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Economics
What effect does a $1 specific tax have on equilibrium price and quantity, and what is the incidence on consumers, if the following is true: a. The demand curve is perfectly inelastic. b. The demand
On July 1, 1965, the federal ad valorem taxes on many goods and services were eliminated. Comparing prices before and after this change, we can determine how much the price fell in response to the
Essentially none of the savings from removing the federal ad valorem tax were passed on to consumers for motion picture admissions and club dues (Brownlee and Perry, 1967; see Exercise 6.2). List the
Do you care whether a 15¢ tax per gallon of milk is collected from milk producers or from consumers at the store? Why or why not?
Green et al. (2005) estimate that for almonds, the demand elasticity is -0.47 and the long-run supply elasticity is 12.0. The corresponding elasticities are -0.68 and 0.73 for cotton and -0.26 and
A subsidy is a negative tax through which the government gives people money instead of taking it from them. If the government applied a $1.05 specific subsidy instead of a specific tax in Figure
Canada provided a 35% subsidy of the wage of employees of video game manufacturers in 2011. ("Video game makers say subsidies are vital," CBC News, June 4, 2011.) a. What is the effect of a wage
Use calculus to show that an increase in a specific sales tax ( reduces quantity less and tax revenue more, the less elastic the demand curve. (The quantity demanded depends on its price, which in
After Hurricane Katrina damaged a substantial portion of the nation's oil-refining capacity in 2005, the price of gasoline shot up around the country. In 2006, many state and federal elected
The Thai government actively intervenes in markets (Limsamarnphun, Nophakhun, "Govt Imposes Price Controls in Response to Complaints," The Nation, May 12, 2012). a. The government increased the daily
An increase in the minimum wage could raise the total wage payment, W = wL(w), where w is the minimum wage and L(w) is the demand function for labor, despite the fall in demand for labor services.
Are predictions using the supply-and-demand model likely to be reliable in each of the following markets? Why or why not? a. Apples b. Convenience stores c. Electronic games (a market dominated by
In the Challenge Solution, we could predict the change in the equilibrium price of crops but not the quantity when GM seeds are introduced. Are there any conditions on the shapes of the supply and
Soon after the United States revealed the discovery of a single mad cow in December 2003, more than 40 countries slapped an embargo on U.S. beef. In addition, some U.S. consumers stopped eating
Explain why economists assume that the more-is-better property holds. Give as many reasons as you can?
Can an indifference curve be downward sloping in one section, but then bend backward so that it forms a "hook" at the end of the indifference curve?
Explain why economists believe that indifference curves are convex. Give as many reasons as you can?
Don is altruistic. Show the possible shape of his indifference curves between charitable contributions and all other goods. Does this indifference curve violate any of our assumptions? Why or why not?
Miguel considers tickets to the Houston Grand Opera and to Houston Astros baseball games to be perfect substitutes. Show his preference map. What is his utility function?
Sofia will consume hot dogs only with whipped cream. Show her preference map. What is her utility function?
Fiona requires a minimum level of consumption, a threshold, to derive additional utility: U(X, Z) is 0 if X + Z ( 5 and is X + Z otherwise. Draw Fiona's indifference curves. Which of our preference
Tiffany's constant elasticity of substitution (CES) utility function is U(q(1, q(2) = (q(1 + q(2)1/(. Show that there is a positive monotonic transformation such that there is an equivalent
Suppose we calculate the MRS at a particular bundle for a consumer whose utility function is U(q1, q2). If we use a positive monotonic transformation, F, to obtain a new utility function, V(q1, q2) =
If José Maria's utility function is U(q1, q2) = q1 + Aq1a q2b + q2, what is his marginal utility from q2? What is his marginal rate of substitution between these two goods?
Phil's quasilinear utility function is U(q1, q2) = ln q1 + q2. Show that his MRS is the same on all of his indifference curves at a given q1?
What is the effect of a 50% income tax on Dale's budget line and opportunity set?
What happens to a consumer's optimal choice of goods if all prices and the consumer's income double? (What happens to the intercepts of the budget constraint?)
