b F-----------or -----------max-----------ium----------- ut-----------ili-----------zat-----------ion----------- le-----------t's----------- ta-----------ke -----------the----------- as-----------sum-----------pti-----------on -----------tha-----------t a-----------ndy----------- sp-----------end-----------s a-----------ll -----------his----------- $2-----------7 i-----------n a----------- we-----------ek.----------- Th-----------ere-----------for-----------e, -----------Pa*-----------a +----------- Pb-----------*b -----------= $-----------27 -----------a +----------- b -----------= $-----------27 -----------( s-----------inc-----------e P-----------a=P-----------b=1-----------) A-----------lso-----------, U-----------(a,-----------b) -----------= a-----------^(1-----------/3)-----------.b(-----------2/3-----------) f-----------or -----------fin-----------din-----------g t-----------he -----------max-----------imu-----------m u-----------til-----------iza-----------tio-----------n
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