Governments frequently limit how much of a good a consumer can buy. During emergencies, governments may ration "essential" goods such as water, food, and gasoline rather than let their prices rise.
What happens to the budget line if the government applies a specific tax of $1 per gallon on gasoline but does not tax other goods? What happens to the budget line if the tax applies only to
Suppose that Boston consumers pay twice as much for avocados as they pay for tangerines, whereas San Diego consumers pay half as much for avocados as they pay for tangerines. Assuming that consumers
A function ((X, Y) is homogeneous of degree ( if, when we multiply each argument by a constant α, f(αX,αY) = α(((X, Y). Thus, if a function is homogeneous of degree zero, ((αX,αY) = α0( (X, Y)
Diogo's utility function is U(q1, q2) = q10.75q20.25, where q1 is chocolate candy and q2 is slices of pie. If the price of a chocolate bar, p1, is $1, the price of a slice of pie, p2, is $2, and Y is
In 2005, Americans bought 9.1 million home radios for $202 million and 3.8 million home-theater-in-a box units for $730 million (TWICE, March 27, 2006, www.twice.com/article/CA6319031.html). Suppose
According to a 2010 survey of British students (www.leedsuniversityunion.org.uk/helpandadvice/ money/costofliving), a typical student had a budget of £18.8 per week to spend on mobile telephones,
David's utility function is U = q1 + 2q2. Describe his optimal bundle in terms of the prices of q1 and q2?
Vasco likes spare ribs, q1, and fried chicken, q2. His utility function is U = 10q12q2. His weekly income is $90, which he spends on ribs and chicken only. a. If he pays $10 for a slab of ribs and $5
Ann's utility function is U = q1q2 / (q1 + q2). Solve for her optimal values of q1 and q2 as a function of p1, p2, and Y?
Wolf's utility function is U = aq10.5 + q2. For given prices and income, show how whether he has an interior or corner solution depends on a?
Given that Kip's utility function is U(qc, qm) = qc0.5 + qm0.5, what is his expenditure function?
Elise consumes cans of anchovies, q1, and boxes of biscuits, q2. Each of her indifference curves reflects strictly diminishing marginal rates of substitution. Where q1 = 2 and q2 = 2, her marginal
Andy purchases only two goods, apples (q1) and kumquats (q2). He has an income of $40 and can buy apples at $2 per pound and kumquats at $4 per pound. His utility function is U(q1, q2) = 3q1 + 2.
Mark consumes only cookies and books. At his current consumption bundle, his marginal utility from books is 10 and from cookies is 5. Each book costs $10, and each cookie costs $2. Is he maximizing
Some of the largest import tariffs, the tax on imported goods, are on shoes. Strangely, the higher the tariff, the cheaper the shoes. The highest U.S. tariff, 67%, is on a pair of $3 canvas sneakers,
Helen views raspberries and blackberries as perfect complements. Initially, she buys five pints of each this month. Suppose that the price of raspberries falls while the price of blackberries rises
Use indifference curve-budget line diagrams to illustrate the results in Table 3.2 for each of these utility functions?Table 3.2: Type of Solution for Five Utility Functionsi > 0, j > 0, 0 and (
For the utility function U(q1, q2) = q1ρ + q2ρ , solve for the optimal q1 and q2?
The application "Indifference Curves Between Food and Clothing" postulates that there are minimum levels of food and clothing necessary to support life. Suppose that the amount of food one has is F,
Use a graph to show how the analysis changes in the Challenge if Max and Bob view e-books and printed books as imperfect substitutes?
In previous years, gasoline was less expensive in the United States than in Canada, but now, due to a change in taxes, gasoline costs less in Canada than in the United States. How will the
Einav et al. (2012) found that people who live in high sales tax locations are much more likely than other consumers to purchase goods over the Internet because Internet purchases are generally
Salvo and Huse (2012) found that roughly one-fifth of flexible-fuel (cars that can run on a mix of ethanol and gasoline) car owners choose gasoline when the price of gas is 20% above that of ethanol
Manufactured diamonds have become as big and virtually indistinguishable from the best natural diamonds (Dan Mitchell, "Fake Gems, Genuine Appeal," New York Times, June 21, 2008). Suppose consumers
How would your answer to Exercise 1.1 change if U = ln (q1 + q2) so that consumers have diminishing marginal utility of diamonds?
Derive Ryan's demand curve for q1, given his CES utility function is U = q1ρ + q2ρ?
David consumes two things: gasoline (G) and bread (B). David's utility function is U(q1, q2) = 10q10.25q20.75. a. Derive David's demand curve for gasoline. b. If the price of gasoline rises, how much
If Philip's utility function is U = 2q10.5 + q2, what are his demand functions for the two goods?
Draw a figure to illustrate the Application "Quitting Smoking." That is, show why as the price of cell phones drops, less tobacco is consumed?(Draw a figure like panel a of Figure 4.2 with cell
In 2005, a typical U.S. owner of a home theater (a television and a DVD player) bought 12 music CDs (q1) per year and 6 Top-20 movie DVDs (q2) per year. The average price of a CD was about p1 = $15,
Have your folks given you cash or promised to leave you money after they're gone? If so, they may think of such gifts as a good. They decide whether to spend their money on fun, food, drink, cars, or
Guerdon always puts half a sliced banana, q1, on his bowl of cereal, q2-the two goods are perfect complements. What is his utility function? Derive his demand curve for bananas graphically and
According to the U.S. Consumer Expenditure Survey for 2008, Americans with incomes below $20,000 spend about 39% of their income on housing. What are the limits on their income elasticities of
Given the estimated Cobb-Douglas utility function in Exercise 1.7, U = q10.6q20.4, for CDs, q1, and DVDs, q2, derive a typical consumer's Engel curve for movie DVDs. Illustrate in a figure?
Derive the income elasticity of demand for individuals with (a) Cobb-Douglas, (b) Perfect substitutes, and (c) Perfect complements utility functions?
Ryan has a constant elasticity of substitution utility function U = q(1 + q(2. Derive his Engel curve?
Sally's utility function is U(q1, q2) = 4q10.5 + q2. Derive her Engel curve?
Under what conditions does the income effect reinforce the substitution effect? Under what conditions does it have an offsetting effect? If the income effect more than offsets the substitution effect
Bill's utility function is U = 0.5 ln q1 + 0.5 ln q2. What is his compensated demand function for q1?
Sylvan's utility function is U(q1, q2) = q1 + 2q2. Derive his compensated (Hicksian) demand and expenditure functions?
Don spends his money on food and operas. Food is an inferior good for Don. Does he view an opera performance as an inferior or a normal good? Why? In a diagram, show a possible income-consumption
Pat eats eggs and toast for breakfast and insists on having three pieces of toast for every two eggs he eats. Derive his utility function. If the price of eggs increases but we compensate Pat to make
Are relatively more high-quality navel oranges sold in California or in New York? Why?
Draw a figure to illustrate the answer given in Solved Problem 4.3. Use math and a figure to show whether applying an ad valorem tax rather than a specific tax changes the analysis?
Lucy views Bayer aspirin and Tylenol as perfect substitutes. Initially the aspirin is cheaper. However, a price increase makes aspirin more expensive than Tylenol. Show the substitution, income, and
Philip's quasilinear utility function is U = 4q10.5 + q2. His budget for these goods is Y = 10. Originally, the prices are p1 = p2 = 1. However, the price of the first good rises to p1 = 2. Discuss
Sylvia's utility function is U(q1, q2) = min(q1, jq2). Derive her compensated (Hicksian) demand and expenditure functions?
Jean views coffee and cream as perfect complements. In the first year, Jean picks an optimal bundle of coffee and cream, e1. In the second year, inflation occurs, the prices of coffee and cream
Ann's only income is her annual college scholarship, which she spends exclusively on gallons of ice cream and books. Last year, when ice cream cost $10 and used books cost $20, Ann spent her $250
The Economist magazine publishes the Big Mac Index, which is based on the price of a Big Mac at McDonald's in various countries over time. Under what circumstances would people find this index to be
During his first year at school, Guojun buys eight new college textbooks at a cost of $50 each. Used books cost $30 each. When the bookstore announces a 20% price increase in new texts and a 10%
Use a graph to illustrate that the Paasche cost-of-living index (see the Application "Fixing the CPI Substitution Bias") underestimates the rate of inflation when compared to the true cost-of-living
Cynthia buys gasoline and other goods. The government considers imposing a lump-sum tax, + dollars per person, or a specific tax on gasoline of ( dollars per gallon. If + and ( are such that either
Remy spends her weekly income of $30 on chocolate, q1, and shampoo, q2. Initially, when the prices are p1 = $2 = p2, she buys q1 = 10 and q2 = 5. After the prices change to p1 = $1 and p2 = $3, she
Analyze the problem in Exercise 5.1 making use of Equation 4.16. Refer to Exercise 5.1, Remy spends her weekly income of $30 on chocolate, q1, and shampoo, q2. Initially, when the prices are p1 = $2
Felix chooses between clothing, q1, and food, q2. His initial income is $1,000 a month, p1 = 100, and p2 = 10. At his initial bundle, he consumes q1 = 2 and q2 = 80. Later, his income rises to $1,200
Jim's utility function is U(q1, q2) = min(q1, q2). The price of each good is $1, and his monthly income is $4,000. His firm wants him to relocate to another city where the price of q2 is $2, but the
Jane's utility function is U(q1, q2) = q1 + q2. The price of each good is $1, and her monthly income is $4,000. Her firm wants her to relocate to another city where the price of q2 is $2, but the
If the inverse demand function for toasters is p = 60 - q, what is the consumer surplus if the price is 30?
If the inverse demand function for radios is p = a - bq, what is the consumer surplus if the price is a/2?
According to Hong and Wolak (2008), a 5% postal price increase, such as the one in 2006, reduces postal revenue by $215 million and lowers consumer surplus by $333 million. Illustrate these results
Use the facts in Exercise 1.3: a. Hong and Wolak estimate that the elasticity of demand for postal services is -1.6. Assume that there is a constant elasticity of demand function, Q = Xp-1.6, where X
In the application "Compensating Variation and Equivalent Variation for the Internet," people are asked how much they would have to be paid not to use the Internet or what else they'd have to give up
Redraw Figure 5.4 for an inferior good. Use your diagram to compare the relative sizes of CV, S, and EV.Figure 5.4 Comparing CV, EV, and CS
Suppose that Lucy's quasilinear utility function in Solved Problem 5.2 is U(q1, q2) = 2q1 0.5 + q2, p1 = 2, p2 = 4, p̅ 1 = 4, q1 = q1(p1) = 4, q̅ 1 = q1(p1) = 1. Compare her CV, EV, and (CS.
Marvin has a Cobb-Douglas utility function, U = q10.5 q20.5, his income is Y = 100, and, initially he faces prices of p1 = 1 and p2 = 2. If p1 increases to 2, what are his CV, S, and EV?
Compare the welfare effects on a consumer between a lump-sum tax and an ad valorem (percentage) tax on all goods that raise the same amount of tax revenue?
Use the numbers for the alcohol and tobacco category from Table 5.2 to draw a figure that illustrates the roles that the revenue and the elasticity of demand play in determining the loss of consumer
Suppose that the inverse market demand for an upcoming Bruce Springsteen concert at Philadelphia's 20,000-seat Wachovia Center is p = 1,000 - 0.04Q. Mr. Springsteen is concerned about the well-being
Two linear demand curves go through the initial equilibrium, e1. One demand curve is less elastic than the other at e1. For which demand curve will a price increase cause the larger consumer surplus
Max chooses between water and all other goods. If he spends all his money on water, he can buy 12,000 gallons per week. At current prices, his optimal bundle is e1. Show in a diagram. During a
Since 1979, low-income recipients have been given food stamps without charge. However before 1979, people bought food stamps at a subsidized rate. For example, to get $1 worth of food stamps, a
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